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Minn. Tax Plan Raises Question: What’s Rich?

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(credit: Jupiter Images)

(credit: Jupiter Images)

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EDINA, Minn. (AP) – Lisa MacMartin says she and her husband are well-off. Greg Ferguson thinks he and MacMartin are members of the upper middle class. Just don’t call them rich.

“No. Absolutely not,” said Ferguson, a financial planner.

But he and MacMartin, a retailer who just closed her two stores, are on track to earn enough in 2011 to qualify as wealthy under Minnesota Gov. Mark Dayton’s proposal to hike income taxes on top earners. It’s the centerpiece of his fix for the state’s $6.2 billion budget shortfall.

In asking the state’s most affluent to help out in a time of need, Dayton drew a sharp contrast with new governors in other cash-strapped states. In neighboring Wisconsin, GOP Gov. Scott Walker sparked massive protests with his bill to strip public employees of union rights and cut pensions and benefits. Similar bills loom in Ohio, Indiana, Tennessee and other states.

Even some Democrats are sounding like Republicans, with California’s Jerry Brown proposing state employee pay trims while New York’s Andrew Cuomo touts tax cuts as he seeks reductions in the state workforce.

Not in Minnesota. Dayton was born to a family that built a dry goods store into powerhouse Target Corp., voluntarily feeding community programs through profits along the way. He routinely cites studies of state taxation showing that Minnesota tax burdens fall disproportionately hardest on lower incomes.

“If we’re going to have a successful society, people need to know that other citizens are paying their same share of income in taxes, especially people at the top,” Dayton says.

His plan would affect the top 5 percent. Single filers with yearly taxable income above $85,000 and joint filers above $150,000 would see the tax rate for dollars earned above those thresholds bumped from 7.85 percent to 10.95 percent. Those making above $500,000 a year would be dealt an additional 3-percent surtax for the next three years.

Republicans at Minnesota’s Capitol blasted Dayton’s proposal, pointing out it would give Minnesota the country’s highest tax rate and suggesting it would cripple job-creation efforts.

Republican control of both legislative chambers makes prospects dim for Dayton’s plan as it now stands. But it ignited a debate about the responsibility of the state’s wealthiest amid likely cuts to social services, colleges, local governments and state agencies.

Ferguson and MacMartin think they’ll earn more than $150,000 in 2011, after a couple years of recessionary lean times in which MacMartin closed two toys stores she owned and Ferguson Financial attracted few new clients.

Ferguson, 56, didn’t vote in November’s election — he said he doesn’t like politics and felt uninformed about the candidates. But he quickly grows irritated at the thought of paying higher taxes.

“What’s my incentive for being self-employed and working my butt off to make the income I make if my taxation is going to keep going higher?” said Ferguson, sitting with MacMartin in his office in Edina, a suburb just southwest of Minneapolis that’s home to exclusive country clubs, high-end shopping and neighborhoods of mansions with manicured lawns.

MacMartin is quick to point out the couple actually live next door in Minneapolis, in a relatively modest home. Ferguson drives a 5-year-old Nissan SUV — “If I was rich, I’d be down at the Land Rover dealership,” he said — and their once-a-year vacation is usually by car rather than airplane.

MacMartin, 51, voted for Dayton.

“I think that it’s a good thing that we take care of people in our society,” MacMartin said. “I think I take a little more altruistic view of things.”

State calculations show that those near the new threshold would see tax burdens rise by about $130 while those with seven-figure incomes could face five-figure hits.

Clint Gerner, a St. Paul-based wealth manager, said he’s already had discussions with many of his wealthy clients about ways they could avoid higher taxes. He’s also considering his own options.

“My wife and I fit that bill,” Gerner said of Dayton’s standard for wealthy. “We’re business owners, and we have been looking at different options to go out of state. With a company that’s growing, we’d easily be boosted into that upper tax bracket. We’d see an 11-percent gain in our income if we moved to a place like South Dakota or Texas, even for six months of the year.”

Retirees and other “snowbirds” who split their time between Minnesota and other states could face a new tax, too.

A third Dayton proposal aimed at the rich is a property tax hike on homes worth more than $1 million. Jimmy Fogel, a Coldwell Banker Burnet Realtor who specializes in multimillion-dollar homes in the ritzy neighborhoods around the Minneapolis chain of lakes, said that would have a definite effect on the market for high-end homes.

“The thing about people in that price range is that you can almost always afford to do something else,” Fogel said. “Having a lot of money means having other options.”

Minneapolis Mayor R.T. Rybak, a defender of Dayton’s plan, doesn’t buy the theory that the rich will uproot if their income taxes rise. He fears the alternative is deeper cuts to local aid programs, which have led to round after round of property tax increases.

“We should have at least equal concern about pricing people out of their homes because the state has slashed the one program it has to lower property taxes,” Rybak said.

(© Copyright 2011 The Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten or redistributed.)

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