Viewpoint: Senate and the House propose tax reforms

Talk about it

The size of Minnesota’s budget deficit and the likelihood of even larger deficits without federal funds are motivating state policymakers to consider ways to find more revenue.

In March, the Senate and the House unveiled comprehensive, revenue-neutral proposals to update and reform Minnesota’s tax system in ways that attempt to ensure greater fairness, stability, and modernity in our system.

Each proposal was released in the wake of the 2009 Minnesota Tax Incidence Study, a biennial report developed by the Minnesota Department of Revenue (www.taxes.state.mn.us/ legal_policy/research_reports/content/incidence.shtml) to document who pays and how much, in our state and local taxes. The report documents an increasingly skewed tax incidence in Minnesota.

Higher income households pay a significantly lower percentage of income on taxes than lower and middle-income households — this difference has now increased.

Since 2006 the state tax system has become significantly more regressive. Both the Senate and the House proposals advocate greater progressivity in their efforts to realign Minnesota’s tax system for a new era and a new economy but differ in their approach.

Some specifics on the reform legislation currently being carried by Sen. Ann Rest and Rep. Ann Lenczewski are outlined in the following paragraphs.

In Senate File 1274 (Proposed Realignment of Minnesota’s Tax System), Sen. Rest is trying to establish a new long-term framework for state taxation that is based more on taxing consumption than either property taxes or income taxes.

The goals of this legislation include:

(1) Realigning the state’s tax system to reflect a more 21st Century approach to revenue generation with an overall revenue neutral approach

(2) Beginning to eliminate distortions in the system

(3) Balancing the burden for the personal income tax more fairly

(4) Recognizing that a broad based consumption tax with lowered rates offers the opportunity for more transparency in the tax system

(5) Increasing the stability of the tax systems overall

(6) Providing a stimulus effect to

Minnesota’s businesses during a period of economic collapse. Proposed reforms would phase out the corporate income tax, extend the sales tax to clothing, legal, and accounting services and require a fourth tier income tax rate for Minnesotans who earn more than $250,000 per year.

In House File 1782 (Reforming Individual Income Tax and Corporate Franchise Tax), Rep. Ann Lenczewski is proposing to eliminate several individual and business breaks from our state’s tax code.

The goals of this legislation include:

(1) Implementing the most significant individual income and corporate franchise tax reform in over 20 years

(2) Increasing progressivity of the Minnesota tax system

(3) Eliminating dozens of business subsidies and tax expenditures that are ineffective, regressive, or that the state can no longer afford

(4) Replacing tax subsidies that disproportionately benefit upper-income earners with income tax cuts that benefit everyone. Eliminating these tax breaks align with similar cuts made in the 1980s by the state and federal government.

Both proposals offer reforms that warrant further discussion between policymakers as we consider the prospect of rising job losses, increasing property taxes, and impending cuts to essential services and programs.

By 2010, property taxes will overtake income taxes as Minnesota’s primary source of revenue. State revenue projections for the next two years show the biggest drop in half a century.

As Minnesotans continue to lose jobs, income and even their homes, general fund revenue for the state is expected to fall 4.75 percent.

State records show only one other period (1986-87) where revenues actually dropped.

The current revenue shortfall we’re struggling with is not expected to abate any time soon as unemployment rates continue to climb and baby boomers begin to retire at record levels.

According to our state economist, Tom Stinson, unemployment in Minnesota is expected to peak around nine percent — about double the rate that existed when the recession began in early 2008.

As the Minnesota Budget Trends Study Commission points out, even without a recession, the aging of Minnesota’s population will see a decline in revenues from sales and income taxes over time.

The state of our economy is compelling policymakers to take stock of our projected revenues along with our spending habits.

This massive deficit can be an opportunity to develop reforms that benefit Minnesota taxpayers and help build our state’s prosperity.

I welcome your comments on these and any other proposals under discussion at the Legislature.

Bunn (DFL-Lake Elmo) represents District 56A in the Minnesota House of Representatives. She can be reached at (651) 296-4244, by mail at 521 State Office Building, 100 Martin Luther King Blvd., St. Paul, MN 55155 or via e-mail at rep.Julie.bunn@house.mn.

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