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Dayton administration defends controversial sales tax overhaul

Revenue Commissioner Myron Frans’ goal clearly was to blunt  criticisms, particularly over extending the tax to business services.

“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.”
Office of the Governor

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.

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“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.

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“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.

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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.