MPR: Ventura's Tax Plan: Dead on Arrival?

Ventura's Tax Plan: Dead on Arrival?
By Laura McCallum
January 5, 2000
Part of MPR's online coverage of Session 2001

When Gov. Ventura delivered his State of the State address, he acknowledged that the most controversial part of his tax-reform proposal is likely to be expanding the sales tax to services. The reaction at the Capitol has been almost universally negative from both sides of the aisle, although economists say the idea makes sense.

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THE GOVERNOR WANTS TO LOWER the sales-tax rate from 6.5 to six percent, while at the same time broadening the tax to include services such as lawyer and accountant fees, car washes, and haircuts.

At the Capitol Barber Shop, owner Ken Kirkpatrick says he's been hearing a lot of talk about the governor's proposal. He says most of his customers haven't decided whether they like the idea. The customer sitting in Kirkpatrick's chair, MnDOT employee John Benson, says he wouldn't mind paying sales tax on a haircut.

"I support sales taxes on everything but clothing and and food," he says.

But while some taxpayers might not mind paying a little extra for a haircut, they might balk at paying an additional six percent for bigger purchases such as legal fees and advertising. The Minnesota director of the National Federation of Independent Business, Mike Hickey, says those industries are likely to lobby against the governor's proposal.

"Some of these services, such as real-estate management, attorneys fees, engineering, structural and surveying services; these are very large-dollar items, and these actually could have a chilling effect on their industry, when somebody has to pay several hundreds or thousands of dollars in a sales tax," Hickey said.

Hickey says extending the tax to services will also create an administrative headache for businesses that haven't had to collect sales tax in the past. Given the widespread opposition, Hickey and other lobbyists doubt the governor's proposal will go anywhere.

"The betting has to be that it's dead on arrival, for obvious reasons," says David Strom, legislative director of the conservative Taxpayers League. "We're talking about expanding the sales tax to 60 percent of the goods and services that we buy today that are untaxed."

Strom says it will be tough to sell an expanded tax when the state is projecting a $3 billion surplus over the next two-and-a-half years.

Republicans don't like the idea because they say it sends a mixed message to cut the rate and broaden the base, while Democrats don't like it because they say the sales tax is a regressive tax that hits low-income Minnesotans particularly hard.

Ventura's lone ally in the Legislature - newly-converted Independence Party Sen. Bob Lessard of International Falls - agrees that the idea is a tough sell. Lessard opposed broadening the sales tax base when he was a DFLer, but says he'll carry the bill, because it raises money for the governor's plan to reform the property-tax system.

"I don't know the answer, but can somebody out there give me a better idea?" Lessard asks. "Give us a better idea of what we can do to reform this tax system. The one we got now is archaic, it's outmoded, and most of all, it's completely unfair."

The Department of Revenue estimates that lowering the sales rate to six percent and expanding the tax to services will generate another $400 to $500 million a year.

While the plan may not be politically palatable, many economists endorse the idea. Joel Slemrod, economics professor at the University of Michigan-Ann Arbor, says a broader tax base is more efficient.

"If you have some goods and services taxed, and others not, there is an inefficient incentive for people to buy the untaxed goods, so the idea of lowering the sales tax rate and making up the lost revenue by broadening the base is one that almost all economists would say is the right direction to go," he said.

Slemrod says taxing services also makes sense in today's economy, where 60 percent of the consumer purchases are services and only 40 percent are goods.

While the governor's plan isn't generating any enthusiasm at this point at the Capitol, some groups, including the Minnesota Chamber of Commerce, are applauding Ventura for sparking what they see as an important debate over the merits of the sales tax.

Laura McCallum is the Capitol Bureau Chief for Minnesota Public Radio. Reach her via e-mail at lmccallum@mpr.org.

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