When Gov. Mark Dayton outlined his sweeping budget plan on Tuesday, he probably realized proposing significant changes in the sales tax would generate the most blowback of any potential revenue hike — no matter how it was framed.
Technically, the governor argued in his pitch that the average consumer wouldn’t pay any more in overall sales taxes because the rate paid would drop from 6.875 percent to 5.5 percent. His proposal also exempts items of clothing under $100 from the expanded tax on goods and services, which would go into effect in 2014.
Minnesotans’ buying habits have shifted significantly from physical products to services, making the narrow sales tax an inadequate revenue stream for the state, Dayton said in defense of the plan. The 20 percent rate reduction also would drop Minnesota from seventh to 27th in the nation when it comes to the highest sales tax rate.
Much of the anticipated $2.1 billion in new sales tax revenue would come from now-exempt business-to-business services, Revenue Commissioner Myron Frans told reporters after the event. Dayton billed it as a “basic fairness” issue.
Predictably, though, a barrage of groups representing interests ranging from lawyers to retailers immediately rejected the proposed extension. Robert Enger, president of the Minnesota State Bar Association, sent out a statement calling the expansion a “misery tax” on divorces and other legal proceedings.
Representatives from the Mall of America last week said they opposed a similar measure because it would deter tourism and hurt retailers at the shopping destination.
Laura Bordelon, senior vice president of advocacy at the state Chamber of Commerce, said taxing business-to-business services is “very concerning.” Small firms that don’t have in-house public relations and legal teams would be especially affected by the additional burden, she said.
Frans conceded that “there are very few items excluded on the business-to-business [side].”
“We got to the point where we felt like it’s better to have everything in than to try to make those few exceptions,” he said. “If we make an exception … the rates have to come up, so every time you want to add something back in, the rate’s got to go up.”
Republicans argued that businesses would simply pass their new tax burden on to consumers, invalidating the governor’s claims that most people wouldn’t feel a hit in their wallets. They criticized Dayton for breaking his promise to hold middle-class Minnesotans harmless.
“We are going to raise $2 billion in sales taxes but nobody’s going to pay them?” Senate Minority Leader David Hann asked at a Tuesday afternoon press conference. “How does that work? So the businesses are going to be absorbing these taxes and what is going to happen? [They’re] not going to pass them to ordinary people and consumers? So, of course, people are going to pay.”
Even DFL legislative leaders were reluctant to stand squarely behind the proposal. Senate Majority Leader Tom Bakk called the expanded sales tax provision “interesting.” Assistant Majority Leader Katie Sieben said the governor’s budget was a “starting point.”
Sen. Rod Skoe, chairman of the powerful Senate Taxes Committee, said he hasn’t supported expanding the sales tax in the past.
Skoe, who hadn’t thoroughly reviewed the governor’s plan, said in an interview Tuesday evening that drawing the $100 line on clothing “is an invitation for mischief.” Retailers, for example, could simply charge $99.99 for the item, rather than $100.
“I’m pretty sure that the tax committee will have a full discussion of this,” Skoe said,
“and I hope we come up with some better mechanism than having that cliff.”
Dayton administration officials didn’t immediately have a comprehensive list of goods and services that would be taxed under the proposal, Frans said, noting that the governor’s plan also includes an “Amazon bill” provision, which expands taxes to some online transactions.
“The motor vehicle repair, the lawn service, the tree removing services, for most consumer services, they will be now taxed,” he said.
Medical services, including prescription drugs and eyeglasses, would be exempted from the expansion. Other exceptions would include food, textbooks, child care services and renewable energy systems.
Here’s a look (PDF) at new goods and services that would be subject to the governor’s sales tax expansion.
Consumer goods and services
Digital goods; parallel taxation of direct satellite services and remote access software; clothing items costing more than $100; admissions and memberships; over-the-counter drugs; personal care services and instruction; legal, accounting, and auto and other repair services.
Legal, accounting, architecture, specialized design, computer, management consulting, advertising, employment, business support services.