The evolution of the Dayton tax plan

Ronald Dixon

For the past few months, we have seen the tax plan of Gov. Mark Dayton go about interesting reforms. It began with speculation over the specifics of a reform to the sales tax, followed by staunch opposition, and some praise, to the general blueprint that Dayton presented. Finally, Dayton dropped the basis of the reform altogether in favor of the traditional progressive call for a heightened tax on the rich.

The speculation of the change to the tax system began in Jan., and, reading the reports on the potential reforms that the executive branch was concocting, I added my voice to the speculation by declaring that any new tax increase that is not exclusively for the rich will not only harm the middle and lower classes, but will also portray Dayton as a tax and spend liberal, an association that Republicans created for political gain. I drew upon the idea that was circulating through the media at the time to decrease the sales tax, but broaden the items that would be subjected to taxation. The tax stands at 6.875 percent, and the expansion to include clothing, the most contentious speculation of the time, would have added $300 million to the economy over the course of a year.

On the same day that my critique was printed, though, Dayton released his first blueprint for tax reform. Although it included some minute details, the most revealing release was the income tax change for clothing. The rate was reduced in this plan from 6.875 percent to 5.5 percent and the items that are taxed were expanded, and the controversial clothing tax would have only included purchases that exceed the value of $100. This change mitigated my concerns over harming the populace, as well as portraying Dayton as a “stereotypical liberal,” which would have opened the floor for more attacks amongst Republicans.

When following the media coverage of the substantive plan, I found that there was much more negative coverage than I was expecting. For example, even during the speculative stage, the Mall of America ardently opposed the extension of the sales tax to clothing on the grounds that it harms the mall competitively. Maureen Bausch, the executive vice president of business development for the MoA, declared that, "Once we can't use the word 'no' sales tax on clothing, we lose that competitive advantage [with other states].”

Moreover, although economists are in general agreement about the broadening of the taxable item base, given how it would reflect a more modern economy, they had a concern over business-to-business taxes, where services conducted for one business to another business would be taxed. The primary concern was over “tax pyramiding,” where a product goes through several stages of production from varying industries or businesses and, therefore, is taxed substantially. In fact, John Spry, a business economics professor at the University of St. Thomas, even went as far as to claim that “all economists agree” that the business-to-business tax is a bad idea, noting that “…I am still trying to find an economist who studies this area who thinks taxing business-to-business services is a good idea.”

The Moorhead Economic Development Authority declared their opposition against both the expansion of the sales tax code and the business-to-business taxes, and they noted their intention to write letters to local legislators in opposition to this plan.

There was more opposition, and any support for Dayton’s plan was not as evident in the media. When it came to the views of the people, we find that the concerns over business-to-business taxes were clear, with 63 percent of respondents to a Star Tribune poll opposing this specific segment of the plan, with only 28 percent supporting the proposal and 9 percent undecided. Also, when asked about broadening the tax base in general, Minnesotans fell within the 3.5 percent margin-of-error, with 48 percent opposed and 45 percent supporting the proposal. Finally, the tax on luxury clothing showed a support of 49 percent, with 42 percent opposing the new tax.

With the electorate questioning several aspects of Dayton’s tax blueprint, and business declaring their opposition against changes that could reduce their profits, the governor dropped any change to the sales tax or the addition of a business-to-business tax on March 14. He shifted his focus on the progressive goal of taxing the rich, a proposal that was a significant part of his platform during the 2010 gubernatorial election.

Specifically, his new proposal would increase taxes on partners making $250,00 and individuals making $150,000, increase taxes on cigarettes, and implement a “snowbird” tax, a measure that would force those that live in Minnesota over 6 months out of the year to pay Minnesota taxes. The same Star Tribune poll that showed opposition to the business-to-business taxes and split views on taxing general services showed much support for taxing the rich akin to the rates that Dayton is currently proposing, with 54 percent supportive and 39 percent opposed.

Dayton’s new plan conforms to the political realities of Minnesota, where there is a general tendency to support taxes if they primarily are applied to the rich and where businesses do not want to feel monetary pressure from government. The electorate is expected to support Dayton’s new plans, assuming that they are not manipulated by the legislature to a great extent, and MoA praised Dayton for dropping the income tax plan.

My prediction is that Dayton’s new blueprint will be far more politically palatable to the DFL legislators, especially the Congressmen that represent moderately conservative districts. His old plan may have been ambitious, but the reform of his proposals will enable a greater chance of its passage into law.

Ronald Dixon welcomes comments at [email protected].