The major tax overhaul that Minnesota lawmakers are expected to consider next year could include some significant changes in the state sales tax.
Extending the sales tax to clothing remains an unpopular and unlikely option, but many other transactions could be taxed for the first time as a way to boost state revenues.
DFL Gov. Mark Dayton has placed tax reform near the top of his to-do list for 2013. He's frequently said he wants a tax system that is fairer, more equitable and better suited for the economy of today and tomorrow, rather than the economy of the past.
Dayton will be taking a long look at Minnesota's 45-year-old state sales tax. But during a recent MPR News interview, the governor acknowledged it will be a tough sell to expand the sales tax to goods and services that are currently exempt.
"Two-thirds of our economy now is services, and yet we tax very few of those," said Dayton. "Broadening that base sounds good in concept. But it also means you tax things that aren't being taxed now, and nobody is going to like that."
Dayton's point man on taxes, Revenue Commissioner Myron Frans, has been traveling the state to talk about potential changes that could be in the governor's tax reform proposal next month. Frans said a lot of people are interested in expanding the sales tax base and lowering the rate. The general sales tax rate currently stands at 6.875 percent.
"We have one of the smallest sales tax bases in the country right now, and certainly in this region," he said. "And at the same time, we have the highest sales tax rate in the five-state region."
Frans said the trick is figuring out which goods and services to start taxing after decades of exemption. Minnesota's exemption list includes necessities such as food, clothing, home heating fuels and prescription drugs. Business-to-business purchases are exempt, as well a large number of services ranging from advertising to veterinary treatments.
Frans said another area of concern is the sales tax revenue lost from online transactions.
"Main street businesses really deserve support by the state, so that we collect sales tax from those folks who are selling into Minnesota over the Internet or remote sellers," he said. "Everyone believes that the main street businesses in Minnesota have a competitive disadvantage with those folks selling over the Internet, and that's something we should definitely address."
“I think you'll see massive tax increases in every possible category that you can think of” under DFL control.Rep. Greg Davids, R-Preston
But Frans stressed that it would take a change in federal law to capture the bulk of the $400 million in sales taxes lost last year through online sales. He said state lawmakers could solve about a $5 million annual problem by taxing the Minnesota affiliates of the larger online retailers.
DFL Senate Majority Leader-Designate Tom Bakk of Cook said that so-called "affiliate nexus" tax is a top priority for business groups. During a pre-session media briefing, Bakk urged Republicans leaders to show some bipartisan support for the issue.
"It would be nice if we could hold hands here today and say it's going to be one of the pieces of tax reform," said Bakk. "I think Minnesota brick-and-mortar retailers need that legislation passed into law."
GOP Senate Minority Leader-Designate David Hann of Eden Prairie was not making any commitments.
"Our caucus has not met to talk about tax policy specifics. But we will," said Hann.
Rep. Greg Davids, R-Preston, supports the affiliate nexus tax, which he describes as a matter of tax fairness. But Davids, the outgoing chair of the House tax committee, said he probably won't be supporting any other tax proposals from the new DFL majority.
Davids said he thinks Democrats will try to increase every tax they can and expand the sales tax to everything they can.
"You'll probably see sales tax including legal services, funeral services. I don't know if they'll do food and clothing," said Davids. "I think you'll see massive tax increases in every possible category that you can think of."
Davids said he doesn't view a sales tax on Internet purchases as a tax increase, but rather the collection of taxes that should already be collected. However, he cautioned that the potential revenue generated from such a tax would be minimal.