By Danielle Killey and Don Davis
Gov. Mark Dayton said tax changes he proposed Tuesday would not cost middle-class Minnesotans more money, but its specific impact remains unknown.
Dayton said his state budget and tax reform plan is a starting point for conversation as the Minnesota Legislature works to set a two-year budget by May 20. While he highlighted key proposals, questions remain.
Dayton’s plan, which would bring in $2 billion in new revenue over two years, would reduce the sales tax rate from 6.875 percent to 5.5 percent in a year but expand what is taxed to include most services, such as haircuts and auto repairs. Clothing items that cost more than $100 also would be taxed.
“This is the largest sales tax reduction in the history of the state,” Revenue Commissioner Myron Frans said.
The sales tax would extend to services businesses provide to other business, which are not taxed now.
Dayton said he did not know how that business tax change would affect consumers. Senate Minority Leader David Hann, R-Eden Prairie, said he thinks the cost would be passed on to them.
“We don’t know how this is going to work out yet,” Frans said. “This is a pretty massive change.”
The proposal also would up income taxes from the current 7.85 percent to 9.85 percent for couples making more than $250,000 and individuals earning more than $150,000. Suggesting increasing those taxes for the wealthiest Minnesotans came as no surprise since Dayton has pushed the proposal for years.
Under the governor’s plan, homeowners would get a property tax rebate of up to $500.
Sen. Rod Skoe, DFL-Clearbrook, said Minnesotans have been asking for property tax relief.
“That’s one of the priorities we had,” said Skoe, the Senate Taxes Committee chairman. He said the committee will look into whether the credit is the best way to provide that relief.
Commissioner Tony Sertich of the Iron Range Resources and Rehabilitation Board said the rebate is a big deal, given how much property taxes have risen in recent years.
“It is going to make a significant dent on it,” he said.
But just how much Dayton’s tax plan will help is not known, Sertich added. “We are not going to have all the answers today. Some things are going up, some things are going down. … It is going to take some time to know the total impact.”
Dayton said the lower sales tax rate should offset the expansion, and between that and the property tax rebate middle-class Minnesotans should not pay more taxes and could pay less.
“For most Minnesota families it is a wash,” he said.
Democrat Dayton said his plan is just the start of the conversation and he expects disagreement from within his own party as well as from Republicans.
He challenged those who disagree with his proposals to come up with their own.
“To those who don’t want to raise any of these taxes I say, ‘Where do you want to cut?’” Dayton said.
Democratic legislative leaders said as they delve into the budget, which they said they have not had a chance to do, they will have more to say on specific provisions. But in general they said Tuesday they were happy with the theme of the budget and tax plan.
Republicans were not as pleased, especially when it came to taxes. Hann refuted Dayton’s claims that the average Minnesotan would not pay more with the changes.
“Everybody’s going to get hit with these taxes,” he said.
Hann said he would like to see tax reform but would rather focus on lowering the rate rather than also expanding what is taxed.
Senate Majority Leader Tom Bakk, DFL-Cook, said he plans to talk with business leaders about their reactions to the proposal.
“There’s a lot in here for the business community to like,” Bakk said.
The plan includes provisions that cut the corporate income tax rate by 14 percentage and put a two-year freeze on statewide businesses property taxes.
Local governments that pay sales taxes are looking into whether the Dayton proposal will save or cost them money.
Executive Director Jim Miller of the League of Minnesota Cities said cities pay sales tax now. Dayton and Frans said their plan to lower the sales tax percentage but increase things it covers would average out to a wash, but Miller said it could hurt some cities and help others.
Taxing clothing already has proven to be controversial.
“It’s probably the right policy,” Bakk said.
But the fact that Minnesota is one of few states that doesn’t have the tax could make it a tough sell, he added. “That’s what makes it, I think, a pretty steep hill to climb.”
The tax would be applied to the full amount of clothing items that cost more than $100.
“I am sure it will give rise to a good many $99.99 deals around the state,” the governor said.
Frans said that could be the case, but “we had to pick a line somewhere.”
Dayton and officials emphasized the plan comes as a package, so it is difficult to assess specific pieces.
“Everything is connected,” Bakk said.
The details will dominate discussion at the Legislature in the coming months.
“It’s a good, bold move that the governor made,” Skoe said. “I think he’s given the Legislature a lot of opportunity … Now it’s our turn.”