Revenue commissioner: Tax system is like a three-legged stool

In speaking of tax reform, Minnesota Revenue Commissioners has often brought his three-legged stool to emphasize his points. (Photo by T.W. Budig, ECM Capitol Reporter)

To sit on one of Revenue Commissioner Myron Frans’ three-legged stools is to topple off.
Frans brought his brightly painted symbols of the state tax system to the Met Council on Wednesday (Sept. 6) as part of a Dayton Administration initiative on tax reform.
Over past months, Frans has traveled the state talking taxes, listening to the public and government officials. The three-legged stools — now marked with various signatures — serve to illustrate the three streams of tax revenue — income, property tax, sales taxes — flowing into state coffers.
The legs on the stool representing the tax streams in 1999 are about equal length, as the tax steams were more or less equal at that time. But the legs on the stool representing the 2010 tax streams provides an unstable platform as the tax streams have diverged.
“I broke it once,” Frans said of the unbalanced stool.
“I’ve been told not break it again,” he said, smiling.
But the uneven revenue flow — there’s no magic formula but a balance is preferable, Frans suggested — is only one foible in the state’s current tax system.
There’s a need for better transparency, Frans suggested.
Frans considers Minnesota’s property tax system the most complex in the United States. Things aren’t a lot better when it comes to the income tax, he explained.
The number of adjustments on the individual income tax form has jumped from 9 to 50 since 1987.
Beyond this, the commissioner spoke of “hidden spending” — tax credits, exemptions, deeply embedded in state tax code — automatically siphoning billions out of the tax revenue stream.
Out of the annual state tax revenue of $27 billion in 2010, only $16 billion remained after the hidden spending.
Venturing into politically hotter ground, Frans, citing revenue department tax incident study data, said the state’s effective tax rate favors the wealthy in terms of percent of income paid to taxes.
The top 10 percent of Minnesota earners pays almost 17 percent less than the remaining 90 percent of wage earners in terms of percentage of income paid to taxes.
More specifically, middle income households — those earning between $41,000 to $53,000 — pay about 12.3 percent of their income to state and local taxes.
By contrast, the top one percent, those earning more than $429,000 annually, pay 9.7 percent of their income to taxes.
This has not escaped notice.
One of the most repeated slogans of Democrat Dayton’s gubernatorial campaign was “tax the rich.”
Nationally, wealth has been massing at the top for years, Frans explained.
The top 10 percent — a decile including families with an annual income above $109,600 — has a 50 percent share of the overall U.S. income.
This has not been seen since the late 1920s, according revenue department data.
Still, the percent of local and state tax revenue as percent of personal income in Minnesota in recent years has been below the U.S. average, Frans explained.
He pointed out other foibles in the system.
While the corporate income tax rate at 9.8 percent is the third highest in the United States, the effective corporate tax rate ranks much lower, he explained.
“It’s not a good way to sell Minnesota as a place to do business,” he said.
In taking questions from council members, Frans indicated neighboring states have lower sales tax rates than Minnesota. But Minnesota does not extend its sales tax to clothing, which is unusual.
Theoretically, by broadening the sales tax base, Minnesota could get its sales tax rate down to perhaps three percent without losing revenue.
“There’s an enormous amount of stuff we don’t tax,” he said.
But politically, broadening the tax base has been heated issue.
Council Member Steven T. Chávez of Eagan asked why the same principles guiding business, the sharp realities of investment and return, couldn’t be applied to state taxation and spending.
Would it be possible to put together a some kind of grand tax reform bargain as achieved in the 1980s?
“If you get people to hold their fire,” Frans said, stressing the need for elected leaders to refrain from predictable rhetoric and step forward with a willingness to bargain.
Frans personally has a number of tax reform ideas, but is avoiding talking about them, preferring to listen for now, he explained.
The number of possible solutions to the puzzle isn’t limitless.
“There’s just so many ways to solve the problem,” he said.
But there are a lot of conflicting opinions, Frans added.
Dayton Administration officials are looking to include a tax reform component to the proposed, two-year state budget the governor will release in January.
Revenue department officials have held more than a dozen town hall tax reform forums over past months, including ones in Roseville and Farmington.
A presentation is scheduled at the New Ulm Rotary Club on Sept. 11,
Information about the reform initiative, and parade of charts and graphs, can be found on the Revenue Department website at http://www.revenue.state.mn.us/tax_reform/Pages/Tax-Reform.aspx
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