Much remains to be seen
about Dayton's tax reform
Tuesday, January 29, 2013 8:05 AM
Minnesota Gov. Mark Dayton did something that seemed extremely unlikely just a few weeks ago. He presented a budget that took the focus off his "tax the rich" angle.
Now, his proposal still has a new tax bracket for the top 2 percent of wage earners in Minnesota, but the item that is getting most of the attention now is his comprehensive sales tax reform. His proposal is a bold move that frames the debate on the role of taxes, which is to his credit.
However, at first look, it may also have some hidden consequences, much like the DFL used to accuse the Republicans of in the reductions to local government aid.
Dayton's tax reform tries to shift the tax burden so that Minnesota residents pay roughly equal amounts of income, sales and property taxes. He proposes extending the sales tax to clothing costing more than $100, to some personal and business services and to online sales while lowering the overall sales tax rate to 5.5 percent.
Despite lowering the overall rate, the new items taxed from the sales tax will bring in more money, allowing $500 property tax rebates to Minnesota homeowners. He also proposes increasing local government aid to cities and counties, which he feels will also lower property taxes.
Dayton also proposes raising the income tax rate 2 percent on Minnesotans making more than $150,000 if single or $250,000 if married. His proposal would lower the corporate tax rate from 9.8 percent to 8.4 percent while eliminating some tax breaks for corporations.
The Republicans, which were in power the last several years, with their "no new taxes" pledge, cut local government aid several times. The DFL response was that it was a hidden tax because local units of government had to increase property taxes to maintain revenue to provide essential services.
That didn't happen much in the communities in our area, but the cuts did have a great impact on the services offered to residents in rural Minnesota.
Dayton claims the sales tax shift will lower the overall tax rate for middle income residents. That remains to be seen as it will now include such things as over-the-counter drugs, auto repairs, bank charges, legal services, veterinary services and many other services purchased by consumers.
However, the sales tax has also been extended to business-to-business transactions and services. Although Dayton likely doesn't include this in his net tax effect on consumers, it could make an impact if businesses increase prices to make up for the increase in cost of doing business, a likely scenario. That could have as significant of an impact on Minnesota residents in higher prices, perhaps as much as the increase in property taxes due to cuts in aid.
Not only will it affect Minnesota residents, this will make Minnesota's professional services more expensive and less competitive nationally and, since we now live in a global economy, around the world. Our world is highly mobile and competitiveness across state lines is important.
It should be pointed out, in our continual goal of transparency, that his proposal would have a direct effect on newspapers, placing the sales tax on advertising as well as the sale of publications. So, readers may lump us in with the complainers that only speak up when losing a tax break that favors them.
However, it should also be pointed out that under this proposal newspapers would have three new taxes - not only when you purchase the newspaper, but when customers place advertisements and when it is printed at a central plant. That drives up costs, and, perhaps in turn, prices, and may drive more newspapers to print in Iowa or other surrounding states, thus hurting the state's printing industry.
Perhaps more important, though, is the proposal seems to leave behind the discussion on spending. Although his proposals for increased spending in education make sense, at least initially, he glosses over what the $225 million in cuts this biennium are and how the savings of more than $1 billion will come about. Most residents favor a balanced approach that includes reductions in spending, something that is unclear with this budget.
Now that he has thrown his tax reform proposal out there, the debate will begin once people delve into the details. Dayton does have guts - unlike most politicians, he never seems to have a focus on winning the next election - and Minnesotans are in a mood for some sweeping changes after years of inaction due to partisan bickering.
Whether Dayton has the answer remains to be seen, but he made a good first step in initiating a debate on reform and the future direction of Minnesota.