GOP's Scott Jensen proposed ending Minnesota income tax. But how to pay for it?

Minnesota has one of the nation's highest personal income taxes. If Republican Scott Jensen is elected governor, he wants to eliminate it.

Ending a tax that covers more than half of the state's general fund budget — about $15 billion this year — would lead to a radical overhaul of how Minnesota pays for everything from schools to health and human service programs to city services.

"No state has ever had a large, broad-based individual income tax, built an entire fiscal system around it, then got rid of it," said Mark Haveman, executive director of the Minnesota Center for Fiscal Excellence. "You are now investing, potentially, in a lot of bad tax policy to try to make up for that."

It's a shift Jensen readily admits might not be realistic, and one that his Democratic opponent Gov. Tim Walz says would gut state services and diminish Minnesotans' quality of life. Many doubt the political feasibility of passing a proposal that would be met with a volley of lobbying from individuals and interest groups who stand to lose funds.

Nonetheless, Jensen has proposed the tax change throughout his bid for the state's top office. He sketched it out in more detail during an interview with the Star Tribune, including suggesting increased sales taxes, an idea from which he has since backtracked.

Jensen said in the September interview that he had met with experts and spent hours reviewing spreadsheets. He laid out a path to phase out the income tax over eight years and navigate the resulting hole in state finances.

It would start with a 10% cut in state spending during his first year in office. Minnesota has a two-year budget of nearly $53 billion, and Jensen said he would like to return to where it was a couple years ago, at roughly $48 billion. For the following three years, he said, he would cap state spending at that same level.

"We would still be in the black, and we would have reduced every one of those four personal income tax brackets by 50%. We'd be halfway there," he said. "Then we would reassess and say, 'OK, how do we get the rest of the way over the next four years?'"

At the end of those four years, Jensen said, he believes the state would have increased corporate revenue. Spokesman Joel Hanson said Jensen would do that by enticing people to come to Minnesota with lower taxes, streamlined mining and business permitting, and removal of "unnecessary" regulations.

"Then one of the questions would have to be, is: How do we deal with our sales tax? Right now, Minnesota exempts a lot more purchases than many states. And that's a significant source of revenue," Jensen said. "Would all food be tax-free? Would all clothing? Would we give a credit to people who have income of less than a certain level, threshold?"

When he suggested that idea in September, he said the credit could help make up for costs "that they might incur on sales tax."

Yet after a debate with Walz this week, Jensen backpedaled. "I don't see any sales tax increase," he said. "What I see is an opportunity to have a conversation that we haven't had in decades."

Personal income taxes and general sales taxes make up more than two-thirds of all states' tax revenue, according to the National Conference of State Legislatures.

If Jensen doesn't look to those two avenues, he would need to turn to greater taxes on businesses and increasing the gas tax to prevent roads from deteriorating, and would leave local governments to fend for themselves financially, said Joel Michael, who spent more than four decades in the Minnesota House nonpartisan research department, largely focused on state and local tax issues.

He now blogs on the topic. His post exploring Jensen's idea is titled "Fantasy Policy."

Jensen emphasizes that some other states don't tax individual income. Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming are the nine that don't tax wage or salary income. However, the national nonprofit Tax Foundation notes Washington taxes high earners' capital gains and New Hampshire taxes interest and dividend income.

Many of those states rely heavily on taxes paid by nonresidents. Michael pointed to taxes on tourism and gambling in Florida and Nevada, and those on gas, oil and coal in Alaska, Wyoming and Texas. He said others on the list, including neighboring South Dakota, lack urban centers that require more services.

Doing away with the income tax would mark the end of the "Minnesota Miracle," where the state took a greater role in funding education and local government, Haveman said. The 50-year-old bipartisan reform was a response to soaring property taxes and uneven education funding, as communities with lower property values — many in rural areas — struggled to pay for schools.

States without an income tax kick more of that responsibility to the local level, Haveman said, giving municipalities control over sales and property taxes with the message, "You do what you need to do and don't look to the state for as much help."

Minnesota has a graduated income tax, where higher earners pay more. Walz said in Tuesday's debate that ending the tax would result in higher property taxes and largely benefit millionaires.

"It would gut the funding to our schools, to our transportation systems and to things that Minnesotans love," Walz said. "We're proud of our progressive taxation system and our fairness in taxes. And we make sure that those who are doing well pay their fair share. What we get out of that is one of the best states for longevity, health, wellness and the other things that come with being in Minnesota. You get what you pay for in Minnesota."

While the elimination of the income tax — and the resulting overhaul of government funding — appears unlikely, some tax policy analysts said Jensen could be setting the stage for a continued conversation about more modest income tax reductions.