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Monday, February 18, 2008

Minnesota Governor to Form 21st Century Tax Reform Commission

In his 2/13/08 State-of-the-State address, Minnesota Governor Tim Pawlenty announced that he would create a 21st Century Tax Reform Commission to recommend tax reforms for the 21st century economy. Related to this, he also noted:
  • the state has a serious deficit
  • tax policies, job climate and large government have harmed economic growth
  • there is a need to reduce taxes
  • Minnesota should join other states and cap property taxes
  • there is a need to move the tax system from the 1960s to the 21st century
  • tax reforms should "encourage job growth, income generation, investment, entrepreneurial activity, research and exports"

Well, as the title of this blog would suggest, I think this is a good move for Minnesota. But, it won't be easy -- change rarely is.

Many states have had tax reform commissions that travel the state holding hearings and receive many comments from businesses, individuals, academics, and various organizations with lots of complaints and ideas. The final report is delivered and then, usually sits on a shelf. The National Conference on State Legislatures (NCSL) maintains a website with links to many of these reports. I testified before California's last tax reform commisssion (California Commission on Tax Policy in the New Economy) three times. The Commission's 12/03 report has lots of useful information and ideas, but sits on a shelf while California faces a budget shortfall partially due to not moving its tax system into the 21st century ways of living and doing business.

Some ideas for success:
  1. Get serious legislative buy-in. While a governor can establish his/her own tax reform commission, there is no guarantee that anyone will do anything with the recommendations. And, if the recommendations are politically unpopular, which might happen, perhaps no one will use the report. This happened in 2003 with the President's Advisory Panel on Federal Tax Reform. It delivered its report in 11/05 and almost no discussion occurred anywhere. While President Bush has pushed for tax reform in a variety of ways (the panel, recent Treasury studies, and various tax law changes such as a reduced dividend tax), the work of the panel hasn't led to anything.
  2. Why not introduce legislation to establish the Commission, let the legislators select some of the commission members and require that there be X number of legislative hearings on the final report within 3 months of its issuance and that the tax-writing committees and governor propose a set of coordinated tax law changes in response to the report and result of legislative hearings by a specified date.
  3. Start educating the public now on the problems with the Minnesota tax system and the adverse impacts it causes now and in the future on the economy and the lives of Minnesotans.
  4. Read the reports of other state tax reform commission. A lot of work has already been done in other states and a decent amount of it is likely relevant to Minnesota. (See the NCSL website.)
  5. Use research already done in Minnesota and by various tax policy organizations. For example, see the list at the end of this blog entry (*).
  6. Review tax reform work done by various state government organizations such as the NGA and NCSL.
  7. Use and follow the principles of good tax policy in analyzing the current structure and any proposals. Doing so should lead to better proposals and help make the case for them. The California Commission used a set of principles designed by the AICPA Tax Division (disclaimer -- I chaired the AICPA committee that produced that set of principles). A Silicon Valley policy group modified the principles into a workbook with examples. When the State of Washington did a recent study, it also included home ownership as a principle to follow. For more information on tax principles to consider and details and links: (1) summary chart I prepared; (2) 9/05 GAO Tax Reform report, see section on "criteria for a good tax system;" and (3) the various reports of state tax commissions (see earlier NCSL link).

Many states do have tax systems based on the economy and ways of living in the 1960s. Moving them into the 21st century will not be easy. It will likely involve broadening the sales tax base to include more services and digital goods; moving to combined reporting (Minnesota already does this); eliminating expensive, overly generous, out-dated tax expenditures (even if it increases non-conformity with federal tax rules); improving use tax collection; eliminating tax pyramiding; considering green taxes, such as a carbon tax designed in a progressive manner (such as taxing utilities with a higher rate for homes greater than the average size); considering a split roll for any property tax cap; and not harming local governments in the tax reform process.

Remember that the longer a state takes to update its tax systems, the harder it becomes. For example, for states that tax the purchase of a music CD, but not downloaded music, the longer it waits to do so, the harder it is to convince the public that the downloaded music is equivalent to the purchase of a taxable CD, and the greater the total loss of revenue from the eroding tax base.
Examples of information already in existence for the Minnesota Tax Reform Commission:

  • Minnesota House Research on the sales tax base (10/02).
  • Minnesota Sales Tax Gap study (11/02).
    (there are likely many more reports and data sets from Minnesota government agencies).
  • The Center on Budget and Policy Priorities has done some analysis of Minnesota's tax system (search for "Minnesota" at their website).
  • The Tax Foundation has also analyzed various aspects of Minnesota's tax system and business climate (which it ranks in the bottom 10). A search for "Minnesota" at its website produces several hits.
  • Various other local, state and national organizations that have studied various aspects of Minnesota's tax and fiscal structure.

Let's see what happens.

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