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Making a pitch for tax reform

State revenue commissioner seeks input on improving tax system

September 12, 2012
By Kevin Sweeney - Journal Editor , The Journal

NEW ULM - Myron Frans, Revenue commissioner for the State of Minnesota, made a pitch for tax reform at Tuesday's meeting of the New Ulm Rotary Club.

Frans, whose department oversees the collection of taxes and fees in the state, spoke about Gov. Mark Dayton's plan for tax reform in the coming year. He said Dayton's priorities are to make the state's tax system simpler, fairer and more conducive to economic growth.

Frans is crossing the state, speaking to groups and listening to ideas people have for improving the state's tax system, which he said is one of the most complicated in the U.S.

Article Photos

Staff photo by Kevin Sweeney
Minnesota Revenue Commissioner Myron Frans uses a pair of three-legged stools, with legs representing income, sales and property tax, to show how the balance among the three has changed over the years. Frans spoke at the Kaiserhoff on Tuesday to the New Ulm Rotary Club.

Minnesota has faced multi-billion dollar budget deficits in the past several years, Frans said. The state's revenue is driven by the number of jobs, and as employment numbers rise and fall, so does the state's revenue. Jobs would be expected to affect income taxes, but they also affect sales tax. People without jobs spend less on taxable goods, said Frans.

Minnesota has been improving its standing in the country as a high tax state, said Frans. For 45 years, through 2002, the state and local tax revenue as a percent of personal income was above the national average, but in seven of the eight years from 2002 to 2010, the state has been below the national average.

Over the years, the state's tax environment has changed in different ways. Frans said that in 1950, Minnesotans spent about 61 percent of their income on goods, and 39 percent on services. In 2010 that had flipped, with consumers spending on 33 percent on goods and 67 percent on services. Since the state sales tax applies mostly to goods, this affects the sales tax revenue.

Frans also pointed to the nationwide issue of sales tax revenue lost to commerce, from people buying online or from catalogs. In 2011 the state lost an estimated $400 million in uncollected sales taxes. Bills are being introduced in Congress to require e-tailers to collect sales taxes and distribute them to the various states.

Frans addressed the question of whether Minnesota's tax system is competitive for business. Some groups say no, because the state's statutory tax rates are high. This is the rate that state law says most businesses must pay. But a Ernst and Young study shows Minnesota's effective tax rate, the amount businesses actually pay after tax credits and exemptions, puts Minnesota among the top 10 states with the lowest effective tax rates on new investment. Is it time for Minnesota to close that gap, Frans asked, to lower its statutory rate and eliminate some of the tax breaks?

Frans pointed also to the changes in Minnesota's age demographics. As baby boomers enter retirement, their tax bills will be getting lower. They will be making up a larger portion of the state population, but they will be paying less in income taxes.

Frans discussed the question of who pays what in taxes. He showed that middle income wage earners pay 12.3 percent of their income in cumulative state and local taxes. Those in the top 5 percent and 1 percent of wage earners pay closer to 10. Frans said Dayton wants to see all taxpayers paying a fair share.

Frans said the state has become more dependent on property tax, which made up 40 percent of the state's total tax revenue in 2010, compared to income and sales tax.

Frans also pointed to the complexity of the state's tax system. The number of adjustments and credits in the state's individual income tax system has risen from 9 to 50 from 1987 to 2010. The number of property tax classes and tiers has risen from 26 in 1973 to 55 in 2011. The state spends about 40 percent of the revenue it takes in on tax breaks, he said.

Frans said the governor will present his budget proposal on Jan. 22, 2013, and shortly thereafter will present a report that Frans is working on regarding ways to make the tax system fairer, simpler, an supportive of economic growth.



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