The Free Press, Mankato, MN

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December 5, 2012

Our View: Tax reform should be smart reform

The Free Press

— Minnesota's tax system ranks high among the most complicated in the country and low in providing an even state revenue stream. Add problems of equity, transparency and political trickery and you've got a system ripe for reform.

Gov. Mark Dayton appears to have made tax reform one of his top priorities. It couldn't happen soon enough, and it doesn't have to be a partisan effort. There's plenty about tax reform that Republicans should embrace.

Time has eroded the Minnesota tax code that may have worked in the steady growth of the 1990s but is ill equipped to work in the gyrating economy of 2012 and beyond. The system has become unbalanced. It now relies more on revenue streams that aren't growing and less on ones that are growing. It relies more on taxing things subject to political whim and less on ones that are more stable.

The system was more balanced in 1999 when about a third of state revenues came from each of three drivers -- property taxes, income taxes and sales taxes. Today, a full 40 percent comes from property tax, income tax brings in 34 percent and sales tax brings in just 26 percent.

We think it would be helpful for the governor and Republicans to consider principles of taxation all Minnesotans could endorse before getting to the specifics.

The biggest state challenge over the last eight years or so has been the unevenness of the revenue. This has created budget deficits that stifle anything getting done in a number of areas. Budget deficits and political disagreement led to the state government shutdown. So there needs to be a fix to even out that revenue stream.

The system needs to make more sense from a cost-benefit analysis. Costs of a state service should be tied to the benefit and revenue should come mostly from folks who benefit from the service. There were hints of this idea in a recent transportation report that suggested a metrowide sales tax be increased to help pay for metro transit, removing a statewide funding stream.

By the same token, property owners should  feel fairly confident that the local benefits they get from local government are paid for with local taxes. The state shouldn't really be the primary revenue source for snowplowing in Fairmont any more than it should be for park service in Fridley. But local governments and local taxpayers also shouldn't pay for state mandates they don't need and don't want.

Transparency in a tax system creates confidence and compliance. Local and state taxpayers should have a good feel for what spending is connected to their tax dollars. Complicated local government aid formulas only cloud that picture. In a simpler local tax system local taxpayers can communicate their spending priorities clearly. They should be able to tell their government officials in a simple way they want more snowplowing or less park service.

A new Minnesota tax code should be fair -- not necessarily fair in an altruistic way but fair in a way that those who benefit pay for that benefit.

The current mish-mash list of what business is subject to the state sales tax is the best example of fairness hijacked by political favoritism. Over the  years dozens of businesses have become exempt from the sales tax. Some never were subject to the tax. Yet in this age of multi-product business entities, we've created a system where government ends up playing favorites.

Finally, we should be somewhat concerned about how our tax rates overall compare with our competitors. While this should not be a major, driving concern, it's worth considering the public relations benefit we might get by improving our tax ranking. It shouldn't be a primary concern because many a business location study has shown that very few business location decisions are based on a state's tax rates.

Tax reform will undoubtedly bring out  a cadre of lobbyists, each with a legitimate argument on how their interests shouldn't be taxed. So if legislators and the governor agree to sound principles first, they will have a better foundation on which to argue for sensible tax reform that is for the public, not the private, good.

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