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Taxpayers association keeping an eye on activity at the Capitol

During the first six weeks of the session, a variety of taxing and spending ideas have been brought forward. And as legislators return from the Passover/Easter recess on Tuesday, new tax credits and spending initiatives are likely to surface.

Lawmakers have a modest surplus to play with this year. But Lynn Reed, executive director of the Minnesota Taxpayers Association in St. Paul, is quick to point out complicating factors. Revenue from the Health Impact Fee of 75 cents per pack of cigarettes is on shaky ground. The Minnesota Supreme Court will decide its fate. The November election also complicates matters, especially in terms of how lawmakers vote on tax and spending issues during the session.

In an interview with the Legal Ledger last Thursday, Reed discussed the state of affairs at the Capitol and some of the policy ideas his organization is contemplating.

Legal Ledger: Is the tobacco fee litigation creating a great deal of uncertainty about taxing and spending proposals?

Reed: Absolutely. I thought the Supreme Court would turn around pretty quickly.

But I have heard that it might be this summer. So that’s why the House passed their property tax relief contingent upon that decision. There’s not a lot you can do with $400 million at stake. It pretty well wipes it out.

Legal Ledger: Property taxes are part of the mix this session. The House has proposed property tax rebates, and there are other suggestions for property tax relief through local governments. Is there anything being discussed right now that would have a meaningful impact on the property taxes that Minnesotan’s pay?

Reed: The Senate is arguing there should be more comprehensive change to provide long-term property tax relief rather than just a check. They know this isn’t the session to do that. They’re just saying it to make a point. Sending a check is very efficient. Obviously it’s just a one-time thing. But, realistically, there’s not going to be any significant change this session.

Legal Ledger: In the MTA’s Fiscal Focus newsletter, you presented an article in a recent edition that was critical of proposals to dedicate a portion of the sales tax to the natural environment. What are the problems you see to that dedicated funding approach?

Reed: Number 1 is that we are binding future legislators and voters to something that is a priority now. It’s an expression of failure on the part of the Legislature to deal with it. If it is a priority, then make it so. It seems to me abdicating responsibility to say, ‘Let the people decide when we can’t come to a consensus on it. We’re worried about it, but we’re more worried about other things so we can get re-elected.’ We did a study in Missouri that showed the same problem. They finished their wetlands goals in 1997, and they are still buying land. They have too much money. They need to find a way to spend it. We don’t want to end up like that.

Legal Ledger: We hear about prominent fees like the Health Impact Fee from last session. But are fees on the increase and what sort of affect are they having on people and the economy?

Reed: Minnesota, based on the latest Census data, has traditionally relied less on fees than many other states. They are lower per capita and per $1,000 of income. They are lower in general than non-tax revenues in other states. Much more than taxes. We have room. That’s one part. The second is, a fee is the best way to start funding public services. It’s the closest to the voter. It’s the clearest price wise.

Whenever you can charge for a service a fee that reflects the cost, that’s a very efficient way to raise revenue. And it’s an accountable way to raise revenue. Clearly, there are limits. For general benefits that can’t be tied to specific uses by individuals, you have to charge a general tax. … The fact that fees are coming up is not alarming to me if they are tied to costs. When you call something a fee to avoid calling it a tax, that’s a problem. Although I would hasten to say there are solid technical grounds for calling the tobacco fee a fee. It’s not made out of whole cloth. It appears that way to the voters so I’m not sure if they got anything for doing it. But technically it was a fee.

Legal Ledger: Is broadening the sales tax a topic for consideration by policymakers right now?

Reed: At our annual meeting on Feb. 28, our theme was tax reform: what’s desirable, what’s doable. In 2004, the Legislature invited us to study the issue. There is no appetite for it now. Maybe there will be in ’07. Clearly there is no lack of consensus on the sales tax. That could be done in an off year except for the politics of it.

It’s very clear that policy-wise, stability-wise, in every way, our sales tax is screwed up. It’s the third highest rate in the nation. And yet we’re 26th per $1,000 of income in our collections because it is so full of holes. Food and clothing are the two biggies. But services by and large are not taxed in Minnesota. We are a service economy. As people age, they tend to purchase more services instead of things. Our Research and Policy Committee is circling the issue of tax reform. We are hashing through what the principles would suggest should be done. Then we have to hash through what MTA should do about it. We’ve not decided on that yet. We’re still hashing through the principles and saying, ‘What do we think these principles would look like given the political climate in Minnesota?’ We always have an ear cocked to the political realities. If you come out with pure theory, you’re laughed out. My personal hope is the climate will change and eventually, if not in ‘07, then sometime they will come back and say we really do need this.

Legal Ledger: What trends come to light from the MTA’s comparative studies of other states?

Reed: Over the years, the sales tax has crept up. Income tax has remained high even with changes. We’ve always been a heavy relier on income taxes even with the cuts because our income growth has been so phenomenal in Minnesota.

In 1942, we were the 31st highest per capita income state. In 2002, it was ninth for that ranking. That’s dramatic and most of it happened in the ‘90s. The income tax is very efficient in cranking in more revenue as income rises. The sales tax, we waited until 1967 to get one — one of the last states to enact a sales tax. We started at 3 percent. We exempted food and clothing. They really didn’t like the sales tax. But they bowed to reality over the years. Now we’re 6 and a half (percent) in the state; 7 and a half in Duluth; 7 in St. Paul and Minneapolis plus some special food and beverage taxes. Property tax has remained steady over those years. But we’ve changed the mix inside of the property tax.

Legal Ledger: What has happened with corporate taxes and the new single-sales apportionment?

Reed: It was enacted last session, but they had been pushing for it for a long time. We facilitated a study in the late ‘90s. Your only factor for apportioning income to the state is sales. So you can add payroll without sucking more income into the state. From a policy point of view, the sooner you do it, the better. It’s more defensive than anything. Minnesota’s law is not phased in until 2014. Wisconsin is going to be 100 percent in 2008. Illinois already has it. Iowa has it. They’re saying 2014 is too late. They got it on the books, and now they are trying to speed it up. They’re trying to get it for 2011. The ideal would be now.

Legal Ledger: Do you have any predictions for the remainder of the legislative session?

Reed: I think one potential scenario is they get the bonding bill hashed out and passed, and that’s it.

Because the tax bills are so far apart it isn’t funny, why conference it? There is nothing that is required.

We used to hear every year that there would be no tax bill. It never happened until ‘04. Now that it happened there is precedent.

The House property tax relief is actually not a bad idea. But it looks so political, and it is, too. That is, it actually has policy support given the way that the increases came about. It’s efficient. It’s measured. But the check is there two weeks before the election.

On the other side, the Senate says we need to deal with the underlying issues, which is true, too. But it’s unrealistic in ‘06.

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