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Businesses worry about Dayton tax plan’s effects

Revenue Commissioner Myron Frans tells reporters on Tuesday that tax increases Gov. Mark Dayton proposes overall will not raise what middle class Minneotans pay. Don Davis | Forum News Service

By Danielle Killey

Forum News Service

ST. PAUL – Someone has to pay.

Gov. Mark Dayton’s budget proposal would add more than $3.1 billion in new tax revenue over the next two years. Higher income taxes on the richest Minnesotans would bring in about $1.1 billion, but the rest has to come from somewhere. Businesses are worried they, and their customers, would take the hit.

Legislators, who must approve any tax change, admit they do not have all the information needed to decide if Minnesotans would benefit or be hurt by the Dayton plan. Republicans are especially vocal, questioning Dayton’s claim that the average Minnesotan will pay about the same in taxes under the proposal as now.

“How can that be?” Rep. Rod Hamilton, R-Mountain Lake, asked since total tax increases would be more than $3 billion and property tax refunds would return a third of that, leaving $2 billion that someone must pay.

Mike Hickey of the National Federation of Independent Business-Minnesota said new taxes on businesses will be passed on to customers.

“This is truly a net sales tax increase of $2.1 billion, and most of that is going to fall on the businesses,” said Beth Kadoun, tax and fiscal policy director for the Minnesota Chamber of Commerce. “It’s a huge concern for the business community.”

Much of that concern stems from a proposed new tax on services, including those that businesses provide to other businesses.

The governor’s plan also includes a lower 5.5 percent sales tax rate, down from 6.875 percent, but would expand what is taxed.

“We like the idea of lowering the overall sales tax rate,” Bruce Nustad, president of the Minnesota Retailers Association, said. “The tradeoffs, though, are a little difficult for us.”

Revenue Commissioner Myron Frans said the taxing of more services, such as haircuts, auto repairs and accounting, is meant to reflect a change in the state’s economy. In the 1960s people spent about a third of their money on services and the rest on goods. Now, that has flipped, Frans said.

He said the typical consumer would not pay more in sales tax overall because “the rate reduction is so significant.”

“I think this would be relatively neutral for the Minnesota economy,” said Jay Kiedrowski, a senior fellow at the University of Minnesota’s Humphrey School of Public Affairs.

The tax on business-to-business services offers the most risk for a negative impact, he said.

It is hard to predict what businesses would do to offset the tax changes, Frans said, but it could include lower wages, higher prices or less of a profit.

That means even though sales taxes are expected to even out for typical consumers under the plan, Minnesotans could end up paying more overall because of price increases or other charges.

Nustad said he is not sure the lower tax rate would be enough to appease businesses.

“Retailers would really have to be convinced that lowering (the rate) overall would spark spending on the part of consumers,” he said.

Kiedrowski said while businesses might charge more to cover the taxes, they cannot raise prices too high.

“It’s a competitive marketplace,” he said.

Some businesses are worried the plan would affect their competitive edge. Another piece of the governor’s proposal includes a tax on articles of clothing that cost more than $100, which has caused a stir.

Tax-free clothing has made Minnesota unique and drawn shoppers here, Nustad said.

“It’s tough to envision a tax bill where we’d embrace the clothing tax,” he said.

There are pieces businesses like in the governor’s proposal.

A plan to tax Internet purchases has been applauded by business leaders. The rule, often called the Amazon tax, would require online businesses with state ties to collect Minnesota sales tax on purchases.

That change would bring in an estimated $5 million a year for the state. Kadoun said the change also would make the system fair, putting Minnesota’s brick-and-mortar businesses back in competition with Internet-based businesses.

“We think that Minnesota passing that language really would level the playing field,” Nustad said.

A federal solution would be ideal, Nustad and Frans said, but Minnesota taking action would be a start.

Dayton also has included in his plan a drop in the corporate tax rate from 9.8 percent to 8.4 percent. He would freeze businesses’ state property taxes for two years as well and change how the rate increases in the future.

Those are good changes, Kadoun said, but they do not balance the concerns.

“Those positives are miniscule as compared to the overall tax expansion,” she said.

Questions still remain about the details of the proposal, but that has not stopped businesses from worrying.

“Part of it is trying to still sort through what all he’s taxing,” Kadoun said. “But the feedback we’re hearing is this is just terrible for Minnesota’s business climate.”

Frans said the governor is serious about hearing new or different ideas for a plan, though the budget must remain balanced.

Kadoun acknowledged this is only the first version of the budget plan and it likely will change before it is finalized.

“Sometimes it’s easy to say you don’t like the whole thing because you don’t like parts of it,” Nustad said. “We’re going to try to be a constructive part of the conversation.”What would be taxed under Dayton plan

Here are some goods and services not now subject to the sales tax that the Minnesota Revenue Department says would be taxed under Gov. Mark Dayton’s tax reform proposal:

—  Some online sales

— Digital products

— Direct satellite services

— Remote access software

— Admission to stadium box seats and suites, exhibitions and selling events

— Ready-to-eat meat and seafood

— Clothing on items costing more than $100

— Admissions and memberships

— Over-the-counter drugs

— Personal services such as barber shops, beauty salons, tattoos, body piercing, nail salons, wedding planning, dating services, shoe shining, personal shopping

— Veterinary services

— Personal instruction such as dance, golf, tennis, etc

— Brokerage and investment counseling such as portfolio management, investment advice

— Bank charges and safe deposit box rental

— Legal services purchased by consumers

— Accounting services purchased by consumers

— Auto repair services

— Household goods repair and maintenance

— Warehousing and storage services (does not include storage of farm products or refrigerated storage)

— Taxicabs and other ground transport services (does not include public transportation or schools transportation)

— Travel agent services

— Legal services purchased by businesses

— Accounting and bookkeeping services purchased by businesses

— Architectural and engineering services

— Specialized design services such as interior decorating, industrial design services, graphic design services

— Computer services such as custom computer programming, computer systems design services

— Computer facilities management services, data processing, hosting and related services

— Management consulting services such as administrative management consulting services, human resources consulting services, marketing consulting services, environmental consulting services, scientific and technical consulting services, scientific research and development services

— Other consulting and development services such as environmental, sanitation, site remediation, safety, economic, security

— Advertising and related services such as advertising agencies, public relations agencies, media buying, agencies, media representatives, display advertising, advertising material distribution services

— Office administrative services

— Facilities support services such as snow plowing, cleaning

— Employment services such as temporary help agencies, employment placement agencies, executive search agencies, professional employer organizations

— Business support services such as telephone answering services, collection agencies, telemarketing services on contract, secretarial and court reporting services, document preparation services, private mail centers, collection agencies, credit bureaus, repossession services, marketing research and public opinion polling, photographic services, commercial photography, translation and interpretation services

— Other support services such as packaging and labeling services, convention and trade show organizing

— Electronic and commercial equipment repair and maintenance

— Personal services purchased by businesses

— Telecommunications equipment

— Court reporter documents

— Advertising materials

— Publications such as newspapers, magazines, commercial printing

What wouldn’t be taxed under Dayton plan

The Revenue Department says these are examples of items that would remain exempt from sales tax:

— Food

— Clothing items and apparel less than $100

— Medical services, such as prescription eyeglasses, prescription drugs, hospitals and outpatient surgical centers, chairlifts, ramps and elevators in homes

— Parts and accessories to make motor vehicles handicapped accessible

— Nonprofit organizations, including fundraising sales

— Public safety items, including firefighters personal protective equipment, public safety radio systems, ambulances leased to private ambulance services

— Textbooks and personal computers required for school use

— Residential heating fuels and water services

— Agricultural items, including farm machinery and replacement parts, farm conservation programs, agricultural processing facilities

— Renewable energy systems, wind energy conservation systems, solar energy systems, biosolids processing equipment

— Veterans’ organizations

— Building materials for disabled veterans’ homes

— Construction materials for low-income housing

— Mining production materials

— Capital equipment

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