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Myron Frans, commissioner of the state Department of Revenue, uses a three-legged stool to illustrate how the percentages of Minnesota's tax revenue have changed. Monte Draper | Bemidji Pioneer

Revenue commissioner: State tax system in need of repair

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BEMIDJI - Two three-legged stools illustrate how the state's tax revenue has changed in the last decade.

With legs representing the percentages of income, sales and property taxes take in by the state, Myron Frans, commissioner of the Minnesota Department of Revenue, showed how, in 1999, all three were close enough to equal that the stool was able to remain standing.

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Then, income tax comprised 34.8 percent, sales tax 34.7 percent and property taxes 30.4 percent of the state's revenues.

But in 2010, sales tax comprised 26.6 percent, income tax 33.6 percent and property taxes 39.8 percent.

"If I set this thing down, it will literally fall over," Frans said Wednesday while holding a wooden stool built to scale based on 2010 figures.

Frans hosted a town hall meeting at Bemidji City Hall as he continues a statewide tour on tax-reform initiatives.

Making Minnesota's tax system more fair, he said, is one of Gov. Mark Dayton's top priorities, along with creating jobs to keep Minnesota competitive and improving how state government works to deliver the best services at the best price.

Frans, wearing a red and black plaid tie in recognition of Bemidji's Plaid Wednesdays, thanked the 30-some people who attended the forum, particularly recognizing the six legislators in attendance: Sens. John Carlson, R-Bemidji, Tom Saxhaug, DFL-Grand Rapids, and Rod Skoe, DFL-Clearbrook; and Reps. Dave Hancock, R-Bemidji, Larry Howes, R-Walker, and John Persell, DFL-Bemidji.

"A deficit isn't a Democratic or Republican thing," Frans said. "It's a deficit and we've got to solve it."

Dayton, Frans said, will present his budget during the next legislative session and a tax-reform system will be developed to meet that target.

"We're not going to raise revenue if we don't have to," Frans said.

Dayton, he said, is focused on addressing the state's projected deficit and also paying back the school shift.

One of the hardest points to address through any tax reform, Frans said, will be increasing property taxes.

"That's going to take money," he said. "We've got to look at different ways to put the lid on property tax increases."

Jim Hess, superintendent of the Bemidji School District, told Frans he was encouraged that the governor wants to pay back the school shift, but asked what Dayton's ultimate goal would be.

"We know education is one of the key components to success for the future," Frans said. "I think everyone's on the same page. The key is how to go about making that work."

Saxhaug asked Frans if Dayton and his staff recognize that northern Minnesota has a "real problem" with increasing property taxes due to the amount of public lands.

"This is a different ball of wax up here," Frans said, noting that his statewide tour has been a learning experience.

The Local Government Aid formula was intended to take into account the burdens placed on regional cities, but measuring burdens can be difficult, he said.

"You've got to figure out a system that's fair to places like this," Frans said. "It's a complicated system. One-size-fits-all is something that just doesn't work."

Frans opened the one-hour meeting with a 20-minute presentation detailing the current tax picture. The presentation can be viewed online at http://bit.ly/TaxReformMN.

An early slide showed that Minnesota collected tax revenues at or above the national average for 45 years until 2002, but below the national average for seven of the last eight years.

Frans said it is difficult to compare one state tax system to another, pointing out that the Small Business Entrepreneurial Council listed Minnesota as among the 10 worst tax systems, largely due to high statutory rates. Meanwhile, though, Ernst and Young listed Minnesota among the 10 best states with the lowest effective tax rates on new investment.

"It's hard to compare one state to another," Frans said. "The tax systems are tremendously different."

The demographics of the state are changing, which will impact the state's tax system, Frans said. By 2035, an additional 1.2 million people are expected to become Minnesotans, 850,000 of who will be over the age of 60 and only 60,000 aged 35-59.

"We've got a revenue-stream problem," he said, noting that people tend to earn the most money from age 35-60.

Consumers now are spending more money on services and less on goods, he said. Consumers now spend about 67 percent on services, whereas, in 1950, they spent 61 percent on goods.

E-commerce continues to be a concern, Frans said, explaining the state lost about $149 million in taxes due to online sales, or $400 million total, when considering e-commerce, catalogs and remote sellers.

"It's a matter of fairness," Frans said.

The federal government is now considering the Marketplace Fairness Act, which would require sellers to collect sales tax no matter where they are located based on where the good was sold to.

Minnesota's sales-tax base, too, is quite limited, he said.

When asked if legislators would consider expanding that base, either to services or additional goods, Frans said it is a "difficult" political issue for legislators.

No one, he said, wants to stand up and say it should be expanded.

"It's a difficult topic," Frans said. "Is there political will to do it? I don't know."

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