Tax Pyramiding

Governor Mark Dayton recently released his budget proposal for the new budget cycle. Governor Dayton’s current plan will reduce the state sales tax from 6.875% to 5.5%, which puts Minnesota closer to the sales taxes of its neighboring states:

North Dakota: 4.0%
South Dakota: 5.0%
Iowa: 6.0%
Wisconsin: 5.0%

While the proposal will reduce the tax, it will also widen the tax base to include clothing items over $100, digital goods and e-sales, accounting services, and a wide array of consumer services estimating an additional $2.1 billion in tax revenue for the state. This proposal would also cause Minnesota to drop from having the seventh highest sales tax rate to the twenty-seventh highest in the country. Revenue Commissioner Myron Frans has said this will create a fairer and more sustainable tax plan.

According to Governor Dayton most of these increases will not affect 98% of Minnesotans, but some say that they will have a trickle-down effect or “tax pyramid”. A recent article on Minnpost looked at the sales tax proposal, and for the most part the tax experts agree that cutting and broadening the tax base will create a more modern tax code and will reduce inequities. However, extending the tax base to business-to-business services such as accounting, architecture, design, consulting services, and engineering services will produce inequitable effects on consumers.

The business community argues that it will make business in Minnesota less competitive and cause them (and jobs) to leave the state. Commissioner Frans argues that this creates fairness for businesses, because business-to-business transactions haven’t had to pay the same taxes that a consumer pays to the business. Some say this will create that effect of “tax pyramiding” because the taxes accrue, businesses have to raise prices, and then pass that cost of the tax onto the consumer – sometimes turning a progressive tax into a regressive tax. This would create the opposite effect of tax fairness it intended to have.

To sum up the rest of the article, the tax experts create several hypotheticals and end by saying it would be difficult for the state to even collect on such a tax. But this article really just left me with more questions than it answered. I don’t doubt that all these tax experts know what they are talking about, but this really just made me wonder if they were fear-mongering with hypothetical situations of jobs leaving the state, creating an inequitable cost to consumers, and overall hurting business or are these legitimate concerns? They don’t seem to offer any valid evidence of this happening or give an example where such a problem has occurred which is why I question the severity of this concern. This may in fact be a regressive tax, but one has to question how plausible the trickle down effects will be.

Check out Governor Dayton’s blog for more fact sheets: http://mn.gov/governor/blog/the-office-of-the-governor-blog-entry-detail.jsp?id=102-54436