Tax talk heating up at the state Capitol

After reading the recommendations from several task force reports, Sen. Ann Rest, DFL-New Hope, says she put together a comprehensive, revenue-neutral plan to realign Minnesota's tax system.

The bill would phase out the corporate income tax, impose a fourth tier income tax rate on Minnesotans who earn more than $250,000 a year, and expand the sales tax to clothing and legal and accounting services.

"When the sales tax is imposed, the sales tax rate will drop. It will certainly get to 6 percent. We're hoping it can get below that for the out biennium," said Rest.

Rest says her goal is to bring fairness to a tax system she believes is favoring more affluent Minnesotans.

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She introduced her bill the same day the Minnesota Department of Revenue released its biennial Tax Incidence Study, which offered a similar conclusion.

Based on 2006 data, the study found the state tax system became significantly more regressive that year. The results show lower and middle-income households pay a higher percentage of their income on taxes than the highest income households do.

Paul Wilson, the Revenue Department's director of research, says policy decisions do not explain the changes.

"This looks like it's at least related to distribution of income issues. Now what causes the distribution of income to change? It could be a lot of things, but the business cycle is certainly part of it," said Wilson.

With both the House and Senate in session, some key legislators had not yet had time to study the report. Sen. Tom Bakk, DFL-Cook, the chairman of the Senate Tax Committee, said he was waiting to read his copy. But Bakk said he's not surprised by the finding that Minnesota's tax system is somewhat regressive.

"Lower and middle-income households pay around 12.3 percent of their income in taxes. As you earn more and you start getting over $200,000, that percentage goes down," said Bakk. "And by the time you reach about $500,000 in income, it's actually about 9 percent in state and local taxes together."

Bakk says he suspects if any legislators want to propose an increase in the state income tax in the coming weeks, they'll use the report to make their case.

The chair of the House Tax Committee, Rep. Ann Lenczewski, DFL-Bloomington, says the report shows a worsening trend. Lenczewski says she's not comfortable with a regressive tax system and wants to make changes.

"You can make the system more progressive or more regressive, whatever you believe in, without raising taxes. It's the mix that we're talking about here," said Lenczewski. "So whether you're a kind of a small government person who doesn't want a lot of revenue, or if you're a big government and want a lot of revenue, that's a separate issue than who pays it."

House Republican Minority Leader Marty Seifert says House Democrats are dancing around the tax issue. Seifert says he's convinced tax increase proposals are on the way, and he'd like to see them sooner than later.

"If they're going to raise taxes, just go ahead and get the bills out there and let's get them vetoed," said Seifert. "Then let's get to work on the budget, and come up with a fair compromise that will get the work of the people done."

The House Tax Committee is scheduled to review the Revenue Department's report on Wednesday.