A sustainable, balanced budget and tax reform are among Gov. Mark Dayton’s priorities.
Minnesota Department of Revenue Assistant Commissioner Terri Steenblock visited Isanti Wednesday, Dec. 19, to discuss tax reform and explain why the governor and Department of Revenue think it’s needed.
“If we have the opportunity to look at tax reform and make some changes to the tax policy, that’s going to help us not only balance the budget, but it’s going to help create jobs,” Steenblock said. “We’re going to be more competitive as a state.”
Over the last several decades, she explained, the tax burden has been put on property taxes, rather than sales and income tax, whereas it had been more balanced in the past.
With tax reform, Dayton and the Department of Revenue will look at ways to shift that burden for the purpose of rebalancing tax revenues and making the tax system fair, balanced, competitive and sustainable for businesses and individuals.
From Commissioner Myron Frans’ and Steenblock’s visits to over 50 cities around the state, people have agreed that Minnesota’s tax code is out of date, out of balance, not fair and too complex, Steenblock said.
“A significant amount of weight is being put on property tax, and so it’s out of balance,” she said. “When you’re out of balance, that has an impact on the revenue, it has an impact on the citizens of the state. We need to look at getting it back into balance.”
Between 2004 and 2008, there was a significant increase in jobs in the state. After that, jobs started to decline until the low in 2009. With fewer people employed, people spend less, which in turn translates to fewer dollars of sales tax revenue.
“When jobs are down, it impacts the rest of the revenue stream,” Steenblock said. “We have one of the higher sales tax rates, but we have less revenue than some of the states around us.”
She also explained that consumer purchasing has shifted over time from goods to services — and in many cases, services are not taxed, which further decreases sales tax revenue.
“People aren’t buying as many goods, they’re buying services,” Steenblock said. “When your goods are included and less specifically excluded, services are excluded from taxes and less specifically included — so most of your services are excluded from taxes and your goods are included.”
E-commerce has also been an issue that has led to declining sales revenue in many states. Depending on the state’s laws, items purchased online from out-of-state are not taxed.
“The sales tax hasn’t kept pace with what’s happening in the industry,” Steenblock said, explaining that $149 million was potentially lost in sales tax revenue last year because of e-commerce. “There’s a gap here, and this definitely needs to be looked at … It’s another change in how people are purchasing things; when the tax system isn’t keeping pace with that, we’re losing potential revenue and we’re making ourselves less competitive.”
There are also arbitrary sales tax laws that could be changed. For instance, a Milky Way candy bar is taxed, but a Twix candy bar is not because of the flour content.
Steenblock said the department has also been analyzing changing demographics when they look at tax reform and the impacts those changes will have on the revenue system. By 2035, there will be a much higher elderly population, but not much change in the number of people in their 30s, 40s and 50s, which is the group paying the most in income taxes.
“When people retire, their income goes down and taxes go down, which then impacts the overall revenue that is coming into the state,” she said. “We need to be concerned about demographics and we need to take that into consideration when we’re looking at tax reform.”
There will be a significant shift in the population, leading to a shift in revenue, Steenblock explained.
“We can’t depend solely on income and income tax to help with that revenue difference,” she said.
The purpose of tax reform will be to rebalance tax revenues, making the system fair, simple and sustainable and the state more competitive.
“If we had a simpler system, it would make us more effective as an agency,” Steenblock said. “In order to get the state budget back on track, we need something that supports growth. If we continue down the path we’re on, we’re not going to be able to get the budget back on track … it’s the right time for us to look at tax reform.”
Dayton will present the tax reform package as part of his budget bill in January.
Stay updated on Minnesota tax reform online at www.bit.ly/TaxReformMN. Contact Commissioner of Revenue Myron Frans at 651-556-6003.