Wednesday, March 28, 2012

Minnesota's Revenue System: "Fair", "Understandable", and Obsolete?

Minnesota relies on nearly $36 billion in own-source revenue each year with a vast majority of that amount - $25.3 billion - coming from taxes. The issue of reliance on tax revenue is always a hot-button issue in Minnesota politics. Republicans often point to Minnesota as one of the most highly-taxed states in the country, while Democrats feel more revenue should be generated to make up for budget shortfalls in recent years. In reality, Minnesota is on-par with most states in regard to sales tax, excise taxes, and corporate taxes. The state lags behind on property taxes, but relies more heavily on income taxes than most other states.

The National Conference of State Legislatures (NCSL) notes 9 features of high-quality state revenue systems, and based on a number of those criteria, Minnesota appears to fare well. For example, the NCSL discourages competition between state and local governments over the tax base. Recognizing that Minnesota relies less heavily on property taxes than most other states for its own-source revenue, it would seem that local governments (which rely more heavily on property taxes) are able to count on property taxes for a greater share of their own-source revenues  without having to compete with the state government for adequate resources. 

In other criteria, the NCSL discusses the importance of stability, certainty, sufficiency, and transparency of the tax system. Here again, Minnesota appears to do well. In a survey done by the Minnesota Department of Revenue, 48% of Minnesotans said they felt the state’s tax system was “predictable”, 47% felt it was “understandable” and 39% believed it was “fair” according to the “ability to pay”.

Despite Minnesota’s seeming success at establishing a predictable, understandable, and fair revenue system, there are those who argue that the current revenue structure for state governments is becoming obsolete. The Brookings Institution makes this case, pointing specifically to the shift away from goods to services in our systems of commerce which makes it difficult to rely on sales tax for a stable source of revenue. They also note that as more and more commerce occurs via the Internet, states will have to adapt in order to capture revenue associated with those transactions. 

However, Minnesota seems to be addressing some of those concerns, in particular, by attempting to change commerce laws that would result in greater sales tax revenue generated from online purchases.

1 comment:

  1. Nice job! I have a question about the property tax discussion. Minnesota relies less heavily on property taxes than other states, but how would that lead to the thought that local governments shall be able to count on property taxes for a greater share of their OSR?