If you haven't heard, Minnesota is confronting a major budget shortfall. Legislators are debating how to restructure revenue and expenditures to balance the state budget.
28.6% of Minnesota's general fund tax revenue comes from the state sales tax. This morning's Star Tribune included a lengthy article about the potential expansion of the state sales tax. Talk is about expanding the reach of sales tax, not raising the sales tax rate. Currently, food, clothing, and most services are exempt from sales tax.
Interestingly, expanding the sales tax to food, clothing, and services could raise enough revenue to cover the state's $6.2 billion budget deficit. The MN Department of Revenue estimates the potential sales tax revenue to be $7.5 billion for FY 2012-2013. This breaks down to:
- Groceries: $1.5 billion
- Clothing: $639 million
- Services: $5.4 billion
Problem solved, right? But as we discussed in class, sales tax is considered a regressive tax. Low and middle income households spend a higher proportion of their income on goods and services. Also, many of the services that would be taxed are legal and professional services provided to businesses as inputs to their final products (which are then taxed again when purchased by the consumer).
Naturally, grocers, the Mall of America, lawyers, and advertising agencies are opposed to sales tax expansion. What do you think?