On Wednesday, February 6, Governor Mark Dayton gave his third State of the State address. In his speech, he was reflective about how far the state has come the past two years and set the tone for the coming two years.

Looking back, Minnesota has made strides toward economic recovery. In 2011, the projected deficit was $6 billion; today, the state is facing a less daunting $1.1 billion deficit. Over the last two years, Minnesota has added 72,000 jobs, seen an increase in math and reading scores for all tested grades, and eliminated premiums and expanded health-care access to 16,000 children.

While acknowledging that progress has been made, the Governor made it clear that more can be done.

Moving forward, Governor Dayton outlined his top priorities for this legislative session:

• Providing all Minnesotans with the best, most advanced and affordable educational opportunities.
• Addressing climate change through clean energy initiatives.
• Encouraging businesses to "adopt an after-school program" to invest in communities statewide.
• Reforming health care to emphasize access and efficiency.
• Allowing all Minnesotans the freedom to marry, regardless of sexual orientation.

Finally, Governor Dayton spent considerable time defending his budget proposal, which proposes raising revenues of over $2.1 billion. As he noted, "Trying to cut our way to a better Minnesota is a failed experiment." Republicans reacted harshly to this assessment and accused the Governor of promoting policies that will cause Minnesotans to "pay more and expect less." They also criticized the Governor for using the address to highlight divisive social issues, like gay marriage, rather than focusing on more important priorities, like the budget.

Despite the acrimony, the speech did conclude with a bipartisan standing ovation when Dayton reminded policymakers that, despite their partisan predispositions, they are united in their work "to serve all of Minnesota."

Go here to read the Governor Dayton's State of the State in its entirety.

Governor's Budget Continues to Provoke Conversation and Consternation

It has been over two weeks since the release of Governor Dayton's budget proposal, which not only balances the budget but fuels over $2 billion in new spending for education, economic development and health care. Beyond a new income tax rate on Minnesota's top earners, the bulk of the money comes from a significant expansion of the sales tax on services provided to consumers and generated through business-to-business transactions.

This has unleashed a groundswell of opposition from impacted businesses—firms and agencies in accounting, architecture, advertising, employment, engineering, information technology, law and management consulting—and the companies that use them. According to the Department of Revenue, businesses already account for 44% of total sales tax receipts in Minnesota. Even the Minneapolis Star Tribune's editorial board weighed in with a surprisingly strong rebuke of the plan.

Because his proposal also lowers the corporate income tax rate from 9.8 percent to 8.4 percent, freezes the statewide business property tax for the next two years and lowers the overall sales tax rate from 6.875 to 5.5%, Governor Dayton was hoping for more buy-in from the business community. But there seems to be a major disconnect, as his primary argument for lowering corporate taxes—"they get passed on to consumers"—is ignored when it comes to levying the sales tax on business inputs. In addition, around 92% of Minnesota businesses flow income through personal income taxes, not the corporate income tax, and could see tax obligations go up as a result of the new top-tier rate in the Governor's budget.

Legislative leadership has not come out to fully endorse the Governor's proposal. While supportive of raising revenue as a way to balance the budget, they have not embraced the specifics outlined by Dayton. Policymakers are also awaiting the February Forecast, due February 28, in order to better assess the state's financial situation. Legislative leaders have been open to conversations with business leaders and are committed to finding the best solution for the state.

Other resources of note:

Department of Revenue Guidance on the Proposed Sales Tax Expansion.

A Minneapolis Star Tribune opinion piece written by David Olson, President of the Minnesota Chamber of Commerce.

Legislature Continues at Leisurely Pace

Today, the Minnesota Legislature will have been in session for one month. Other than the release of Governor Dayton's budget recommendations, not much has happened at the Capitol. Bill introductions are trickling in, but only at half the number typically seen at this time. Committee meetings continue to be devoted largely to overviews from state agencies about their programming and funding. Beyond a week of hearings on gun safety bills in the House and the steady progress of legislation to implement a statewide health insurance exchange (see below), legislative action has been slow.

Health Insurance Exchange Consuming Committee Time

Bills to create a health insurance exchange (HIX) in Minnesota (Senate File 1/House File 5) have been among the most visible activities early in the 2013 session. With a federally imposed deadline of March 31, 2013, to establish a state-based exchange, the legislation continues to work its way through a lengthy list of committees. Currently, the newly created marketplace responsible for screening and providing health insurance options for up to 1.3 million Minnesotans would be presided over by a seven-member board bound by a strict conflict of interest policy, and be funded by a new 3.5% withholding on premiums of insurance products sold within the HIX.

While general support for creating a state-based HIX in Minnesota has been broad, several business groups and representatives of managed health care plans have consistently raised concerns with aspects of the legislation. For example, some feel that the current conflict of interest policies for the HIX board will prohibit those most qualified from serving. Additionally, some stakeholders feel the original financing proposal unfairly targets health plans and would lead to increased costs for consumers. This last concern may have been addressed Thursday in the Senate Tax Committee, where the 3.5% withholding was replaced by revenues from the state's current tobacco tax. It remains to be seen whether the House will follow the Senate's lead with this change, or if this issue will receive further discussion down the road in a conference committee. In addition to these issues, there continues to also be robust discussion over data privacy provisions within the bill.

We will keep you posted as this sweeping piece of legislation winds its way through the process. Go here for more information about Minnesota's proposed HIX.

Awaiting a Full House—Special Elections Set for Tuesday

This coming Tuesday, February 12, there will be two special elections held for House seats vacated by retiring members who took on new career opportunities since the November elections.

District 14A was left open by Rep. Steve Gottwalt (R). This district is in Stearns County and represents a southwest portion of St. Cloud, as well as Waite Park, St. Augusta and surrounding townships. The candidates vying for this seat are Joanne Dorsher (DFL), Tama Theis (R) and Todd McKee (I).

District 19A was left vacant by Rep. Terry Morrow (DFL). This district is in Nicollet County and includes a portion of western Le Sueur County. The cities represented are North Mankato and St. Peter, as well as surrounding townships. The candidates vying for this seat are Clark Johnson (DFL), Allen Quist (R) and Tim Gieseke (I).

The outcome of the elections will not impact control of the Minnesota House of Representatives, which will stay in DFL hands.