Gov. Mark Dayton is proposing Minnesotans pay a lower overall sales tax rate but wants to apply the tax to more goods and services, including clothing items over $100.
The expanded tax would cover many services for consumers and businesses that aren't taxed now.
Dayton would reduce the sales tax rate from 6.875 percent to 5.5 percent. But with more things taxed, Revenue Commissioner Myron Frans said the changes would bring in about $1 billion more each year. On top of the sales tax on big-buck clothing, Frans said the tax would also apply to digital goods, such as music downloads, and a wide range of services.
"Motor vehicle repair, the lawn service," Frans said. "Most consumer services will now be taxed. What's tax exempt? Medical supplies, prescriptions, prescription eyeglasses, burial services."
But Frans and the governor argue the vast majority of consumers will not pay more overall in sales taxes, because of the lower tax rate.
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Most of the increased revenue would come from taxing a slew of business services, as Minnesota follows other states in taxing such services. The list includes legal, accounting, architectural, and management consulting.
Frans said there was a lot of discussion about exempting some services but decided it was better to have everything in rather than make exceptions.
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"Because if we make an exception, let's say for legal services, the rate has to come up," Frans said. "The only was to get the rate down to 5.5 percent statewide for everything was to pretty much put in as much as we could to make it as broad as we could."
Businesses could absorb those taxes, letting them hit their bottom lines. Or they could try to pass on the taxes. Frans said the state would keep an eye on how that plays out.
"Business taxes get transferred in high prices sometimes and lower wage and lower profits for the owners," Frans said. "Some of it gets exported out of the state. This is pretty massive change. So, we're studying that."
If the Dayton's sales tax proposal survives the inevitable efforts to scuttle or transform it, Minnesota would go from the seventh-highest sales tax rate to the 27th highest among U.S. states. It would join most states in applying sales taxes to clothes.
Bruce Nustad, president of the Minnesota Retailers Association, had a mixed reaction to the sales tax proposal.
"[There's a ] couple of things in there we like. And few things we don't. Right now, we need we need to take a little a bit more time to review the whole package and bring context to it," Nustad said.
Some business leaders already have an opinion. Charlie Weaver of the Minnesota Business Partnership said expanding the sales tax on businesses could cost the state jobs.
"What a Target, or an Ecolab or General Mills will do then is just buy those services elsewhere. They can certainly buy those services in Chicago or Sioux Falls or any other city," Weaver said. "It can really hurt those small accounting and PR firms and law firms that provide those big companies locally."
Maureen Bausch, vice president for business development at the Mall of America, said taxing clothes could really hurt the mall and the state's tourism industry. She said a survey indicated 40 percent of the some 17 million tourists who visit the mall would not come if clothing were taxed.
"It could affect the tax they're already paying on things. There are just many negatives in this and I really hope we look at it thoroughly before making any decisions," Bausch said.
Lawyers aren't happy with the sales tax proposal either because it would cover both consumer and business legal services.
Robert Enger, president of the Minnesota Bar Association, said that the move amounts to a misery tax, hitting up people for extra money when they're dealing with weighty matters like divorces, death and injury.
"When a consumer seeks the assistance of an attorney, there's a specific reason they're doing it," Enger said. "They've been in a car accident, or there's been a personal injury."
(MPR reporter Matt Sepic contributed to this report.)