Dept. of Revenue details Dayton tax plan

MARSHALL – Gov. Mark Dayton’s tax plan that would drop the sales tax rate in Minnesota by 20 percent was detailed in a 16-page report Friday by Minnesota’s revenue commissioner.

Dayton’s controversial proposal, which will be introduced in a bill next week, includes a significant widening of the sales tax to go along with a push to lower the underlying rate from 6.875 percent to 5.5 percent.

In Friday’s conference call with reporters, Commissioner of Revenue Myron Frans said that drop would put Minnesota more in line with other states.

“The competitive part comes in when we take our high tax rate (Minnesota currently has the seventh highest tax rate in the nation) to 27th,” Frans said. “That’s a big drop. If you look at states in our region, they’re all in the 4, 5, 6 range. This puts us at that level to be competitive.”

District 16 Sen. Gary Dahms calls the claim that Dayton’s tax plan will make Minnesota more competitive a “fallacy.” He said Minnesota won’t become more attractive just because the tax base is lowered, considering the number of products being taxed will grow.

“You have to compare our sales tax that we currently have versus our ranking and take the new group of products and compare those to other states and see how that ranking comes out,” said Dahms, R-Redwood Falls. “We’re increasing sales taxes to Minnesotans by a little over $4 billion – $2 billion is going to reduce the rate, the other $2 billion is going into the General Fund. So we’re not making ourselves more competitive, certainly not business-wise. If you’re going to have resolution here and become more competitive, you keep the basket of products being taxed the same and reduce the actual tax.”

This modernization of the state’s tax rates, the Revenue Department says, doesn’t include across-the-board changes. A number of items currently exempt will remain so, things like capital equipment, clothing items under $100, day care services, funeral and medical services, prescription drugs, textbooks and computers for school use and renewable energy systems.

Some of the newly-taxed items would include accounting and advertising services, auto repair, clothing items over $100, computer and design services, legal services, over-the-counter drugs and veterinary services.

In terms of sourcing, goods and services bought and sold in Minnesota will be considered taxable, as would items bought by Minnesota residents from an out-of-state seller. When the recipient of a service is from out of state no tax is owed.

“That tax is determined by that state,” Frans said. “When you ship a product outside the state, they determine the tax. The export of products and services outside the state of Minnesota are not taxable.”

District 17 DFL Sen. Lyle Koenen, who sits on both the tax and tax reform committees, said he’s worried about how the state’s tax system overall has gotten more regressive during the last 15 years but said there are good points to Dayton’s plan.

“Broadening the base and lowering the rate, for the most part, that’s pretty good tax principle,” said Koenen of Clara City. “We’re going to be going through it to see exactly which taxes are affected by the broadening of the base, look at each one and consider each one by itself and the effect it will have on the economy and how it affects consumers and businesses.”

Koenen said his office has fielded numerous calls from businesses concerned about the proposed business-to-business sales tax on services. He’s also heard concerns about the proposed sales tax on clothing items over $100, but doesn’t think that particular tax will be a burden to the lower and middle class.

Dahms doesn’t believe Dayton’s tax proposal will hold up and move through the DFL-controlled House and Senate as it stands now. He said “major” changes will need to take place before the bill is passed.

“I think there’s going to be some negotiations,” he said. “I think there’s going to be more contention than just partisan. I think the DFL will get in line and vote for it, but it’s not going to start that way. I might be wrong, but I’m not confident the Senate majority is going to vote for this bill in its current context. I don’t see that happening.”

Democrats who control the Legislature are more than a month away from voting on tax-and-spending bills.

The Associated Press contributed to this report.