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Dayton says tax plan intended to force businesses to pay fair share

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State of the State
Minnesota Gov. Mark Dayton delivers his state of the state address Wednesday, Feb. 6, 2013 at the State Capitol in St. Paul. Hoping to drum up support for the proposed sales tax overhaul, the governor's office on Tuesday put out a report from the revenue department detailing how the reworked sales tax would play out in an average Minnesotan's shopping cart.
MPR Photo/Jennifer Simonson

Mark Dayton campaigned for governor calling for higher taxes on wealthy Minnesotans. He said then and now that they need to pay their fair share.  

Dayton speaks about his ambitious sales tax plan in similar terms. He says it is intended to force businesses to pay their fair share. Dayton's proposal would increase sales tax collections by nearly $2.1 billion. The governor insists average Minnesotans would not be stuck with the bill, but many people are skeptical.

Hoping to drum up support for the proposed sales tax overhaul, the governor's office put out a report from the revenue department detailing how the reworked sales tax would play out in an average Minnesotan's shopping cart.

A hypothetical shopping cart compares the difference in tax paid under the current plan and the governor's proposed plan. 

In a hypothetical shopping cart, the total bill for the purchased goods before taxes is $157.77. Under the current sales tax, $9.12 tax is added to the bill. But under Dayton's plan the sales tax for the same shopping trip would amount to $7.75. Our average Minnesotan would actually save $1.52 because Dayton's plan would drop the sales tax rate from 6.85 percent to 5.5 percent.  The only item taxed under the governor's plan that is not currently taxed is over-the-counter cold medicine.

Can the state increase sales tax revenue by more than $2 billion without average Minnesotans like you and me footing the bill.

Out of the gate, tax consultant Terry Magill is not happy about the governor's proposal, but he says it's not just about his business and that everyone should be concerned.

The consulting work Magill does which is currently sales-tax free would be taxed at the 5.5 percent rate under Dayton's plan.

"My dad used to say, 'There's no such thing as a free lunch.' And if anybody thinks that they're lowering the sales tax to help us out, they're wrong. It's a smoke and mirrors things," Magill said. "Look at it, 'We're lowering the sales tax, but we're going to end up collecting way more revenue.' The revenue comes from somebody, and it's going to be the middle class."

Magill said he is unsure whether he would pass along the sales tax to his customers or absorb some of the cost himself.  But he is adamant that he would not let the tax cut into his bottom line.

"The average business person that's going to get hit with these extra taxes is going to pass it along to their consumer," Magill said. "And if they cannot pass it along they're going to end up reducing their expenses. And when a business reduces its expenses, they end up cutting jobs."

Maybe that's why, according to a recent Star Tribune poll, more than 60 percent of Minnesotans don't like the governor's plan to tax business services.

A recent unscientific sampling of some shoppers at the Mall of America found general agreement that regular Minnesotans expect that they --not the businesses Dayton says need to pay their fair share -- will end up paying the tax.

"I think it's going to come back to bite us," said Katie Latzke, 24, of Robbinsdale.

"You're not going to save any money. It's going to cost you more money down the road. It's just a matter of time," said another shopper who identified himself  only as Gary, 64, from Edina.

Mari Scott of New Hope said she does not oppose taxing business services if the state needs the money. That said, she fully expects that businesses that would be hit with the new tax would pass it along to their customers.

"I do think they probably will," Scott said. Dayton said he is considering the concerns of those who oppose the tax plan as he reworks his budget following the improved revenue forecast.

"We have almost a half-a-billion dollar change in the budget  forecast for the better, so that means going back to the drawing boards regardless of what public opinion appears to be or not," Dayton said.

If the governor decides back off taxing business services, he will also have to dramatically reshape his plans for new spending, because he would lose more than $2.2 billion.