Trying to untangle Minnesota’s unruly tax web

By Brian Rosemeyer – Sun Newspapers

Overgrown and intricate, Minnesota’s tax system sends mixed messages about the state’s economic condition.

But it doesn’t have to be that way, according to one public official.

“Minnesota has a great economy, we’re already seeing the improvement in our employment, we’re seeing so many good things happening in the state,” Minnesota Management Budget Commissioner Jim Schowalter said. “Yet the political impasse is drawing a negative discussion on Wall Street. That’s just not where we need to be.”

The TwinWest Chamber of Commerce hosted Schowalter, Minnesota Department of Revenue Commissioner Myron Frans and Governor Dayton’s Chief of Staff Tina Smith as part of its Legislative Breakfast series Nov. 9.

The three speakers discussed taxes and revenue in the 2013 Legislative Session. Topics included what a good tax system looks like, how to simplify Minnesota’s system and how fair taxation relates to local businesses and communities.

Smith began the presentation with a layout of Gov. Dayton’s priorities in setting Minnesota back on track during difficult economic times.

“We start this conversation with the feeling that Minnesota is a great state,” said Smith. “We want to focus on what makes Minnesota great, and what the opportunities and challenges before us are.”

Smith stated that Gov. Dayton’s priorities are to create jobs and improve the state’s competitiveness, to improve how the state’s government works and to build a sustainable budget and tax reform.

“There is significant disparity in the outcomes people see in Minnesota around health, education and opportunities for jobs,” said Smith. “We can’t afford that disparity because Minnesota is an increasingly diverse state.”

Schowalter continued the discussion with a look at the complicated nature of the state budget.

Schowalter demonstrated the way the tax system works in Minnesota. He highlighted that a large number of different bodies within health care and education handle Minnesota’s tax dollars outside of direct government influence.

“A significant chunk, more than 80 percent of our budget, is actually working with other entities in a complex discussion across units of government and across sectors that deliver the services we need,” Schowalter said.

Frans closed out the presentation with a more in-depth look at how Minnesota’s tax system has evolved, and continues to evolve, into a more elaborate and unbalanced web of revenue and spending.

“We think the Minnesota tax code has become out of date, out of balance, and we think it’s way too complex,” Frans said. “We’d like to make the tax code as simple as possible.”

Frans demonstrated how employment conditions relate to revenue and how the recession has impacted the sales tax. He said that we will always be able to see property and income taxes go up and down, but emphasized the importance of creating new jobs in rebuilding a healthy tax system in Minnesota.

Frans brought a visual to illustrate the way various revenue streams work toward a healthy and balanced tax system. He used two three-legged stools as an example of stability. The three legs represent property tax, income tax and sales tax.

The first stool represented conditions in 1999, and showed a relatively even balance between revenue streams, resulting in a sturdy stool. The second stool represented 2010, where the difference in leg length (revenue) was varied enough to cause the stool to fall over. The leg representing property tax was much larger than the other revenue sources.

“We all know that property tax has jumped up about 20 percent,” said Frans. “So people have grown very concerned about the continual reliance on property taxes to fund state and local government.”

Frans also focused on the large amount of tax breaks in Minnesota. He claimed that nearly 40 percent of tax revenue is distributed in tax breaks, and attributed much of the problem to that.

“It’s time to fix this mess,” Frans said. “It needs more than just a little tinkering. We all need to work together on tax reform.”