Expand sales tax, panel advises

Minnesota's corporate income tax would be repealed and its sales tax expanded to clothing and most services under a proposal by a tax reform commission appointed by Gov. Tim Pawlenty -- who reacted coolly to the sales tax suggestion.

The Governor's 21st Century Tax Reform Commission also recommended increasing the cigarette excise tax by as much as $1 per pack to help replace the lost corporate tax revenue.

Commission Chairman Mike Vekich said the state needs to dramatically retool its tax system for an economy that has shifted definitively from manufacturing to services. Minnesota taxes few services, making it heavily reliant on a smaller, more volatile sales tax base than most other states. Minnesota also is one of only a handful of states that do not tax clothing.

Just after the release of the recommendations, Pawlenty spokesman Alex Carey said the governor "does not like the idea of raising sales taxes on consumers and is not embracing that portion of the commission's proposal."

Carey noted that Pawlenty had proposed reducing taxes on business, including halving the corporate income tax over several years.

While the report itself was vague about how to pay for business tax reductions, Vekich said at a news conference Friday that the changes proposed would require an estimated $800 million per year from an expanded sales tax and about $300 million from an increased cigarette tax. First-year replacement revenues would be lower, but by the time the changes were fully phased in, about $1 billion per year of corporate and business taxes would have been shifted to individuals.

Vekich said that multiple studies have shown that corporate taxes are passed through to consumers and workers as a hidden tax that lands heaviest on those with the least income. "Businesses don't pay taxes," he said Friday morning at a release of the commission's recommendations. "You and I do. Where we tax businesses, we are taxing our own wealth."

The recommendations propose taxing the purchase of "most goods and services" by individuals, but those purchased by businesses would be exempt from the sales tax.

Small businesses would get a special boost -- one-fifth of owners' profits would be exempt from taxation.

House Taxes Committee Chairwoman Ann Lenczewski, DFL-Bloomington, said she was "stunned" by that recommendation.

"What it means is a managing partner at a small law firm will pay a smaller top rate on income than the associate partner who makes less," Lenczewski said. "The boss gets a big tax break because he owns the business, but the secretary doesn't. I agree with some of the commission's recommendations, but this one just confounds me."

Lenczewski said it seemed "unlikely" that a majority of DFLers would support a major shift in tax burden from corporations to individuals at a time when pennies, and jobs, are scarce.

"And raising the cigarette tax to pay for corporate tax breaks?" she said. "Honestly?"

Lenczewski said she's a fan of dumping the corporate tax, but noted that when business bounces back the tax is a large generator of revenue. "Yes, it's volatile," she said, "but that's a separate issue. If you're going to get rid of it, you have to replace it with something that's growing."

Vekich said the specific means for offsetting the business tax reductions "is for legislators to devise," saying that the commission did not lay out details on which goods and services to tax. But he cautioned that the state's only other significant revenue stream -- individual income taxes -- should be off-limits because they were already high.

The 15-member commission, appointed by Pawlenty last April, included a number of business executives, along with others including a former state senator, a university business professor and the head of a nonprofit.

Patricia Lopez • 651-222-1288