Gov. Mark Dayton’s administration on Friday offered a deeper look at its sales tax plan that would raise more than $2 billion in new revenue in the next budget cycle.
The administration released a 16-page report that broke down what would change under the new tax system, which will be formally introduced in the Legislature next week.
Dayton’s proposal would add sales taxes to a menu of goods and services, including legal fees, auto repair, clothing more than $100 and over-the-counter medication. With more goods and services being taxed, the state will lower the sales tax rate to 5.5 percent from 6.8 percent.
Republican legislators and business leaders have hammered the budget proposal for the increased spending and for business-to-business tax hikes they say will make the state less competitive.
Minnesota Revenue Commissioner Myron Frans said the economy has switched dramatically over the years and consumers are now spending far more money on services than on taxable goods.
“We want to try to generate more revenue from the service economy,” Frans said in a conference call with journalists. “We really wanted to make sure our definition of consumer goods matched our modern economy.”
Dayton’s budget would wipe out a $1.1 billion deficit, increase spending on education and give homeowners a $500 property tax rebate.
Frans clarified what the administration said has been a growing misconception in the business community since Dayton first released the budget outline a month ago.
Businesses that make money selling services like legal and consulting fees won’t have to charge Minnesota sales tax if they sell to consumers in other states, so long as they don’t have an affiliate office in that state.
Frans said the new tax system will be more fair for consumers and businesses, though they were braced for criticism from businesses that haven’t had to collect taxes.
Broadening the sales tax base and lowering the rate would make Minnesota’s sales tax 27th highest in the country, dramatically lower than the current ranking of seventh-highest.
Legislators will begin reviewing and critiquing Dayton’s budget next week.
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The governor has kept his budget proposal a secret, but likely targets for new or increased sales taxes include cigarettes, some consumer services and perhaps the most politically vexing target -- a first-ever tax on clothing.