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Sunday, October 7, 2012

What tax reform in MN should look like

Mark Dayton plans to unveil a budget in January 2013; tax reform will be a major piece of the proposal. The Commissioner of Revenue, Myron Frans, has been traveling the state to garner ideas for tax reform from cities, counties, businesses, taxpayers and legislators.

On Monday, the Commissioner gave a presentation at the Humphrey School at the University of Minnesota.  After his presentation, he sat on a panel with Bill Blazar, Senior Vice President of the Minnesota Chamber of Commerce, and Laura Kalambokidis, Associate Professor and Extension Economist in the Applied Economics Department at the University of MN.

If you’d like to watch his presentation outlining the many reasons we need tax reform, you can view the presentation here.  I’d like to sum it up quickly for you as well because tax reform is crucial for both the State and Federal Budgets- it would be nice to see MN at the forefront of tax reform.

Prominent Minnesotans like Tom Stinson, Art Rolnick and Myron Frans often tell a similar story about Minnesota. In 1950 MN was ranked 26th in per-capita income. At that time, agriculture provided a major source of employment for Minnesotans. Over the past fifty years, the state invested heavily in education and infrastructure. The State’s investments in education paid off; in 2004 MN was ranked 7th in per-capita income. MN is also home to the most Fortune 500 companies on a per-capita basis. Why? Because businesses have access to a highly educated work force and adequate infrastructure thanks to the many investments Minnesota made over the past 60 years.

However, in order to continue spending on education and infrastructure, the state needs to address a structural problem in the budget. The state of MN has run a deficit 8 out of the last 11 years; addressing this structural deficit problem is of growing concern as Minnesota’s population ages. Baby boomers are reaching retirement age, and family sizes have grown smaller, leaving a disparity between the number of Minnesotans in the workforce (and paying into the system) and growing numbers those at retirement age (pulling money out of the system). The Minnesota State Demographer predicts that by 2035 Minnesota will have 850,000 or more people age 60+ and only 60,000 ages 35-59.

Many people will say the state has a spending problem rather than a revenue problem; however, the facts tell a different story. For example, Minnesota is one of only five states that enjoys a tax exemption on clothing[1].  This exemption leaves a gaping hole in sales tax revenue. Similarly, approximately $400 million dollars in sales tax revenue is lost to remote sales and e-commerce sales (unfortunately, taxation of e-commerce is a very complicated issue for a later post). Sales tax currently only accounts for 27% of the annual revenue; a much smaller share than it has accounted for in the past.

Another problem is that the composition of the economy is changing; in the past, goods comprised a greater portion of retail sales than services, but in 2011 services accounted for 67% of sales in MN and goods accounted for 33%. Minnesotans and Americans are spending a much larger share on services than we have in the past, and these services are not tangible, and as such, typically not covered by sales tax. 

Our income tax forms are confusing. In 1950 you chose from 6 possible forms for an initial return, now you have to choose from 18. The number of adjustments and credits has risen from 9 to 50. In 1913 there were 6 property classes and tiers, now there are 55.

Obviously we need tax reform. We need simplicity (eliminate tax expenditures[2] where possible, simplify tax forms) and we need equity (a popular proposal includes graduated sales tax on items like clothing and certain foods).  

It will be interesting to see how tax reform in MN plays out!

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