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Dayton administration defends controversial sales tax overhaul

Myron Frans
Office of the Governor
“There are some cases where companies will absorb the costs and some will not,” Revenue Commissioner Myron Frans admitted, adding that the administration will have to watch the impact “of the trickle down closely.”

For the moment at least, the Dayton administration is going to continue to plow into the strong wind of resistance surrounding the governor’s plan to raise revenue with changes in the sales tax.

There was no backing down from some of the plans most controversial aspects when Revenue Commissioner Myron Frans conducted a Friday tele-conference with reporters from across the state.

The governor’s most controversial proposal calls for collecting sales taxes on most, though not all, business-to-business services.

Frans’ goal clearly was to blunt at least some of the criticisms that have been coming from the business community and showing up in news stories across the state.

“I hope as you write stories,’’ Frans told about 40 reporters, “that you find equal time for things businesses like [about the tax package].”

Those things include a reduction in corporate taxes.

Mostly, though, Frans was trying to clarify elements of the proposal, which has drawn repeated fire.

Such service industries as advertising agencies and accounting firms, for example, have said the proposal would make them non-competitive with firms from other states.

But Frans noted that long-established rules on when a tax is applied have not been changed.  If, for instance, a New York company hires a Minneapolis ad agency to produce ads for its company, the Minneapolis firm would not have to pay a sales tax. In that case, the sales tax laws of the New York firm would apply.

On the other hand, what’s new is if a Duluth company hires the Minneapolis ad firm, a Minnesota sales tax would apply.

Frans repeatedly spoke of how most Minnesota consumers would benefit from the proposed lower sales tax rate that would fall 20 percent, to 5.5 percent.  Even some businesses would benefit, Frans said.

Although the overall effect of adding services and business-to-business sales taxes to the state formula would raise about $2.8 billion, the reduced rate would save companies $655 million, he said.

That, of course, still amounts to more than $2 billion coming into the state coffers. Critics of the plan say that ultimately consumers will be picking up that tab through higher prices.

“There are some cases where companies will absorb the costs and some will not,” Frans admitted, adding that the administration will have to watch the impact “of the trickle down closely.”

Frans wasn’t the only commissioner stumping for the Dayton budget/tax plan.

Others, such as higher-education Commissioner Larry Pogemiller, have been traveling the state, promoting the virtues of what new investments in higher ed can mean to Minnesotans.

Dayton wants the $2 billion in additional revenue for three main purposes: to pay off the state’s $1 billion deficit, to fund his proposed $500 property tax rebate and to invest much of the remainder in public education at all levels.

Frans, as he’s said for months, says that Minnesota must modernize its sales tax system to line up with “a modern economy.” When the sales tax came into being in the 1960s, two-thirds of the dollars spent were for consumer goods, with one-third spent for services. Now, those numbers have flipped.

He said other states already have begun the process of attaching sales taxes to services and predicted that in the next 10 years, most states will have “modernized” their sales tax systems.

But there’s a common denominator in all states: Resistance to change is powerful.

It’s obvious that the administration has attempted to minimize the criticism in how it fashioned the plan.

For example, the ag industry, which has flourished in recent years because of high commodity prices, is virtually untouched by the system Dayton seeks. Everything from farm machinery to feed to chemicals used on fields to veterinary services for livestock would be exempt under the Dayton plan.

There are smaller ways, too, in which the administration attempted to at least stifle some criticism.

 If your family joins a YMCA, for example, a sales tax would be added to membership fees. On the other hand, if you’re a veteran joining a veterans organization, there would be no sales tax charged.

The administration didn’t want to add “a burden” to vets, Frans explained.

The bill form of the sales tax reform package will go to the Legislature next week, Frans said.

Whether Friday’s effort — which included a 16-page packet of examples [PDF] — will stifle at least some of the criticism remains to be seen.

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Comments (6)

Tax the poor and middle class

Of course, the only way DFL Dayton can raise the revenue necessary to support his extravagant spending is by taxing the poor and the middle class through sales taxes and hidden taxes.

I thought he was only going to tax the rich?

The number of taxes increases being proposed

is mind boggling. With the economy still struggling, there is no way a small business like mine (a manufacturing related business, 70 employees, $5-7 Million in revenue) can absorb it. Our margins are not that large so it's hard will be hard absorb internally. Overseas competition is still very real making it difficult to pass on. So, where is it going to come from? From cutting back on hiring, cutting back on raises, cutting back on profit sharing, cutting back on investment in the business - that's where. Sounds like a perfect way to stimulate the frail recovery, doesn't it. (Heavy sarcasm)

The President and Governor have effectively created the illusion that tax increases only effect a few people. But it is time for fiscal conservatives to educate our employees that taxes changes like these fundamental effect the businesses that employ them. I have already had requests for raises because employees noticed that "our checks are smaller" as a result of the withholding change. We have explained that raises are not coming to make that up - it's just part of their "fair share" in the tax burden that the government needs. I get some pretty blank looks when I say that.

As a sub chapter S, the personal tax increases will hit the company. Again, I will be explaining that the profit sharing pool will be lower because of the tax policy - so their profit sharing checks will be smaller too. I'll distribute the same % of profit - but the Federal and State income taxes proposed will definitely make the amount smaller. So, they will work hard, for small checks. We are already providing Jan financial information to the employees (using the expected tax rates) showing them the effect. A few eyes are already being opened.

I am not opposed to taxes to pay for necessary services. Yet, I am remain unconvinced that the State and Federal government have even come close to maximizing the efficiency of the money already being collected and spent.

So until that happens, companies need to work hard to educate our employees that these tax changes effect a lot more people than just "the rich" and should be implemented only as a last result for only the most necessary of needs.

Gov. Dayton and Comm. Frans are giving it a good shot, but...

The proposed tax plan is a little like an over over-decorated Christmas tree. In my opinion the initiative has too many moving parts. All tax plans are that way and in spite ongoing calls for reform and simplification, taxation policy just has a life of its own.

All taxes are regressive and that part never changes. Taxation always takes the most from those who have the least.

However, at least they have a plan...

I understand taxing services

I am not sure how it will work for my services and if it is client dependent. If I'm working for a government or non profit do they pay? But I think taxing services is legitimate.

What I would really like is for non profits who do the same thing I do under their "research" side for private clients pay taxes on what they charge for those services just like I do.

Well, this math is indefensible.

There are two versions of a Sales & Use Tax Reform handout that I have found in the public domain. One gets the math right, and the other does not. (See page 14)

Which is it?

Governor's "Toolkit":
http://www.mn.gov/governor/images/sales_tax_booklet.pdf

Total cost before: $166.89, including tax $9.12
Total cost after: $165.52 including tax of $7.75
Sticker: "You Save $1.52"

Department of Revenue Handout:
http://www.revenue.state.mn.us/tax_reform/Documents/SalesTaxBooklet%20Fe...

Total cost before: $166.89, including tax $9.12
Total cost after: $165.52 including tax of $7.75
Sticker: "You Save $1.37"

To me, this is indicative of a Governor's plan that just doesn't "add up". (FYI, the link may be corrected by the time you view them.)

~Bob

best of intention

i dont see any rich people paying tax on auto repairs ,pretty sure they are driving cars with warranty protection good luck to the family struggling to get by on 40 k with two children and trying to keep the car running so they can get to work just a little added to the bill when the car repairs are done