Dayton tax bill gets first hearing; hundreds weigh in
Bill Salisbury, Pioneer Press, February 28, 2013 – Minnesotans care passionately about Gov. Mark Dayton’s proposal to overhaul the state’s tax system.
The evidence: Hundreds of citizens lined up to testify for and against Dayton’s plan at the first legislative hearing on it at the State Office Building on Wednesday night, Feb. 27. The crowd spilled over into two overflow hearing rooms, where they watched it on closed-circuit television.
Proponents and opponents were given equal time before the House Taxes Committee.
Lining up for Dayton’s plan were city officials backing increases in state aid to local governments, parents of children with disabilities, teachers and students applauding tax increases that would provide more services and education funding, clergymen who want the state to do more for the needy and health care professionals who favors higher cigarette taxes to discourage teenagers from smoking.
Among early opponents was a parade of professional service firm owners, who argued Dayton’s proposed 5.5 percent sales tax on business-to-business services would severely hurt their fields.
They included representatives of architectural and engineering firms, advertising and public relations companies, accountants and information technology consultants.
“This tax, as proposed today, would be absolutely devastating to the state of Minnesota,” said Doug Spong, president of the Carmichael Lynch Spong advertising agency in Minneapolis. “There is no other state in this country that taxes creative services first. It would cripple a thriving creative economy.”
Among the proponents, St. Paul Mayor Chris Coleman and Minneapolis Mayor R.T. Rybak told the panel that state aid cuts over the past decade have resulted in higher property taxes and reduced city services.
Coleman said Dayton’s plan to increase local government aid “takes care of key needs … (and) would strengthen cities.”
Rybak called it a “step in the right direction on property taxes.”
Dayton has proposed the most extensive rewriting of the state’s tax code in a generation. It would increase state taxes by $2.1 billion over the next two years, with top earners and businesses paying the brunt of the costs.
His budget would increase state spending from $35.2 billion in the current two-year cycle to $37.8 billion in the 2014-15 biennium. That’s a 7.6 percent increase.
The governor has said the state needs the extra money to erase a budget deficit, provide more money for education and property tax relief and stabilize future state budgets.
The biggest change he called for would broaden the sales tax base to include haircuts, car repairs, expensive clothes and — stirring the most controversy — business-to-business services, such as advertising, accounting and legal work that are not taxed now. In exchange, he would lower the sales tax rate from 6.875 percent to 5.5 percent.
He would hit the wealthiest 2 percent of Minnesotans with a new top income tax rate — 9.85 percent, up from 7.85 percent.
To offset rising property taxes, he proposed $500 annual tax rebates to homeowners.
And he wants to reduce the state’s corporate income tax rate from 9.8 percent to 8.4 percent, offsetting lost revenue by eliminating certain tax breaks.
Here’s a sampling of testimony from the hearing:
Mark Haveman, executive director of the Minnesota Center for Fiscal Excellence (formerly the Minnesota Taxpayers Association), praised Dayton for trying to modernizing the state’s tax system, but he said the proposed $500 tax rebate isn’t needed, the $1.4 billion it would cost could better be used for other tax reforms and the state’s current property tax refund program, based on ability to pay, is “far more progressive.”
Dayton’s new top income tax bracket would affect 21,000 businesses and give Minnesota the fourth-highest income rate among the states, making it an outlier, said Minnesota Chamber of Commerce lobbyist Beth Kadoun.
But Nan Madden, director of the Minnesota Budget Project, said the proposed fourth tax tier is “an essential step so the highest-income Minnesotans pay a similar share of their incomes in taxes as other Minnesotans do and is critical to a tax plan that is progressive overall.”
A physician said Dayton’s proposal to increase cigarette taxes by 94 cents a pack would discourage teenagers from starting to smoke. “This is a health issue,” he said.
But a tobacco industry lobbyist warned that if Minnesota raises its cigarette tax to the proposed $2.17 a pack, it would prompt bootlegging from North Dakota, which has a 44-cent tax. He said a smuggler with a U Haul truck full of illicit smokes could evade $700 in Minnesota taxes.
A veterinarian warned that the governor’s plan to extend sales taxes to pet services would force cat and dog owners to “make difficult choices and could result in abandoned or euthanized animals.”
Dayton has called for extending the sales tax to items of clothing costing more than $100. Shopping center owners testified that would drive away out-of-state shoppers.
A Lutheran pastor told lawmakers the moral test of their budget policies is how they care for the state’s most vulnerable citizens.
“After a decade of deep budget cuts that have caused significant pain, it is essential that we begin to restore the fabric of our communities through investments in Minnesota’s people and our treasured natural resources,” he said. “But those critical investments in programs like affordable housing and health care can only be realized if sufficient revenue is raised.”
The hearing was only the start of what is expected to be a months-long dissection of Dayton’s proposal that even he expects lawmakers to revise as it moves through the committee process. Since the Legislature is controlled by his fellow Democrats, he is likely to get much of what he wants.
The question is: How much?