Governor Dayton has announced his budget and it includes a sales tax increase.  You may hear that the rate on goods will fall to 5.5% from 6.875%.  But the MMB presentation made after the governor included a slide that shows revenues from the sales tax will rise $2.1 billion in the next biennium under that plan. 

Where does this money go? In part it pays for the property tax rebate that is also part of the governor’s plan.  In the same presentation we find that rebate costs $1.4 billion.  That’s partly offset by the proposed new 4th income tax bracket, but that is estimated to come up $300 million short of paying for the property tax rebate.  None of the other changes made in this tax reform adds more than a few million. 

 

The principle of tax reform is to broaden a tax base and lower its rate, and something economists of all ideological stripes support.  But, as Prof. John Spry of the University of St. Thomas wrote in the Pioneer Pressyesterday, this particular tax reform broadens the tax base into places it should not go.  By taxing business-to-business services, this tax reform hides taxes that will eventually be embedded in higher costs of all goods and services consumers buy.  Different goods will have different sales tax rates, but no good or service – not even food – will be untouched by the tax increase.

It would be hard to comment more fully on the sales tax proposal – or any others offered by the administration – as bills have yet to be introduced to make the proposals into legislation.  The governor’s website has yet to provide any details, for example, on a similar base-broadening, rate-reducing reform planned for the corporate income tax.  There may be parts to like in this plan.  But Dayton’s abandonment of a public finance principle to tax only consumption, only once, and transparently, is a bad start for this round of tax reform.