The expansion of sales taxes to the service industry would raise $2.2 billion for the state treasury over the next two years. It is central to Gov. Mark Dayton’s proposal to reform the Minnesota tax system and raise enough new revenue to close a $1.1 billion budget deficit and boost education funding to schools.
In a conference call with reporters last week, state Revenue Commissioner Myron Frans defended the sales tax expansion as an acknowledgment that Minnesota has shifted from a goods economy to a service economy.
“A lot of states are now taxing certain aspects of the service economy, and I predict in the next 10 years you’re just going to see a gradual continuation of this because that is simply the nature of the economy that we have in the United States,” Frans said.
In a clarification of the sales tax proposal last week, the Dayton administration said firms would not have to collect a sales tax from out-of-state clients, only those that reside in the state.
That distinction doesn’t do much for small and medium-size architectural firms such as Voda’s and Koski’s. Out-of-state clients constitute 15 percent of the client base of Bentz/Thompson/Rietow and 25 percent of Koski’s business.
Public agencies another issue
Architect Ellen Luken throws another wrinkle into the debate. Her biggest clients are public agencies, including the Metropolitan Council and the Minneapolis public school system.
“To burden a public agency with taxes doesn’t make much sense to me,” Luken said in a recent interview.
Dane Smith, president of the progressive think tank Growth and Justice, supports the Dayton proposal and called the tax overhaul “long overdue.”
However, Smith acknowledged, the business-to-business section of the sales tax proposal “is problematic.”
“There are significant administrative, economic and legal issues that must be addressed,” Smith said. “In the end, the benefits from broadening the base may outweigh the challenges.”
This isn’t the first year that an expansion of the sales tax has been proposed. Four years ago, a special commission appointed by Gov. Tim Pawlenty to look at tax reform in Minnesota urged the expansion of the sales tax to consumer services but not on business-to-business transactions. But the proposal went nowhere.
The chairman of that commission, Michael Vekich, still believes the commission’s sales tax recommendation was good tax policy. Vekich also still believes that a tax on business-to-business services is not.
“We could find zero support among tax experts for that idea,” Vekich said in an interview. “Experts will tell you that if you want a stable way to collect taxes, a consumer sales tax will work.”
Minnesota’s service industry knows that major tax-and-spend decisions by the state Legislature are likely months away, but the industry isn’t wasting time.
Voda and the AIA earlier this month sent out a letter to its more than 2,200 Minnesota members urging them to contact legislators to express their opposition to the sales-tax proposal.
“Tell your story,” the letter advises. “Describe your projects on hold and how competition from out of state may impact your business and if you have had difficulty finding work, let the legislators know that their efforts should focus on how to improve the business environment — not adversely impact it.”