A tax overhaul, but what kind?

Listen to this article

Myron Frans has been making the pitch for about two years now.

The Minneapolis tax attorney turned revenue commissioner started his tenure in Gov. Mark Dayton’s administration out on the road, carrying with him a pair of stools to demonstrate the need for comprehensive changes to the state’s tax code. One stool, marked 1999, stands almost evenly on its three proportional legs, labeled “sales taxes,” “income taxes” and “property taxes.”

The 2010 stool, however, can hardly stand up, with the property tax leg jutting out farther than the rest and tipping the stool on its side. Frans has been to 50 different cities, 24 town halls and more than 150 tax reform meetings with the stools, telling everyone who would listen that the three “legs” of Minnesota’s tax system need to made even again.

Now Frans is putting the finishing touches on Dayton’s 2013 tax proposal, and his work on the road is being touted by supporters of major tax reform as the best public relations campaign Dayton could have waged heading into the 2013 legislative session. Dayton’s budget proposal is due in January and will be the first Capitol watchers see, meaning the governor and his administration will be able to set the terms of the tax debate.

They’ve kept mostly quiet on the details of their proposed package, but it’s clear Dayton’s administration will push his campaign promise to increase income taxes on the state’s top earners in some form, and propose additional changes to the state’s corporate tax system and Minnesota sales taxes.

“Dayton is giving every indication that he’s going to have a substantial proposal for reforming the tax code, and he will be the one setting the stage for tax issues to be dominant for the session,” said former DFL House Speaker Bob Vanasek, who served in that capacity the last time Democrats controlled state government. “The reality is, the governor sets the agenda and the Legislature reacts.”

Frans understands the historic opportunity at hand. The last time lawmakers attempted a comprehensive overhaul of the state’s tax code was in the 1980s. Since then, dozens of tax reform commissions and proposals have been created and cast aside in the face of divided government. Starting in 2013, Democrats will once again control all three levers of state government. “We do view this as a very critical and significant opportunity,” Frans said, emphasizing changing demographics in the state and years of constant budget deficits. “If we don’t do it now, we are just going to make it worse down the road.”

But the task is a political minefield. Democrats in the Legislature are already striking a more cautious tone than Dayton in talking about tax reforms, especially in the face of a $1.1 billion projected budget deficit. Leadership’s toned-down rhetoric is partly a reflection of the nature of the incoming freshman class, many of whom were elected in divided or traditionally GOP districts. And while Democrats work to raise some revenue and balance the budget, Republicans, eager to return to power, will be waiting at the ready to label them tax-and-spend liberals.

Differing approaches

In embarking on the daunting task of overhauling Minnesota’s tax code, Frans says he didn’t rule any possible reforms out. “Everything was on the table,” he said. “That’s the way we’ve been looking at it from the start.” The details are few, but Frans and Dayton have publicly said they will follow through on the governor’s campaign promise to make the state’s richest residents pay their fair share. The governor has said he is eyeing the top 2 percent of wage-earners in the state as the most reasonable target for higher income taxes.

The governor is also looking at lowering the overall corporate income tax rate in the state by targeting and eliminating specific corporate tax breaks. And Dayton is likely to pursue a politically challenging proposal to lower the state’s overall sales tax rate by broadening the base to include more goods and services. That could help lighten the burden on property taxes, but changes to the state’s sales tax have been thwarted in the past by powerful retail lobbies and objections from Republicans.

“The idea is to put together a package that, when you look at it, is all tied together. The income tax and the sales tax and the property tax are all connected in a package and they all work together,” Frans said. “We are not going to put together a menu package where you pick what you like and don’t like. Our challenge to those who disagree is to come up with a better plan.”

Senate Tax Reform Division Chairwoman Ann Rest says she supports broadening the sales tax base and lowering the rate, but warns that the income tax is “more volatile.” “The governor has certainly been interested in people paying their fair share on the income tax,” she said. “Some people will like some of what he suggests and other people will dislike the very same things. We need to be looking at that, though.”

Senate Minority Leader Tom Bakk has been cautious when it comes to talking about tax reforms in the state, maintaining that he still thinks there are too many unanswered questions. The former Senate Taxes chairman also understands the political risk in taking on broad tax changes.
“The broader you make the sales tax, how far do you go in lowering the rate? If you broaden the sales tax by $600 million, that could buy down the rate by 1 percent and you would have a revenue-neutral proposal,” he said. “The risk in all this is that [Senate Minority Leader] David Hann will say you broadened the sales tax and raised $600 million.”

Bakk says the tax conversation will be about how much Democrats can change current tax laws without hurting the economy. It’s a talk he’s interested in having with the business community, though less so with Republicans.

“I’m not interested in engaging Republicans on this, but I want to talk to our business community about it,” he said. “I think after this election, the business community has come to understand that we’re going to do a tax reform, and I want them at the table. What we raise will depend partly on how people talk about it. If you’re reconfiguring things in the tax system, Republicans can just add up the parts where taxes rise and come up with a huge number and ignore all the taxes we cut in the process. Some Republicans will frame whatever we do as nothing but a tax increase.”

That’s not the approach House Taxes Chairwoman Ann Lenczewski hopes to take. She’s interested in involving all 134 member of the House in the tax debate, especially Republicans. She also has no intention of moving quickly, as there still needs to be a resolution to the “fiscal cliff” talks in Washington.

“The House is not feeling stressed out,” she said. “I’m more interested in building consensus across ideologies. My sense is that dealing with the actual deficit in a more permanent and lasting way will trump tax reform. One way to think about it is that you can do tax reform and not address the deficit at all, and you can do tax reform and fix the entire deficit. It’s all going to be about the deficit, and what does the minority think? The House is going to try and get 134 people involved.”

Lenczewski also points to an important procedural quirk that gives the House an “upper hand” in any tax talks: Only the House can send bills to the governor that propose raising revenue.
“They can propose whatever they want [in the Senate], but they have to wait for us to send the bill,” she said. “The House has the ability to put a hold on the Legislature’s debate on the tax bill.”

Freshman hesitation

Swallowing dramatic tax changes will likely be the toughest for the Democratic caucuses’ newest members. Many were elected in tight swing races that swung favorably for DFLers this year but could easily swing back to Republicans if voters think Democrats are erring on taxes and other issues.

Freshman Democratic Sen. Vicki Jensen was elected to replace Republican Mike Parry in Senate District 24. Jensen, an Owatonna School Board member and a member of the local chamber of commerce, is the first Democrat to be elected in the area in more than 40 years. She’s also not excited about the tax talks circulating so far.

“One way or another, I don’t think this is the answer, to just say we’re going to create a fourth tier [income tax bracket], and that’s going to fix things,” she said. “I don’t believe that.”

Edina attorney Melisa Franzen, who beat GOP Rep. Keith Downey in Minnesota’s most expensive legislative race of the year, said she thinks Democrats need to be “realistic” about any tax changes that are made. “We need to continue to keep businesses competitive,” she said. “We need to make sure what we do is not just something that’s going to be changed just every two or four years.”

Freshman Democrat John Hoffman also faced an expensive race against freshman Republican Sen. Ben Kruse in Senate District 36, but Hoffman showed more interest in the governor’s plan, as voters in his district have been hit particularly hard by increasing property taxes.
“There is a tax fairness issue there,” Hoffman said. “My area is a property-poor district, so it’s all about property tax relief. I also believe in fairness on paying your income tax and I spoke about that at the doors. Everything has got to be dealt with in one big pile, and in our area, what affects us is really the property tax piece.”