Complicated state taxing system needs reform

Don Heinzman
ECM Editorial Writer

One of the big stories in 2012 will be the need for Minnesota to reform its complicated and unbalanced taxing system.

That story already is being developed by State Revenue Commissioner Myron Frans, as he continues his tour of the state presenting some eye-opening information about the system that needs reform.

Minnesota Department of Revenue Commissioner Myron Frans met with the ECM Editorial Board recently and emphasized a need for tax reform. He used a three-legged stool to point out how it is out of kilter.

After gathering comments from people throughout the state, Frans intends to present his findings and recommendations to Gov. Mark Dayton while hoping for reforms from the 2013 Legislature.

All Minnesotans should wish him good luck in reforming a system that hasn’t been changed since 1986.

Frans makes a convincing case to reform the tax system by explaining that of the $27 billion in annual state tax revenues in 2010, $11 billion in loopholes and tax expenditures (breaks) came off the top, leaving annual state tax revenues of $16 billion.

In other words, he says, for every dollar of state tax revenue, 40 percent went to tax loopholes and tax expenditures. Sixty percent of every dollar went to education, health care and other public expenditures.

To make his point about the unbalanced taxing system, Frans has an actual three-legged stool which is off kilter, because according to 2010 tax revenues, 40 percent of dollars came from the property tax, 33 percent from the income tax and 27 percent from the sales tax.

While Frans would not commit to what tax mix he favors, his analysis clearly shows the property tax needs to be simplified.

For example, since 1913, the number of property classes and tiers has gone up from six to 55 in 2011.

As for the individual income tax, the number of forms has gone up from six in 1987 to 18 in 2010; the number of adjustments and credits has risen from nine to 50.

Frans stresses that much has changed in Minnesota revenues since the tax system was last reformed in 1986. Minnesota’s population is aging dramatically, so that by the year 2035, there will be 850,000 more age 60 and over compared to only 60,000 more ages 35-59. This is significant because tax revenue declines 40 to 50 percent after retirement.

More attention is being paid to broadening the sales tax and perhaps lowering the rate; now there is no sales tax on services. Consumers spent  more on services from 39 percent  in 1950 to 67 percent in 2010. This argues for broadening the sales tax base to include services.

To no one’s surprise, paying more taxes is shifting to the middle class. The top 10 percent  now has 50 percent share of the income, Frans noted.

Another change is the amount of out-of-state sales, particularly over E-commerce that are not taxed:

All this adds up to a powerful case for reforming the state’s tax system if not next year, let’s demand it in 2013.