Minnesota Senate revives sales tax on clothing

Taxes on clothing, over-the-counter drugs, and even dance lessons and tattoos could be back in play at the Capitol as Minnesota Senate DFLers continue to look for ways to raise revenue and reform the state's tax system.

The Senate plan, released Thursday, resurrects pieces of a controversial tax proposal abandoned earlier this year by Gov. Mark Dayton. It would broaden the sales tax but also lower the overall rate to its lowest level in decades. Corporate income taxes would be trimmed, and the plan includes a yearly rebate for lower-income Minnesotans hit hardest by a clothing tax. Similar to a proposal in the House, the Senate package has a sports memorabilia tax to help pay the state's share of the new Minnesota Vikings stadium.

"We think his [Dayton's] policies and principles were absolutely in the right direction. They were bold and thoroughly vetted," said Sen. Ann Rest, a New Hope DFLer who is chairwoman of the Senate Tax Reform Division. "We hope to convince him this is the right time for reform and that Senate Democrats will stand firm with him in going that direction."

Dayton has since backed a much more modest plan that focuses mostly on raising income taxes on the state's wealthiest wage-earners. And while he seldom tries to snuff out legislative proposals early in the process, Dayton staffers said Thursday that he will not embrace crucial components of the Senate's tax overhaul.

"We don't have any interest in the sales tax piece," said Bob Hume, a Dayton spokesman.

Republicans say the state has enough money to meet its obligations and even allow a modest increase in spending. They say the tax overhaul is a thinly veiled job crusher.

"The problem is they are trying to grow government by more than 8 percent," said Sen. Dave Thompson, the highest-ranking Republican on the Tax Reform Division. "To do that when Minnesotans are struggling, I think that's a tough sell."

Unlike Dayton's proposal, the Senate plan would tax all clothing purchases, not just those over $100. To ease the pain, the state would spend $66.9 million on the income tax credit for lower-income families. A family of four making $44,000 a year would get about $60 a year. The credit would shrink as family income rose.

To make up for the lost revenue, those who buy online goods, custom software, and box seats and suites at pro sporting events would have to pay sales tax. Clothing consumers would pay an additional $541 million in sales taxes over the next two years.

Other new tax targets: tattoos, dating services and personal lessons, such as those for dancing, golf or tennis.

Senate DFLers also would bring back a limited version of the tax proposal that caused the biggest political blowback for Dayton — a sales tax on some business services.

Those who need electronic and commercial equipment repair or warehouse space for products could expect to pay an additional $300 million.

The Senate proposes closing millions of dollars in corporate tax loopholes but in return would lower the overall corporate tax rate. In the end, companies would pay an additional $43 million over the next two years, far less than the governor wants.

To drive down property taxes, the Senate would give local governments $80 million more in aid to help offset the cost of city and county services.

"We think this is an extraordinary opportunity that we have," Rest said. "We consider this plan a milestone and a good legacy for Governor Dayton."

The plan includes a tax on sports memorabilia that Rest and others said could be used to pay the state's share of the new stadium. It is not yet known how much money that would raise.

State leaders have been scrambling to find a way to meet the state's $348 million share of the nearly $1 billion stadium. The state had banked on additional money from new and unproven electronic pulltabs. But revenue from the iPad-like devices is profoundly lower than projected, with no salvation in sight.

He voted against the stadium bill last year, he said, because he never believed the pulltab revenue would suffice and the burden would eventually fall to all taxpayers.

But he is leery of the new package, which he said includes way too many tax increases and too much new spending.

"We really don't need the extra money," said Gazelka, who serves on the tax reform group. "In the end, it's passing the tax on to hardworking Minnesotans."

Senate Majority Leader Tom Bakk, a longtime advocate of overhauling the state's sales tax system, said the new tax proposal is in tune with ideas the state revenue commissioner heard during more than 100 meetings with residents around the state.

"It appears the governor has taken that sales tax off the table, but we feel that reform is very important," said Bakk, DFL-Cook. "We want to continue that conversation with the House and the governor."