Frans talks tax reform in Red Wing

The state wants Minnesotans’ ideas on how to fix a broken tax system.

Revenue Commissioner Myron Frans visited Red Wing on his tour around the state to present information on Minnesota’s tax system and gather ideas for reforms. This was the 50th city on the tour, he told a small group gathered at City Hall on Thursday evening, and there have been more than 150 similar meetings.

“We really want to make sure all Minnesotans are in the room when we talk about tax reform,” Frans said of discussions with Gov. Mark Dayton. The governor plans to release his budget and tax reform proposals on Jan. 22, Frans said.

Frans said the tax system is unbalanced, complicated and not always fair.

For example, the revenue is unstable. In the 1970s, property, income and sales taxes were relatively even, Frans said. Now property taxes make up about 40 percent, income taxes 33 percent and sales taxes 27 percent of tax revenues. Frans used two three-legged stools to illustrate his point, showing the one representing 2010 tax income can’t stand on its own.

“We’ve got to figure out a way to rely less on property taxes going forward,” he said.

Local governments also are struggling with changes in state aid. It has been decreasing, leaving them to cut and/or increase revenues.

“That gap has really been a problem for cities and counties and school districts,” he said.

“The burden on the property tax payers has just gotten really unsustainable,” Red Wing Council member Lisa Bayley said.

Council President Ralph Rauterkus noted unpredictable changes in local government aid can be a problem for long-term planning as well. Frans agreed both the adequacy and stability of LGA needs fixing, as well as simplifying the formula.

“It’s those quick changes that make it really hard for cities and counties to plan,” Frans said.

The state’s shifting demographics also pose a problem when it comes to income taxes.

“As our population ages … there’s just less money there to be had,” Frans said. That’s because people generally make the most money in their 40s or 50s, he noted.

The system has gotten complicated as well, he said. In 1987, there were six income tax forms Minnesotans could fill out. By 2010, there were up to 18 forms to be filled out.

Two audience members raised the issue of the cigarette tax. Increasing the tax could help with health care costs and deter young people from taking up the habit, they said.

Frans agreed.

“It’s one of, if not the most, effective ways to keep young people from smoking,” he said. He noted Minnesota is in the middle of the pack when it comes to states’ taxes on cigarettes, and “that’s not necessarily where we want to be” on that type of a tax, he said.

“Using the tax code for social policy is difficult,” he said, but it can also have positive outcomes.

Online sales are also a problem when it comes to sales taxes, Frans said. For example, if someone in Minnesota buys a CD from a local store, state sales tax would be applied. But when purchasing a digital download of same album online from a business that doesn’t have a physical presence in Minnesota, the state does not see any sales tax revenues.

The state lost about $400 million from online and catalog sales in 2011, he noted.

“We think it’s a matter of fairness. If you want to be in the Minnesota marketplace, then you should have to collect sales tax just like the folks do downtown here in Red Wing,” he said.

Much of the online sales tax issue has to be handled at the federal level, Frans noted, though there are some things the state can do.

But when it comes to tax reforms overall, the state has to be careful and make sure it knows all the effects of any changes, Frans said.

“The last thing we want to do is stop the economic growth we see right now,” he said.

How you can get involved:

Commissioner of Revenue Myron Frans encouraged people to get involved in the tax reform discussion by:

• Calling Frans at 651-556-6003

• Emailing revenue@state.mn.us

• Going to www.revenue.state.mn.us and click on the small red “tax reform” button in the lower right corner. There visitors can sign up for email updates and find the presentation Frans has given throughout the state.

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