Minnesota isn’t alone in looking at depending more on sales taxes.
Lawmakers in Nebraska, Kansas, Louisiana and North Carolina are debating this spring whether to repeal the state income tax. Ohio’s governor wants to cut personal income taxes by 20 percent. The governor of Virginia would like to do away with the state gasoline tax.
What all these proposals have in common — in red, blue and purple states — is this: An increased or expanded sales tax.
“People seem to have concluded that the sales tax is either the least harmful for the economy or the least unpopular,” said Eric Thompson, an economist at the University of Nebraska in Lincoln.
Dayton’s budget proposal — which would raise $2.2 billion in new sales tax revenue to help pay for a $627 million budget shortfall, funding for schools and property tax rebates for homeowners — has sparked a vigorous debate that’s now playing out at the Legislature.
Fresh off a recession in which state revenue plummeted, a key question in state governments from St. Paul to Topeka to Baton Rouge is how to craft a system that raises the money a state needs while still encouraging economic growth.
Minnesota is one of at least seven states that are considering an expanded or increased sales tax, signaling momentum for a marked shift toward greater reliance on consumption-based taxes.
One element of this, in Minnesota and elsewhere, is a move to broaden the sales tax to include a wider range of services. Proponents argue that this more appropriately reflects the modern, service-driven economy, even as debate swirls around exactly which services to tax.
In other states there is a push to tax more transactions as a path to moving away from income taxes. Some see this as a way to stimulate the economy by promoting savings and investment, though critics argue that such policies tend to favor the more affluent.
Aside from such questions of fairness or economic benefit, tax policy analyst Norton Francis of the Urban Institute pointed out that an increased sales tax is generally more palatable to the public than an increased income tax.
“It’s a drip-drip-drip with each transaction, rather than one bill at the end of the year, which makes a huge difference psychologically,” he said.
A changed economy
The drive to tax services reflects the fact that state tax codes have not kept up with an economy that’s flipped in the past 40 years from primarily goods-producing to primarily service-providing.
Between 1970 and 2010, the share of household spending on services grew from 43 percent to 60 percent, according to research by John Mikesell, a tax policy expert at the University of Indiana. Yet states continued to exempt a variety of services from the tax, and sales taxes as a share of personal income have shrunk in all but the handful of states that aggressively tax services.
States have jumped on this largely untaxed portion of the economy in 2013.
“The economic reality is the same to Ohio and to Louisiana and to Nebraska and Kansas and Minnesota,” said Myron Frans, revenue commissioner for Minnesota. “The service economy has to be taxed in some way to generate revenues that reflect that service economy.”
The plan that most closely resembles Dayton’s is Gov. John Kasich’s budget in Ohio. Kasich plans to lower the sales tax rate from 5.5 percent to 5 percent, but broaden the tax to a raft of services such as legal, accounting and real estate.
Ohio’s Republican governor wants to use new sales tax revenue — plus increased levies on oil and gas drilling — to pay for a 50 percent income tax cut for businesses and a 20 percent personal income tax cut across all brackets, to be phased in over three years.