Tax Reform On Legislature’s Docket When It Convenes Tuesday

By Danielle Killey and Don Davis

Revenue Commissioner Myron Frans traveled the state in recent months talking to Minnesotans about the state’s tax system, an extended road trip that will produce a tax reform outline in the 2013 legislative session.

The current tax system is out of date, too complex and “picks winners and losers,” Frans said.

His boss, Gov. Mark Dayton, will release his budget and tax reform ideas by Jan. 22. But even some of Dayton’s fellow Democrats wonder if a full reform is possible in 2013, a year in which he and the Legislature must adopt a two-year budget that will consume most of their time.

“I do realize that part of being an effective legislator is being patient,” said incoming Senate Taxes Chairman Rod Skoe, DFL-Clearbook. “Sometimes large changes take more time.”

Even if tax reform only can be started in 2013, committees like the one Skoe leads will be busy. They are expected to hear proposals to raise income taxes on the state’s richest 2 percent, debate whether the sales tax should collect more money and figure out how to reverse ever-increasing property taxes, especially in rural Minnesota.

Some of those goals, such as changing how the sales tax operates, could fit into a tax reform plan that starts in the coming months.

Skoe said some tax reform can happen in a budget year, but other things “may need more time to percolate.”

Dayton and Skoe said a tax reform priority, whenever it occurs, should be to make the tax system more understandable and fair.

“I don’t necessarily know if we can do the property tax reform,” Rep. Paul Marquart, DFL-Dilworth, said. “But I do think a major priority should be looking at property tax relief.”

Many lawmakers agree with Marquart that property taxes are too high, especially Democrats who spent the summer and fall campaigning on the issue.

The homestead property tax credit, which reduced taxes for homeowners by the state paying a portion of their taxes to local government entities, went away in negotiations that ended the 2011 state government shutdown. Efforts will be made to reinstate it, or at least to adopt something to help homeowners.

In 2011, lawmakers tried a new program that excluded a certain amount of properties’ values from taxes, aiming to decrease the amount owed. But the change left many local governments with the choice of raising taxes or cutting costs to make up for the difference in funding.

Eliminating the homestead credit especially hit rural areas because it was designed to help owners of low-value property, which describes many rural homes.

One issue Marquart, who will be House Education Finance Committee chairman, will tackle is property tax levy increases that have been considered in elections across the state to fund schools’ day-to-day operations.

“Now, your education is starting to depend on your ZIP code,” said Marquart, with rich communities often approving higher taxes and poor communities rejecting them.

Property taxes have risen in rural areas more than in cities, which makes passing a property tax increase harder there, Marquart said.

“We need to solve that gap,” Skoe added.

Sen.-elect Kent Eken, DFL-Twin Valley, said property taxes are up to eight times higher in rural parts of his northwestern Minnesota district than in urban areas.

“We are not second-class citizens,” he said.

But fixing the property tax problem would cost money.

“If you are going to put state revenue into property tax relief, it has to come from somewhere,” Skoe said.

Eken suggested that since rural taxes are rising faster than those in cities, “it is time to pursue a more equitable tax policy.”

Most Democratic-Farmer-Labor Party legislators hesitate to outright say they want to raise taxes, but that is a possibility. Also on the table is somehow expanding the state sales tax, although few suggest adding it to clothing or food.

Rep. Bud Nornes, R-Fergus Falls, said expanding the sales tax could “conceal” the tax increase. In recent weeks, talk has increased to reduce the overall 6.875 percent state sales tax rate but apply it to more goods and services.

Many services are not taxed. Neither are sales between businesses.

“We have a very high sales tax, but one of the most narrow in the country,” Rep. Denny McNamara, R-Hastings, said. “I think we’ll look at whether that should be broadened.”

Republicans generally claim that a Democrat’s idea of tax reform is raising taxes.

On the other hand, many Republicans promote cutting all taxes, Nornes said, but “under the current situation that probably is not possible.”

Regardless of warnings that tax reform may need to be delayed, some lawmakers expect that to happen.

“We’re going to have to look at tax reform,” Assistant Senate Majority Leader-elect Katie Sieben, DFL-Cottage Grove, said, noting that past budgets and the current tax structure have had “a negative impact on property taxes.”

Frans said the state needs to look at reducing reliance on property taxes.

Exemptions should be looked into as well, he said.

In 1987, there were nine credits or adjustments people could make on their taxes, but in 2010 there were up to 50, Frans said. About 40 cents of every dollar the state could have in tax revenue is claimed by tax breaks, he added.

The system also may need an overhaul as Minnesota’s demographics change.

People generally make the most when they are in their 30s, 40s and 50s, Frans said. But Minnesota’s population is aging, and as that happens, less tax money is available, especially in income tax.