Gov. Mark Dayton, after recommending in January an expansion of the individual sales tax to cover personal services and clothing purchases, withdrew his proposal last month. He should reverse that position now that the Minnesota Senate majority has recommended expanding the sales tax base as he originally proposed. It is still a sound idea.
We need a balanced revenue system in Minnesota. Roughly a third of state and local revenue should come from our income, a third from our wealth (derived by property taxes), and a third from consumption (derived by sales taxes). This way, everyone shares in the support of government whatever their income, housing status, or consumption patterns.
Some would actually argue that consumption should be taxed more heavily so sales taxes should be a greater portion of the total. Sales taxes are the largest revenue in most states. Ironically, it was at the insistence of conservatives that the sales tax was enacted originally in Minnesota.
Sales tax has lagged in past
Historically, the sales tax has lagged income and property taxes in raising revenue in Minnesota. Today the sales tax only raises 27 percent of total revenue. Projections of future sales tax revenues show a fairly flat trend even with a full economic recovery.
One reason for this lag is that more people are buying products on line, where Minnesota sales taxes are not collected. This siphons off sales taxes that would have been collected if the product were purchased in state.
Minnesota retailers are very concerned about this competitive disadvantage. The governor and Senate majority have proposed an e-fairness sales tax provision to try to recover some of these lost tax dollars.
More significantly, our purchases have changed from products to services. When the Minnesota sales tax was enacted in 1967, two-thirds of consumer spending was for products and one-third for consumer services. Today, the reverse is the case with two-thirds for consumer services and one-third for products.
Broaden items covered, reduce rate
By broadening those items covered by the sales tax to consumer services and clothing, we should expect the sales tax revenues to increase at rates similar to income and property taxes. With the broader base, the sales tax would raise approximately an additional billion dollars so the rate could be reduced to 6 percent and still generate needed income for investments. The sales tax rate reduction is important because Minnesota currently has the seventh-highest sales tax rate in the nation.
With baby boomers retiring or approaching retirement, Minnesota will have less income tax revenues from them. One way to ensure that they contribute their fair share to the support of state and local government in Minnesota is to broaden the base of the sales tax particularly to services so that more of their spending is taxed.
Another argument for expanding the sales tax base is that it will help to stabilize state revenues. Today, Minnesota with its heavy reliance on income taxes has one of the most volatile revenue systems in the nation. A greater use of a broadened sales tax would provide more consistent revenue in slow economic periods.
State must ensure its competitiveness
The final argument for expanding the sales tax is that Minnesota needs more revenue to ensure its competitiveness in future years. Minnesota has a long tradition of investing in its students to produce one of the best work forces in the world.
Consider where the Senate majority has proposed major spending increases in its budget: education. New dollars are allocated to early, K-12, and higher education.
Most agree that early education is one of the most cost-effective investments Minnesota can make for the future. K-12 education needs new dollars to put in place the reforms that will increase the graduation rates from 77 percent today and reduce the graduation disparity between majority and minority students.
Higher-ed spending now ranks 32nd
Minnesota higher-education spending when adjusted for inflation is lower than any time since 1980-81. Minnesota’s spending on higher education now ranks 32nd among the states, below many southern states. By 2018, it is projected that 70 percent of all Minnesota jobs will require a higher education.
Without additional revenue, and an expanded sales tax is arguably the best option, Minnesota will not be able to make the investments in education that are needed to maintain and build a 21st century work force so that Minnesota can be a world leader.
Dayton needs to go back to his original position expanding the individual sales tax as the Minnesota Senate majority has proposed, and together they should urge the House to support the expansion.
Jay Kiedrowski is a Senior Fellow at the Humphrey School of Public Affairs at the University of Minnesota. He was finance commissioner under Gov. Rudy Perpich.
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