Friday, February 27, 2009

An internet tax?

Currently states are prohibited from imposing taxes on internet sales if the business providing the good does not have a physical presence in the state. For state sthis can mean a significant loss in revenue. California estimated that it lost $208 million in sales taxes to internet sales in 2003; Michigan points to the internet for a loss of $345 million in 2005, while South Carolina says that it loses $40 million annually to purchases by residents of items over the internet This is based on a 1992 United States Supreme Court case, Quill Corp v. North Dakota. In that case the Supreme Court found that while it was clear that Quill, an office supply company with offices and warehouses in Illinois, California, and Georgia-but not North Dakota-did significant business by mail order in the state and benefited from the state’s efforts at business climate and waste disposal (think lots and lots of catalogs decomposing in landfills) the fact that it did not have a physical presence in the state was sufficient reason for North Dakota to not be able to tax purchases by North Dakota residents from Quill. The Court however did indicate that Congress could change this current limitation on the taxation of interstate commerce if the taxation met tests on the burden imposed on retailers ability to properly determine and administer the applicable tax.

In March of 2000 the National Conference of State Legislatures convened what has become the Streamlined Sales Tax Project (SSTP) . The goal of the Project is to create an agreement among states to “simplify and modernize sales and use tax administration” such that out of state retailers can be required to impose the appropriate sales tax. Currently 22 states are participating, representing 31% of the U.S. population. Wisconsin has recently applied to join.

The Project, and the Agreement it has created, works to develop greater uniformity and simplification in tax base definitions, rates, tax returns, and perhaps most importantly sourcing rules.

One critical dimension to apply sales and use taxes to out of state purchases is determining which states’ taxes should apply to the purchase-the state of origin (where the retailer is located) or on the state of destination (where the purchaser is located). The SSTP has a significant issue paper arguing that destination taxes are preferable to origin taxes providing there is greater uniformity of definition of items to be taxed and that only sales over a certain dollar threshold are taxed. Additionally they argue that the important act in the sale is in fact the use of the item rather than the sale of the object by the business.

In addition they argue practical consideration in the implementation of origin taxes. They argue that origin taxes would have an unintended consequence of impacting business location decisions, driving businesses with significant remote sales into states with lower sales taxes.

Simplification however isn’t always so simple. In Minnesota food is nontaxable, unless it is classified as prepared food. Food that is created at the same site where it is sold is generally classed as prepared food. At one point, due to that definition stemming from Minnesota’s participation in the SSTP, it meant that a loaf of bread sold in a bakery was considered a taxable item but that same loaf sold by a grocery store was not. Similar confusion revolved around the definition of prepared meats sold in the meat market versus those same meats sold in the meat department of a grocery store until legislative action exempted those items from taxation.

Given the number of states currently facing budget deficits, and the continuing growth in internet commerce interest in taxing interstate, internet sales can be expected to grow.

States Yearn to Collect Online Sales taxes, downloaded February 27, 2009, downloaded February 24, 2009, downloaded February 24, 2009

dedicating sales tax

In the election in November of 2008, Minnesotans voted on a constitutional amendment to raise the sales tax rate by 3/8 of one percent, dedicating this revenue to natural resources and the arts. The bill that passed, enabling this ballot question was HF 2285 (Sertich):

More information about the proposed constitutional amendment can be found at:

The idea of dedicating a sales tax or any funding to a particular cause raises controversy no matter how non-controversial the cause is. Earmarking revenues for a particular purpose has its advantages. In the case of the constitutional amendment, the passage of it guarantees that there will be funding for natural resources and the arts until 2034. It will allow for predictability of revenue for budgeting purposes. These advantages help to make the case for the dedication of the additional sales tax by constitutional amendment. Here is some information about earmarking:

On the other hand, there are several draw backs to earmarking revenue for particular purposes, especially when doing so through an amendment to the constitution. In the case of the 2008 ballot question, the revenue is additional revenue, thereby not affecting the pre-existing budget. However, in 2006 the ballot question that passed, dedicating all motor vehicle sales tax (MVST) revenues to transportation instead of streaming them into the general fund, shifted the revenue stream away from the general revenue fund and left a hole to fill.

Another drawback to earmarking is that the legislature can no longer alter the level of that funding, even if future elected officials and their constituencies would prefer to allocate those revenues to other things. If circumstances change, dedicating sales tax revenues to anything, especially by way of the constitution, can be short sighted.

On the other hand, while dedicating revenue streams to particular causes ensures some funding, depending on the state of the budget each year, lawmakers could decrease the amount of discretionary spending for a cause if there is already earmarked spending for it. For example, the environment, which is often seen as underfunded, could have its funding cut in a given year in order to resolve a budget deficit, based on the merits that it already has earmarked revenue streams (which could be insufficient on their own).

Perhaps a better way to handle funding for any priority is to fund the needs outright, rendering dedicated funding unnecessary. Funding decisions are best made through the legislative process, with the ability to adapt to changes in need.

Legacy Amendment

On November 5th, 2009, Minnesota voters approved a general sales use tax levy of 3/8% known has the Clean Water, Land and Legacy Amendment, a levy which will be in effect for twenty-five years. The following was the ballot question, which further explains the intended uses of the funds:

"Shall the Minnesota Constitution be amended to dedicate funding to protect our drinking water sources; to protect, enhance, and restore our wetlands, prairies, forests, and fish, game, and wildlife habitat [33%]; to preserve our arts and cultural heritage [19.75%]; to support our parks and trails [14.25%]; and to protect, enhance, and restore our lakes, rivers, streams, and groundwater [33%] by increasing the sales and use tax rate beginning July 1, 2009, by three-eighths of one percent on taxable sales until the year 2034?"

The tax is projected to raise approximately $275 million in FY 2011.

The debate of the measure was interesting in that it was not just debating the merits or needs of the funded areas, but also the fundamental idea of constitutionally earmarking a revenue source for specific uses. The Star Tribune op-ed pieces provide two (opposing) sample view points:

The latter piece (Morse) advocates for the amendment based on merits, while the former (Johnson and Gilje) criticizes it for its effects on representative-democracy. The writers believe that passing such an amendment, regardless of merits, will become a slippery slope for voters who will be faced with similar such measures in the future, which will skew the work of the legislature in developing priorities:

“Lawmakers always are faced with demands that vastly exceed revenues. They assemble every two years, with a budget recommendation from the governor. They debate, they change, they add, they subtract. They work on the tax and fee side, they work on the spending side, and ultimately they enact a two-year budget. Not satisfactory to everyone by any means, but it's representative democracy. The alternative represented by the amendment is to select a few functions for favored treatment, without determining if they are more important than others, and to guarantee them a special piece of the revenue pie, via the Constitution, thereby keeping the governor and Legislature, our elected representatives, out of the process.”

Removing the merits from the debate, the point of the detractors is understood. Further, if something potentially unpopular, like offender re-entry programs, where placed on a ballot for funding, their viability would be dashed. Without an elected body to make difficult decisions relative to others, important priorities may fall by the wayside. The issue with the Legacy Amendment is not the causes to be funded nor even the sales tax levy itself, but the decision making process irrelative to other needs. Maybe.

Why Broadening the Sales Tax May Reduce Future State Budget Swings

During the past ten years, Minnesota's budget has swung wildly between periods of feast and famine. In 1999, the long-term budget looked so rosy, that we provided significant tax cuts and tax rebates to Minnesotans. Just four years later, the state of Minnesota faced a $4.2 billion budget deficit, and engaged in soem of the biggest cuts to state government in recent decades: cuts that disproportionately hurt low-income and disabled Minnesotans. After roughly five years of general budget solvency, the economic downturn of 2008 again generated more bad news for the state, with significant (and growing) budget deficits projected for for the next two budget biennia.

How does this happen? And how is it relevant to the sales tax? The structure of the State of Minnesota’s revenue sources make it particularly vulnerable to changes in the economic climate. In fact, a recent Budget Trends Study Commission Report finds that Minnesota’s revenue stream is only getting more volatile over time. This is, in part, a result of Minnesota’s more progressive revenue system. Minnesota generates 48% of its general fund revenue from the state income tax, a very progressive, but also volatile tax (see graph). That is, when times are good, Minnesota generates a LOT of revenue. When times are bad, people make less money, pay fewer income taxes, and the state ends up in a mess.

Correspondingly, the state’s general fund revenue base relies less heavily on more stable forms of revenue, like the sales tax. This is, in part, because Minnesota hasn’t historically relied on regressive taxes like the sales tax, exempting things like food, clothing, and medical costs from taxation. However, this lower reliance on sales tax revenue is also due to the US economy’s shift from a manufacturing base to a service base, reducing the number of transactions subject to sales tax and, over time, eroding the adequacy of Minnesota’s sales tax revenue (from 33.3% of general fund revenues in 1970 to 28.5% in 2006).

In part as a result of this combination of circumstances, budget-related panels appointed by Governor Pawlenty and the legislature, as well as some think tanks (both local and national) have suggested a switch from the current, narrow sales tax structure, to a new, broader structure that taxes more goods and services at a lower rate. By expanding the sales tax to include more services and potentially, more goods (such as food and clothing), we could both reduce the overall rate of sales tax while helping to stabilize Minnesota’s general fund revenue sources. While some may argue that this increases the regressivity of Minnesota’s revenue system, it also stabilizes the state budget, thus better ensuring the long-term sustainability of state programs that assist low-income and vulnerable Minnesotans.

Federal Sales Tax and Abolishing the I.R.S.

Recently a House of Representative member introduced a bill for a national sales tax and the end of the federal income tax, and I.R.S. The bill sets forth a proposed sales tax of 23% on all goods sold, no exceptions. There are many interesting points in this bill. Many of the claims that they list as negatives of the current income tax seem to be present in their version of a sales tax. They claim the federal income tax is too intrusive, yet the bill requires mandatory annual registration of all individuals in every household for any monthly refund and it also requires a separate form to be sent to Social Security office stating a persons income (I assume having the Federal Government know your income is why they thought it was intrusive on individuals privacy). In a list of grievances of the Federal income tax they claim that it "hides the true cost of government by embedding taxes in the costs of everything Americans buy", how a sales tax would be any different is not exactly clear. They claim that the federal payroll taxes, medicare and social security have a "have a disproportionately adverse impact on lower income Americans" while leaving out the regressive nature of sales taxes, especially one as broad as a Federal Sales tax.
There are also a few tidbits which were probably added for specific lobbies, such as the ability for the Social Security office to use "Smartcards" that in doubt are laced with hidden fees. It should also be noted that the authors put collection and enforcement at the state level and will charge the Federal government only a "reasonable administration fee". While a debate on the merits of both system would be interesting, a partisan filled bill hardly accomplishes anything.

Thursday, February 26, 2009

Sin Taxes and Blue Laws: Minnesota’s Sunday Ban on Alcohol Sales

Facing extraordinary budget deficits, state lawmakers appear to be searching for any new source of revenue they can find. In 2008, Rep. Phyllis Kahn introduced legislation to overturn Minnesota’s 75 year-old ban on Sunday off-sale alcohol sales. Though that legislation did not pass, Rep. Tom Anzelc appears to be trying to bring it up again this session. Additionally, liquor store owners are arguing that repealing the ban will increase sales and prevent potential buyers from border-crossing on Sundays to Iowa, North Dakota, or Wisconsin, all of which allow off-sale alcohol sales on Sundays.

Taxes on Alcoholic Beverages Sold Off-Sale

Buying a 12-pack of Summit beer in Hennepin County generates several forms of revenue for state and local governments. First, there is the general 6.5% sales tax. Next, there are the sin taxes- a special general receipts tax of 2.5%, a special wholesale tax that equals about $.17 per 12-pack, and a special $.01 per bottle tax ($.12 per 12-pack). Finally, Hennepin County receives a total of .65% in additional local sales taxes. This all totals to 9.65% in retail taxes, plus $.29 in wholesale excise taxes. For a 12-pack of Summit costing $12, this amounts to nearly $1.45 in state and local revenue. In 2008, the State of Minnesota received $73M in revenue from the special excise tax, and $65M in revenue from the special general receipts tax.
(Data from the Minnesota State Tax Handbook, 2008)

Is a repeal worth it?

While there is not a lot of academic research available regarding this specific policy issue, two studies appear to be particularly relevant. The results of a controlled study out of Sweden showed that a repeal of an off-sale alcohol ban resulted in a 3.7% increase in alcohol sales (and correlating increase in consumption), with no significant increase in harmful effects of alcohol consumption. Another study examined the effects of border-crossing present in states with blue laws, and found that a significant amount of liquor sales after the repeal of a Sunday ban are sales that are recovered from potential buyers that would have previously crossed a border to a state without a Sunday ban. While both findings provide support for repealing Sunday sales bans, additional research needs to occur to estimate what the potential revenues and costs of repealing the Sunday ban will bring to Minnesota. What do you think? Should Minnesota repeal the ban on off-sale alcohol sales on Sundays?

Wednesday, February 25, 2009

Minnesota Tax Handbooks

Minnesota Tax Handbook (2008 edition) is a handy reference for the profile of state and local taxes in Minnesota. This webpage on Minnesota Revenue Department has all recent editions of the handbook since 2000 -- if you like to trace the changes over time.  

Monday, February 23, 2009

For property tax wonks


For any wanting to look deeper into Minnesota property taxes after last weeks class I would suggest you visit the House of Representatives non-partisan research departments website on property taxes. There you will find a number of documents providing an overview of property taxes in Minnesota, basic terms and concepts, discussion of the property tax base, limited market value, the distribution of property taxes across different property classes, the issue of levy limits that we discussed in class, and a whole lot more.

Wonks by the way is a term of respect.

Friday, February 20, 2009

California’s budget crisis…in Minnesotan terms

On Thursday, the California legislature passed a budget plan that will address the state's $40 billion deficit. In addition to the cacophony of financial headlines, the SF Chronicle also noted that home foreclosures have driven the median house value to the lowest level in 9 years. Even if California did not have a property tax cap, it seems that any potential tax revenue gains would have been offset by the record-setting low home values regardless.

As a modified thought experiment, I thought it might be interesting to see what the California decrease in median home values would mean in Minnesotan tax system terms. (I say “modified” because I didn’t have the endurance to track down the exact homestead rebate amount or population levels. The below numbers are estimates based on the linked articles and Census 2000) Here are my rough calculations, using the tax slide from Wednesday’s class and the magic of Excel. (Apologies for the small tax slide picture, blogging pictures is not exactly my forte)--

STEPS   MN EXAMPLE    CA 2004    CA 2009
#1           120000                 474370       304000
#2           0.01                       0.01            0.01
#3          1200                      4743.7         3040
#4          1.15                         1.15              1.15
#5          1380                      5455.255     3496
#6          0.001                     0.001          0.001
#7          120                         474.37        304
#8          1500                      5929.625    3800
(#9 - 10 skipped)

*Difference of CA total gross tax 2004 - 2009 = -$2,129.63*

CA gross tax loss in MN terms = Difference of CA total gross tax 2004-2009 * MN 2000 18+ population ===========> -$7,736,043,830.63

As I warned earlier, the estimate is very rough but it’s interesting nonetheless to see how a market downturn could quite effectively clean out state coffers (among other things)…

And in case you’re still contemplating escaping to California one of these days, here’s a handy tool to figure out how much more California would ask of you in terms of taxes. Note the marked increase in sales taxes instead of income taxes – a nice way to spread out the burden, or a political saving grace? I guess we’ll find out soon enough.

Property tax in the Omnibus Bill

Minnesota is the land of 10,000 lakes. And being such, it has more than enough land that has been used for seasonal recreational property. Many people own cabins, both residents of this state and nonresidents. For those counties with struggling populations, property tax is the most secure way to collect money and ensure services. If they were not able to collect property tax on seasonal recreational property, they would fail miserably.

In the 85th Session (2007-2008), Representative Erhardt (R-Edina) introduced a bill that provided a property tax refund on seasonal recreational property. Although this would not entirely eliminate the property taxes paid on seasonal rec., House File 2348 does allow for a tax refund or credit. This credit would allow one claim to be filed for each seasonal recreational property and would payable of $1,750.

This bill did not make it into the larger Tax Omnibus bill (HF 3149) introduced by Lenczewski (DFL-Bloomington). Many of the bills that went into the larger bill included measures to comply with the “Truth in Taxation”, which was enacted to enhance public participation. In doing so, citizens are provided the opportunity to give input through public advertisements, public hearings, and notices of changes sent to property owners.

Representative Marquart (DFL-Dilworth) was able to get HF 3645 included in the Omnibus Tax Bill which allowed for proposed levy certification modified for purposes of truth in taxation. These levy certifications would be open for public consumption prior to their imposition. I think the reason this bill was included in the Omnibus bill was because of its popularity with the voters. Everyone wants feel like they can make a difference and I think it’s even more empowering when you can make a difference in what you pay. Albeit a seasonal recreational property refund is popular, it does not affect the entire populous, only those who have a property aside from their homestead. The credit would not only cost the state, but it would cost the counties. Homestead owners in those counties would be upset by the loss of revenue and subsequent lack of services. Since they are the ones who vote in the district, they have the political clout.

Thursday, February 19, 2009

Is Green Acres the place to be?

Green acres is the place to be
Farm living is the life for me

Land spreading out, so far and wide
Keep Manhattan,
just give me that countryside.

On Wednesday's class we talked about the role of different, or 'classified', property tax rates. These tax rates look at the type of land use on a given property, and assess the property at the corresponding rate. In Minnesota, for residential properties, tax rates vary between 1.0-2.0% for the property. With Agricultural residential land, the first acre (+ house and garage) are taxed at 1.0-2.0%, with the remaining acreage taxed much lower, from 0.45-1.5%. Non-homesteading agricultural lands are taxed at 1.5% flat.

The Green Acres program, also known as the Agricultural Property Tax Law, strives to lower the tax burden for farmers, especially those in high-growth areas facing development pressures. An example posted by the Land Stewardship Project estimates that farmers receive a 'use value' of approximately $3,600 per acre in tax breaks (the average value per acre of ag. land in MN is $13,800). That's a big help!

In 2008 the Office of the Legislative Auditor found that the eligibility standards for the Green Acres program were "outdated, difficult to implement fairly, or create inequities," leading to major changes. Starting at the beginning of January 2009, wetlands, woodlands, sloughs and other "non-productive" land is no longer eligible for lower tax rates through Green Acres. "Productive land" is now defined as 10 contiguous acres of productive agricultural land with products going for sale.

This has had large impacts on people with small acres of agricultural land (vegetable farms, seed farms, 10-chicken farms, etc), as well as people with woodlands and wetlands. In December, the Star Trib reported on landowners ripping out trees and woodlands in order to convert land to agricultural use (for hay or grass) and recoup state tax benefits.

As conservationists and farmers alike move towards campaigning for revisions to this program, questions surrounding the definition of 'agriculture,' 'productive,' and 'farm' will be up for re-definition, and our state's complicated tax system may not have an answer.

Are You a Renter?

You might want to take a look at Governor Pawlenty’s proposed tax bill. One of his proposed cuts is to the Renter’s Credit, which provides a tax refund to nearly 275,000 Minnesotans who rent. According to the nonpartisan Research Department of the Minnesota House of Representatives, the Renter’s credit was designed to provide “tax relief to renters whose rent and “implicit property taxes” are high relative to their incomes.”

The Minnesota Budget Project (MBP), an initiative of the Minnesota Council of Nonprofits, is deeply concerned about the cuts. The MBP provides independent research, analysis and outreach on state and federal budget and tax policy issues, emphasizing their impact on low- and moderate-income persons. According to one of their recent Minnesota Budget Bites blog entries, the 27% proposed cut in Renter’s Credit “raises some serious concerns about its impact on struggling Minnesotans and the fairness of our tax system.” According to their research, seniors and people with disabilities make up 28% of all Renter’s Credit recipients. (To find out more about eligibility, you can visit the Minnesota Department of Revenue website.)

The Minnesota House of Representatives has set up a property tax comment line for taxpayers to have a voice in finding the solutions to rising property taxes. Should property tax relief come on the backs of those potentially with the lowest incomes? Do you agree with the Minnesota Budget Project that rental property taxes are one of the most regressive parts of the Minnesota tax code?

The Short and Simple Story of Credit Crisis

I cannot help sharing you this video cartoon, which is probably worth more than 1,000 hours of instruction.

Monday, February 16, 2009

Is the property tax regressive of progressive?

It seems an undebatable fact that the property tax is a long-standing reliable revenue source for the local government. However, the feature of regressive or progressive of the property tax is rather controversial. According to the traditional view, the property tax aims to tax on the housing consumption, the increase of property tax will impose a greater burden on low-income homeowners. So it is considered regressive. The second view is from the benefit perspective which assumed the property tax is just a kind of user charge for the matched service without capital mobility. This “benefit tax” makes the measurement of regressivity or progressivity meaningless. While along with the view of “capital tax”, the property tax is treated as a tax with broad base and emphasizes more on capital ownership that consumption or user charge that is more progressive than previously belief. In a further place, the different relationship between property tax rate and community income among different jurisdictions can generate either regressive or progressive result. For example high-income state with high property tax rate will result in progressive burden, and low-income city with high property tax rate could have a regressive result. I think this finding is helpful to understand that the issue of regressive or progressive is more likely derived from and associated with political factors in the process of policy-making than the property tax per se. it also illustrated that since the property tax has a potential spectrum which includes regressive and progressive result, it leaves more space for politicians to excise and adjust the tax and spending system.

Fisher, Ronald. (2007). State and Local Public Finance (3e). South-Western College Publishing
Hovey, Hal. (1996). The Property Tax in the 21st Century. Education Resources Information Center

Accounting gimmicks won't fix the budget

Humphrey Institute Senior Fellow Jay Kiedrowski published his editorial in the Start Tribune (02/13): Accounting gimmicks won't fix the budget:

The state of Minnesota is facing a total budget deficit of $5 billion for the new biennium (from July 2009 through June 2011). In the new budget proposal released last Tuesday, Governor Pawlenty claims to have cut spending without increasing taxes to balanced the budget for the next two years. However, Kiedrowski points out that the budget proposal “fails to fix Minnesota’s long-term revenue and expenditure imbalance, has serious technical flaws, and has a questionable value premises.”

(The original unedited version is presented through PNLC’s pubTalk blog.)

Thursday, February 12, 2009

Minnesota Tax Incidence Study

The Minnesota Department of Revenue released a report in 2007 entitled "2007 Minnesota Tax Incidence Study." (Punchy title, huh) Given our recent class discussions, I thought others may be interested in reading the report. Also, the Joint Religious Legislative Coalition has put together a business card-sized chart from the report that shows a 2009 estimate for effective tax rates by population decile for all state and local taxes. Unfortunately, the results reveal that Minnesota's state and local tax system disproportionately impacts low-income households.

[JZ's note:The JRLC graph of effective tax rates is shown below -- ]

Wednesday, February 11, 2009

Welcome to our new course weblog!

Hello friends,

Welcome to our new course weblog of "State and Local Public Finance," which is created as an additional channel of communication for our journey together on PA5113, 2009 Spring.  
Throughout the semester, each of you will be required to post two blogs, one on a selected revenue policy and the other on a selected expenditure policy. You shall discuss with your group members to coordinate the blogs so that each 5-person group will have one blog posted each week in the remaining 10 weeks. Please submit this group schedule to me before next Wednesday. 
The broad topic area for each week is following the lecture schedule (see the table below). You shall pick a specific point of interest, find related materials on the Internet, and present your comments or questions that are related to our lecture or readings. Each blog should provide hyperlinks to additional web-base resources, and I especially welcome multimedia ones as they are more enjoyable.
You are all encouraged to read these blogs and add comments. Some blogs may be briefly discussed in our class, with the authors invited to make "little speeches." Each week we will select a "Post of the Week," whose author will be awarded 1 extra point in participation score. On the other hand, you will be deducted 1 point if you fail to post the blog in a pre-determined week, or deducted 0.5 point if you post it late.
Let me know if you have any questions or concerns.