reforms will bring more stability, fairness to state tax
Civic CaucusFocus on CompetitivenessInterview January 25, 2013
Dave Broden, Myron Frans, Paul Gilje (coordinator), Randy Johnson, Sallie
Kemper, Ted Kolderie, Dan Loritz (chair), Dana Schroeder, Clarence
Shallbetter. By phone: Janis Clay, Pat Davies, Tim McDonald.
: Minnesota Commissioner of
Revenue Myron Frans has nearly three decades of tax law expertise, as well
as strong business and managerial experience. As commissioner, he supports
Governor Mark Dayton's goal of a fair and equitable tax system.
Prior to his appointment in 2011, Frans served
as president of Leeds Precision Instruments, a manufacturing and
distributing company in Golden Valley, Minnesota. Under his leadership,
Leeds Forensic Systems, a subsidiary of Leeds Precision, earned the
Governor's International Trade Award in 2010 for success in building
Frans has been a tax attorney in private
practice for 27 years, most recently as a senior tax partner at the law
firm of Faegre & Benson in Minneapolis. Before joining Faegre & Benson, he
was a tax partner at Gray Plant Mooty Mooty & Bennett, also in
Minneapolis. He began his tax practice in 1983, with the firm of Miller &
Chevalier in Washington, D.C. He has been active in the American Bar
Association, the Minnesota Bar Association, where he served on the
governing Tax Council for a number of years, and the Hennepin Bar
Association, where he served on the ethics committee.
A graduate of the University of Kansas Law
School, Frans has a bachelor's degree in criminal justice from Washburn
University in Kansas.
Gov. Mark Dayton's recent budget proposal designing a new tax and spending
structure had to deal first with the immediate problems of a looming $1.1
billion deficit in FY2014-2015 and with paying back the school funding
shift of $1.1 billion, says Minnesota Commissioner of Revenue Myron Frans.
Because of these problems, he does not believe the tax reforms in the
governor's proposal could be done in a revenue-neutral way. He notes that
in the last decade, the state has become more and more reliant on the
property tax, instead of keeping the property tax, sales tax and income
tax relatively equal as sources of revenue. The governor's tax reform
proposals generally broaden the base of the sales and income tax, while
lowering the rates. An exception to lowering the rate is the proposal to
have the top two percent of income earners pay a higher income tax rate.
The budget proposal attempts to reduce the growing reliance on the
property tax by giving a $500 rebate to property tax payers. The
governor's proposal will be re-evaluated after the February budget
forecast is issued, Frans concludes.
During his presentation, Minnesota Commissioner of Revenue Myron
Frans outlined the revenue impact of the major tax changes included in
Gov. Mark Dayton's recent budget proposal:
The individual income tax will raise $1.1 billion of new revenue in
the FY2014-2015 biennium from a new top income tax rate on the
There's a net $2.1 billion increase in sales tax revenue from the
combination of broadening the sales tax base and lowering its rate.
New cigarette and tobacco taxes will raise $370 million in new
There will be $4 million in new corporate income tax revenue after
broadening the base and lowering the rate.
The new $500 property tax rebate to property tax payers will
reduce new revenue from other tax changes by $1.46 billion.
The total net new revenue for the biennium from these
proposed tax changes (in addition to other more minor changes) will be
People are adamant that the state fix the
problem of budget deficits.
While working on Gov. Mark Dayton's
tax reform and budget proposal, Frans traveled around the state, meeting
with over 7,000 people in 50 different cities. "People we met with," he
said, "wanted us to develop a revenue system that matched the budget we
had. They believed that budgeting with all the deficits we've had in the
last 10 years is not a way to manage the government. They were very
adamant that we fix this problem."
In designing a new tax and spending structure,
the state faces three problems:
1. How do we resolve the $1.1 billion deficit
projected for the 2014-2015 biennium?
2. What investments should we make in this
biennium? How do we save money and cut those costs where we can?
3. How do we position ourselves going forward
so we have a revenue stream in the next biennium that not only gets us
out of the red, but also pays back the $1.1 billion owed to the state's
school districts due to the school funding shift. (The school shift is
the delay in school payments the Legislature has approved in past years
to balance the budget.)
"That's where we started," Frans said. "What
kind of revenue system do we want to have that will generate the money to
In the last decade, we've become more and more
reliant on the property tax.
As we've cut funding at the state
level and made cuts in local government aid and other areas, Frans said,
we have forced local governments to raise property taxes or cut services
or both. Schools have had to raise property taxes through referenda to
increase their revenue.
"We've managed the crisis at the state level and
we've pushed the crisis down to the local level," he said. As a
consequence, in 2010, the property tax made up 40 percent of the three
major state and local tax revenues.But traditionally, the sales tax, the
income tax and the property tax have always more or less matched each
other. "Not that a perfect match is essential, but they've been relatively
in balance," Frans remarked. "We were concerned about that and we heard a
lot about the overreliance on property taxes. One of the challenges right
out of the chute is how do we effectively give people property tax relief,
both businesses and individuals?"
Another challenge is to redesign the sales tax,
so it is more robust and mirrors our service economy.
two-thirds of the purchases now are for consumer services, not consumer
goods. The sales tax was brought in in 1967, when it was just the reverse
- two-thirds of the spending was for goods. Projections of sales tax
revenue into the future, even with the economy recovering, remained fairly
flat with no change in the current system.
"The income tax will bounce back as the economy
improves," Frans pointed out. "In the projections, the sales tax really
wasn't rebounding or getting to the point where we thought it would be
adequate. We felt we needed to do the traditional tax reform, where you
broaden the base and lower the rates."
One goal in both the individual and corporate
income tax systems was to try to make the system fairer with base
broadening and lower rates.
He said that, on the individual
income tax side, Gov. Dayton was committed to the top two percent of
income earners' paying a higher income tax rate. That's been an important
part of his conviction about the progressivity of the Minnesota tax
system. "We feel we need that for the long-term generation of revenue from
the income tax," Frans said.
In the corporate income tax area, a lot of
companies don't pay the 9.8 percent statutory rate, Frans said. We
eliminated some corporate deductions and credits, he said, so that the
statutory rate would really be the effective rate. Also, the statutory
rate was lowered to 8.4 percent. "We would actually have more companies
paying the tax, but at a lower statutory rate and a higher effective
rate," he said.
Ideas to improve on the governor's budget
proposal must find spending cuts to match any revenue cuts. "We went
through the budget in excruciating detail to try to find budget cuts to
save money," Frans said. "We think we've done that. We want people to take
the challenge to come up with ideas to improve upon our proposal to fund
the government at the level that we have, with these investments, while
solving the $1.1 billion deficit and the $1.1 billion payback to schools."
Some people believe that tax reform should only
be done in a revenue-neutral environment.
In response to a
question, Frans said he doesn't understand how the state could propose a
revenue-neutral system when there is a $1.1 billion deficit and a debt to
the schools of $1.1 billion. "Right out of the box you have over $2
billion you've got to pay back and you've got to solve," he said. "How
does a revenue-neutral system do that? And if people don't want to
generate additional revenue, then what cuts are they willing to make? They
haven't met that challenge yet."
An interviewer asked what the impact would be if
we broaden the base for the sales and income tax as proposed, before
adding in the higher spending. Frans responded that broadening the base of
the sales tax allows lowering of the sales tax rate to 5.5 percent. If the
sales tax rate change were revenue neutral, the rate would be something
less than 5 percent.
Lower federal income tax rates correlate with
income disparity, not economic activity or job growth.
referred to a September 2012 report by the Congressional Research Office,
which studied federal income tax reductions since World War II. He said
the report showed that federal income tax rates for everyone have come
down, but they've come down more substantially for the upper tier of
income. The report's conclusion was that lowering the income tax rates
does not correlate with economic activity or job growth. The only thing
lower income tax rates correlated with was income disparity.
Lowering state income tax rates in 2000 has cost
the state $11 billion in lost revenue over the past decade.
2000, the state lowered the top state income tax rate from 8.5 percent to
7.85 percent. Frans said we would have had about $11 billion in additional
revenue during the last decade if we had not made those changes. "So we
came into this thinking that the income tax rates needed to be adjusted in
a progressive way," he said.
He noted that people pay the most income tax in
their 30s, 40s and 50s. As they near or enter retirement, they tend to
earn less and pay less income tax. The income tax stream is going to have
challenges, he said, because of the aging of the state's population. The
addition of the fourth tier of income tax rates is one way to help support
long-term revenue strength.
Lowering the sales tax rate means the typical
consumer won't pay more sales taxes, even with clothing and consumer
services added to the sales tax base. An interviewer commented that the
state debated the sales tax for about 10 years, before it passed in 1967.
During the debate, there was a proposal to pair an offsetting income tax
credit with the sales tax. Instead, we exempted food and clothing from the
sales tax. He asked if we should go back to some type of credit now that
we're looking at taxing clothing or, perhaps sometime, food.
"By lowering the sales tax rate from 6.875 to
5.5 percent, we find that the typical consumer won't pay more sales tax,"
Frans responded. "We think it holds true for people at the lower income
level, as well, but we're studying that. If not, we might have to look at
a credit system." He said the state's working-family income tax credit
helps with progressivity if we broaden the sales tax base. "But we may
have to have a credit if this turns out to be regressive at all."
He suggested that adding the fourth income tax
tier, adding the $500 property tax rebates and lowering the rate of the
sales tax are all very progressive, but the expansion of the sales tax
base is the part that's regressive. "We think the rate reduction may solve
that problem," he said. "If not, we'll have to design a credit." He noted
that most of the $2.1 billion in new sales tax revenue would come from
business sales taxes.
Adding the sales tax on clothing will generate
less than $100 million in new revenue if, as proposed, the tax applies
only to clothing items costing $100 or more.
Limiting the tax to
items costing $100 or more results in $200 million in lost sales tax
revenue. But, he said, that limit is a progressive element.
"You won't buy a suit anymore," he joked.
"You'll buy the jacket and then you'll buy the pants. You'll have a lot of
An interviewer asked why the governor's proposal
doesn't include a tax on all clothing, paired with the income tax credit.
Frans said they wanted to see whether the system could work alone without
having to add a credit. "We're certainly willing to do that if that's the
route we go," he said. "There are a lot of necessities under $100 that we
thought it was nice to exempt."
Minnesota residential property tax rates rank in
the middle of the pack in the country.
"Part of the outcry over
Minnesota property taxes is that there was a terrible phenomenon of values
going down in the recession and property taxes going up," Frans said.
"That's a prescription for people to be upset. There's been a big
increase, even though we're still at the point where we're not an
We really explored what we could do to make the
property tax more understandable to the average citizen, Frans continued.
"It's complicated. That's one of the reasons we went with the direct
property tax rebate. We wanted to let people know that we're trying to
shift our emphasis off the property tax to income and sales taxes, so
they're all relatively equal."
The state loses a total of $400 million per year
in sales tax revenue from out-of-state Internet and catalog sales.
An interviewer asked what the proposal does regarding the Internet sales
tax fairness issue. Frans responded that the governor proposed that
out-of-state companies, like Amazon, without brick-and-mortar stores in
Minnesota, but with affiliates or sponsors in the state selling on their
behalf, would have to collect state sales taxes. "It's a relatively small
percentage of the out-of-state Internet problem," he said. "It captures
about $5 million a year, but it is important. Best Buy and Target were
really concerned about this as a fairness issue."
The bigger problem is at the federal level,
Frans continued. The Marketplace Fairness Act currently being considered
in Congress would require all sellers to collect sales taxes based on the
destination of the product.
The proposal broadens the sales tax base to
include business-to-business sales transactions, but does away with
upfront sales taxes on capital equipment for use in a business.
Frans said that currently, if a business buys capital equipment for use in
the business, it has to pay the sales tax up front and then file to get a
rebate later. "It's a problem for people," he said. "We're holding their
money for a while." He said it costs $150 million in the FY2014-2015
biennium to eliminate the delay in the rebate. The governor's plan would,
as of July 1, 2015, eliminate the delay and businesses wouldn't have to
pay the sales tax up front and wait for a rebate.
One concern people have on the
business-to-business service taxes is that there is a potential cascading
effect if a company pays a tax on services while making a product and then
sales tax is added again at the point of sale. "That is an issue we're
going to have to address with the business-to-business transactions,"
Frans said. "We went through a lot of exercises of how to draw lines and
make exceptions. Ultimately, we came to the conclusion that at the lowest
possible rate, we had to levy the sales tax across the board."
The governor has been trying to instill in state
agencies a culture of improvement and innovation.
Responding to a
question, Frans said Gov. Dayton asked state agencies to report what
they're doing, how they're doing it and what they can get rid of that's
outside their mission. "If you're managing an agency," Frans said, "it's
so easy to let the agency just do its thing year after year. We've found
ways to make some real savings."
The state is trying to stop the move toward more dedicated funds.
In response to a question about dedicating tax revenue for specific
programs or purposes rather than leaving the money in the general fund,
Frans said, "It's been happening much too much. Everybody wants a
dedicated fund and everybody wants out of the general fund. Part of that
results from not having budgets this last decade that work. If you're
concerned about the appropriations process, the best thing to do is have a
dedicated fund. It's a huge problem and there's enormous pressure. We're
trying to stop that. We feel the best way is to generate the revenue and
then have it go through the appropriations process."
He did say that there could be a problem in
areas like transit where the state needs to make long-term investments.
"You can't always make commitments to those investments in a long-term
project without a dedicated fund," he said.
The $500 property tax credit will not reduce the amount of money going
into the existing property tax circuit breaker. (The "circuit
breaker", a commonly used name for the state's regular property tax refund
program, is a state-paid property tax refund to homeowners and renters
whose property taxes are high relative to their incomes.) An interviewer
asked why the Governor's budget proposal includes a property tax rebate
instead of strengthening the circuit breaker. "We strongly support the
circuit breaker, both for homeowners and renters," Frans responded, "so
we're fully funding them in their current state." He said the governor was
concerned that it's hard for people to understand that the circuit breaker
refund is a reduction in property taxes, because the refund actually comes
through the income tax system. The $500 rebate makes it clear that there's
a reduction in property taxes. "We didn't limit it by income," Frans said.
"While we might have to do that at some point, at least initially the goal
is to give relief generally to homeowners and businesses."
The state could not afford to do more tax simplification right now.
Responding to a question, Frans said that tax simplification
costs a lot of money. "We came up against this in both the property tax
and the individual income tax, two areas where we really wanted to do
simplification. If we didn't have a $1.1 billion deficit and didn't owe
the schools $1.1 billion, we would have done more simplification." He said
the first step has been to add some stability to the revenue system. "Our
next step, if we can get some surpluses, would be to do some more
simplification. We wanted to do more; we simply felt we couldn't afford
The governor's proposal will be re-evaluated after the February budget
forecast. Frans concluded by saying that when state economist Tom
Stinson makes his February budget forecast, "we will re-evaluate this
whole package based on his forecast and his growth assumptions. If the
deficit is reduced, we will be able to make some changes."
The Civic Caucus
is a non-partisan,
tax-exempt educational organization. The Core participants
include persons of varying political persuasions, reflecting years of leadership in politics and
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David Broden, Janis Clay, Bill Frenzel, Paul Gilje,
Jan Hively, Dan Loritz (Chair), Marina Lyon, Joe Mansky,
Tim McDonald, John Mooty, Jim Olson, Wayne Popham and