If you went to the grocery store, would it make sense to pay a sales tax based on your ability to afford it? Maybe, maybe not, but that’s exactly what it would take to make the state’s sales tax more progressive.
Minnesota’s tax system is often dubbed progressive. This means the more money you make, the more you pay in tax. But according to the House Taxes Committee chairwoman, the state has only two progressive taxes: income and estate.
“Every other tax is regressive. Our whole net state tax system is slightly regressive,” said Rep. Ann Lenczewski (DFL-Bloomington).
Regressive means that the poorer a person is the bigger tax burden he or she pays relative to his or her situation. The gas tax is another example of a regressive tax. Like the sales tax, Lenczewski said it is not based on a person’s ability to pay it. “It’s based per gallon as an excise tax. So, if the tax is a dime a gallon, on 10 gallons a person would pay $1 in tax. That doesn’t matter if the price is $2 or $6 a gallon, she said.
“People didn’t think last year’s gas tax was a good idea because prices were so high, but the price (per gallon) had nothing to do with it,” Lenczewski said. “It’s still the exact same level of tax.”
Rep. Laura Brod (R-New Prague), lead Republican on the House Taxes Committee, agreed that the gas tax is regressive, but still didn’t see the logic in passing an increase to the tax last year. She finds the focus on regressivity this session interesting because of the four taxes that have been passed over the last four years — gas, motor vehicle sales, transit sales and the constitutional amendment sales for environment and the arts — every one of them is a regressive tax.
“Folks are forgetting that all these taxes that have passed are more regressive and hit the lowest income folks the hardest,” she said. “If we want to make our tax system more progressive, what we ought to do is lower the regressive taxes that we have.”
Studying the consequences
This focus on regressivity is tied, in part, to the 2009 Minnesota Tax Incidence Study released earlier this month. Based on 2006 figures, the study shows that between 2004 and 2006, the state’s overall tax system became much more regressive. Meaning, among other things, that income distribution has grown more unequal.
“When you look at something like the tax incidence study, people often forget that we have one of the most progressive tax systems in the country,” Brod said. “So when we talk about regressivity, we’re talking about relative regressivity. Compared to other states, we do quite well in terms of being progressive.”
When people think of the income tax being so progressive, Lenczewski said they’re actually thinking of the federal income tax, which is hyper-progressive compared to the state’s.
She added that the word “progressive” gets attached to Democrats a lot. “That’s not the way to think about it. It’s not like Republicans like it to be regressive and Democrats like to be progressive. Both parties want a progressive system. Everyone gets that you want a progressive tax system, it’s just hard to get people to get there.”
Lenczewski said one way to look at progressive tax is that people who want it want it based on ability to pay. Often people think a flat tax would be fair, but 10 percent, for example, means something different to a college student who really has no income than to a millionaire.
“Flat taxes aren’t fair; they’re perfectly proportional, but they aren’t fair,” she said. The state’s income tax is slightly based on ability to pay with the lowest income earners being taxed 5.35 percent, middle income is taxed at 7.05 percent and the richest taxed at 7.85 percent.
“It kind of becomes a philosophical thing, but everyone can kind of get to the fact that regressive is not good.”
The reform proposal
With a projected $4.6 billion deficit looming, Lenczewski sees an opportunity for some tax reform.
She and Rep. Paul Marquart (DFL-Dilworth) have come up with a proposal that would reform the state’s tax system by eliminating dozens of tax breaks while cutting income taxes for those of meager means.
While the plan is revenue neutral, Lenczewski has hinted that scenario could change with a property tax proposal expected before month’s end from Marquart.
“This is going to be a rough trip,” she said. “And we need an oil change.”
Lenczewski’s part of the plan, HF1782, proposes the most significant individual income and corporate franchise tax reform in more than 20 years, she said. This, in turn, would make the system more progressive. The bill is scheduled to be heard March 23 by the House Taxes Committee.
Tax breaks that would be eliminated include individual income tax benefits for JOBZ programs, the charitable contribution deduction and a low-income motor fuels credit.
“We should not be using the tax code to bury this stuff,” Lenczewski said. The plan would make Minnesota’s tax system fairer and easier to understand.
Rep. Kurt Zellers’ (R-Maple Grove) immediate reaction to the bill was that eliminating tax credits could hinder job growth.
“I just don’t see how, in a tough economic time, why that could be a good idea,” he said.
Brod added that the best way to jump-start the economy is to lessen the burden on family and business.
“I get a little frustrated when I hear people say, ‘Well in order to get out of here we’ve got to do X, Y, or Z.’ When I look at that I say, ‘OK, well, yes, we’re going to get out of here, and, yes, we’re required to get out of here, but if we only just get out of here and don’t strategically position ourselves to recover economically, we will have missed an opportunity and not done our job.’ It’s setting up a tax system that ensures the economy moves forward,” Brod said.
The proposal would lower the tax rates for the two lowest income categories, while creating a new credit that would benefit all taxpayers on the mortgage, charitable contributions and family front.
“The income tax system is too complicated, and there now seems to be bipartisan agreement that major reform is necessary,” said House Minority Leader Marty Seifert (R-Marshall) in a press release. “Republicans proposed reducing personal income tax rates in 2007 when the government had a surplus, so we are glad to have Rep. Lenczewski join us in saying Minnesotans need relief when it comes to income taxes.”
But he questioned Democrats credibility when it comes to their professed desire to make the tax system more progressive.
Lenczewski said the bill is modeled after President Reagan’s overhaul of the federal tax code in the 1980s, when several tax breaks were thrown out. She added that over the years these breaks have crept back in. “It’s time to sweep the barn.”