Minnesota taxes: Where do we go from here?

Minnesota taxes: Where do we go from here?
CORBIS/Laughing Stock
Gov. Tim Pawlenty
MinnPost/Terry Gydesen
Gov. Tim Pawlenty

Sure, you’ve heard it before: Gov. Tim Pawlenty vetoes yet another DFL bid to close the state’s budget chasm by raising income taxes on high earners.

But the tax issue has many lives in this election year when the Independence Party’s gubernatorial endorsee, Tom Horner, has joined DFL candidates in saying some form of a tax hike is overdue.

So you can think of Tuesday’s veto as a new beginning, not the end of the tax debate.

It helps set the field for a lively race on major tax choices: 1) no new taxes, 2) expand sales taxes, 3) raise taxes on highest incomes or 4) continue pushing the budget pressure down to the property-tax level.

Context is useful here.

Minnesota’s current mix of state and local taxes has weighed heaviest on families in the middle of the income range — earning about $40,000 to $62,000 in 2007, according to analysis by the Institute on Taxation and Economic Policy which has offices in Whitewater, Wis., and Washington, D.C.

When all taxes were tallied, the highest earners got off the easiest, paying 6.6 percent of their incomes, while that middle group was taxed 10 percent and the lowest earners paid 9.2 percent.

Tax clothing?
Among the options facing the state, one is extending sales and excise taxes — a move favored by Horner, some DFLers and some business leaders.

Minnesota is one of only five states that still exempt clothing from the sales tax, said Thomas Bakk, the DFLer from Cook who chairs the Senate Tax Committee. (Actually the number of states with no tax on clothing is higher if you also count the five states that have no sales tax at all.)

Sen. Tom Bakk
Sen. Tom Bakk

Nixing the clothing exemption could bring in $257 million during the fiscal year that begins in July, according to analysis [PDF] by the Minnesota Department of Revenue.

One argument against the sales tax is that it generally is regressive. Low-income families pay a bigger share of their incomes in sales taxes.

When it comes to clothing, though, that rule may not hold true.   

“People with higher incomes buy more clothing and more expensive clothing,” Bakk said.

Significant sums also could be raised by extending the sales tax to cover services like car repair and legal work.

The Governor’s 21st Century Tax Reform Commission — a blue-ribbon panel of corporate executives and other experts — called [PDF] last year for limited expansion of the sales tax.

The commission’s report also said that raising the cigarette tax by $1 a pack could yield the state an additional $147 million while ultimately resulting in “lower health-care costs for the state and for businesses that provide health care to their employees.”

Taxing highest incomes
News reports aptly used the term “exercise in futility” to describe the DFL’s bid on Monday to raise income taxes on the top 125,000 earners. Pawlenty’s veto was a given.

The state would have gained $435 million from the DFL tax proposal, which had as its main pillar a plan to create a fourth tax bracket for incomes higher than $113,000 for a single taxpayer and $200,000 for couples.

At least 12 other states — including Wisconsin and North Dakota — have created tax brackets on incomes higher than $100,000, according to the Federation of Tax Administrators. [PDF] Their ranks are likely to grow this year as most states also struggle with massive deficits.

Five states — California, Hawaii, New Jersey, Oregon and Rhode Island — have higher rates on upper brackets than the 9.15 percent that was proposed in Minnesota. The highest rates are 11 percent in Hawaii (on incomes of $200,001 and higher) and Oregon (on incomes of $250,000 and higher).

Pawlenty may have killed this option for this session. But look for former Sen. Mark Dayton to push hard on it during his DFL gubernatorial primary campaign. “Read my lips, ‘Tax the rich,’ ” Dayton says on his campaign website.

Meanwhile, see this MinnPost report on the question of whether legislative leaders have a “Plan B” for balancing the budget this year.

Putting the squeeze on property taxes
Whether or not politicians in St. Paul will admit it, Plan B until now has been to kick the problem downstairs by slashing aid to local governments.

At a result, Minnesota homeowners collectively have paid more in each recent year in property taxes — even through the Great Recession and punishing waves of foreclosures, according to the Revenue Department. The increases — 5.7 percent in 2008 and 3 percent in 2009 — outpaced inflation.

Taxes collected this year on homestead properties are projected to decline slightly in tandem with home values and new construction.

But the long-term trend has been for cities and counties to lean harder on property owners to pay for libraries, cops and street maintenance. For example, from 1999 to 2008 city revenues derived from property taxes jumped 102 percent as cities received less state and federal aid, according to the Office of the State Auditor.

That shift could be seen as healthy in that it places responsibility for the tax decisions close to home.

State Auditor Rebecca Otto
State Auditor Rebecca Otto

Punishing at the wrong time?
State Auditor Rebecca Otto doesn’t see it that way, though. She argues that the shift unwisely punishes taxpayers at precisely the wrong time.

Take the homeowner who has lost a job. The property tax is blind to his or her plight.

“This is a dangerous road to go down,” Otto said. “We don’t want to force people out of their homes. … Because of our economic downturn, because of our foreclosure crisis, I believe that putting more emphasis on the property tax is the wrong direction to go.”

In one dire scenario, the full brunt of the state’s fiscal failures could shift to property taxpayers. DFLers warned this week that the state Constitution requires Otto to automatically raise property taxes across the board if the state borrows to cover its bills and can’t pay back the money.

The mechanisms by which that would happen are complex. Otto said she doesn’t know that the provision ever has been exercised.

What she could say while her office researches the prospects is that the danger is not imminent.

“The threat of this having to be used is not there right now,” she said.

Still, she didn’t rule it out entirely.

“It’s like being struck by lightning,” she said. “There’s a chance if certain factors lined up in a certain way.”

Sharon Schmickle reports on the economy, science and other topics for MinnPost.

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Comments (15)

  1. Submitted by Brad Robinson on 05/12/2010 - 08:52 am.

    In looking at the first chart from the 2007 breakdown in tax percentages, it’s no wonder that the wealthier Minnesotans want tax increases to come more from sales tax and property tax, since those tax burdens move disproportionately away from the wealthy, to more percentage-wise on the middle and lower incomes. Whereas the income tax hits them harder. Guess who has more clout in the capitol?

  2. Submitted by Brian Simon on 05/12/2010 - 09:06 am.

    Clearly the only fair system of taxation is NO taxation. No income taxes, no property taxes, no sales taxes, no gas/cigarette/booze taxes. Shut down government facilities & auction them off to the highest bidder – schools, libraries, town halls, courthouses, roads & bridges. Return the proceeds to the rightful owners – we, the people. Then we can all declare ourselves sovereign to ourselves & work out the details as necessary. I think everyone will agree that this is the obvious solution to the budget showdown; the best government is no government.

  3. Submitted by Richard Schulze on 05/12/2010 - 09:25 am.

    The fundamental issue here is this: We’ve run out of other people’s taxes to raise. We’re going to raise yours – whoever you are.

  4. Submitted by Brad Robinson on 05/12/2010 - 10:09 am.

    You are so right Brian. Then we would have no taxes, just FEES.

  5. Submitted by Charles Senkler on 05/12/2010 - 11:34 am.

    Electronic pull tabs = $500,000,000 (that’s millions) per year to the state. The only problem is the American Indian lobby and it’s control via campaign contributions to the legislatures.

  6. Submitted by Howard Salute on 05/12/2010 - 12:28 pm.

    In 2007 the MN sales tax was 6.5%. The table shows that those making less than 23,000 per year paid 6.5% of their income in sales taxes. So, theses folks spent none of their income on exempth purchases liker food and clothes?? I don’t think so! And if we go to the column of people earning 23,000 to 40,000 they paid 5.1% of their income in sales taxes. So, this means they were “exempted” from 1.4% of purchases. Gee, 1.4% of $40,000 is a whopping $560 spent for “exempt purchases” like food and clothes. Come on! Who believes this data? Uhhh..politicians??

  7. Submitted by Arito Moerair on 05/12/2010 - 01:21 pm.

    Excellent idea, Brian.

    For example, my neighborhood is relatively safe. I don’t feel like I need the police, so I refuse to pay for them. Fire them.

    I have lots of books at home. I don’t want to pay for a library, so shut it down.

    I cycle to work. I don’t need roads. Get rid of them and replace them with bike trails.

    I don’t break laws, so I will never need a courthouse. Demolish it and build a football stadium.

    These ideas will most certainly get our state back on track. Thank God for sensible people like you and me.

  8. Submitted by Brian Simon on 05/12/2010 - 01:52 pm.

    Howard writes
    “The table shows that those making less than 23,000 per year paid 6.5% of their income in sales taxes. So, theses folks spent none of their income on exempth purchases liker food and clothes??”

    Not sales taxes alone, but sales & excise taxes. Examples of excise taxes are the ones on booze, tobacco and gasoline. Looking beyond the numbers, people living in poverty tend to buy more of their food from convenience stores, much of which is taxed as snacks or junk food. So, looking at the different lifestyle of the poor (higher rates of tobacco & alcohol use as a percentage of income, lower access to untaxed food at supermarkets), its not at all hard to imagine that they’re paying more sales & excise taxes as percentage of income.

  9. Submitted by Kathleen Doran-Norton on 05/12/2010 - 02:35 pm.

    Do we know what percent of those Minnesotans making $480k and up are small business owners?

    How about the $191-480k group?

  10. Submitted by Ginny Martin on 05/12/2010 - 03:24 pm.

    Don’t small business owners pay a much lower tax in reality because of a number of exemptions and expenditures that can be used to lower taxes? I have a (really small) small business and each year I gather up certain of my business and take it to my tax preparer. That helps bring my taxes down.
    If I made $200,000 and did not spend anything on my business–a new computer, building shelves in my office, business transportation, say– would pay the full amount proposed.
    Correct me if this is wrong and tell me what is right.

  11. Submitted by William Pappas on 05/12/2010 - 06:26 pm.

    Brian is living in that conservative fantasia where all of those former government services delivered with no profit are privatized and now offered with a tidy profit to the provider. Schools, roads, buildings will all be much more expensive when privatized and the public will loose the ability to regulate them effectively. Safety will be comprimised becasue all of the enforcement will be privatized. This path is the one Pawlenty has chosen for us by his use of the structural budget deficit and he has successfully put the state in a fiscal crisis so he can advocate for privitization and cuts in the services that have helped the middle class and small business in Minnesota for decades if not centuries. Taxing the rich is by far the least damaging and moral course for now. The wealthy have been least impacted by this recession and a tax increase does not change their consumption patterns which are less local than spending by the middle and lower classes. It’s time they feel the pain like every one else.

  12. Submitted by Brian Simon on 05/13/2010 - 11:29 am.

    William writes
    “Brian is living in that conservative fantasia …”

    I thought it was just ‘A Modest Proposal,’ though I guess not everybody sees it that way.


  13. Submitted by Brian Simon on 05/13/2010 - 11:31 am.

    “Do we know what percent of those Minnesotans making $480k and up are small business owners?”

    A story at MPR today says 7% of filers who would be hit by the proposed tax are small businesses.

  14. Submitted by David Willard on 05/15/2010 - 12:43 am.

    Yes, we should raise taxes now. That has always helped throughout history, then maybe our fearless Democratic leaders in government would have the tools to increase spending even more than they have for the past thirty years. it seems to work in California. bwahahahaha

  15. Submitted by Herbert Davis on 05/15/2010 - 10:31 am.

    History lesson….when the income tax was progressive the country did quite well and the rich still bought vacation homes and sent their kids to spring break and wen on cruises.

    When we cut the progressivity of the taxes we started to have deficits and created credit as a way of life.

    When it got to the point that the poor were paying the taxes for the rich so that they could work more hours for the rich…(JOBZ)…the rich got richer and bought the government.

    The government saved babies and sent the poor off to fight in wars for oil…. oh well…

    the class war is over…the rich won!
    …get over it and pay up! God Bless America!

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