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Tuesday, February 17, 2009

Minnesota's 21st Century Tax Reform Commission Issues Final Report

The Governor's 21st Century Tax Reform Commission of Minnesota, formed in February 2008, has released its final report (2/13/09). That's an amazing time frame given the daunting task of reviewing an entire tax system, holding public hearings and reaching agreement on what is needed to modernize the system and support economic growth in the global economy.

The final report is entitled Minnesota’s Millennium: Launching a New Generation of Competitive Leadership and Economic Growth. The commission's recommendations include several bold ideas to improve the business climate in the state and better tie the state's tax system to today's ways of living and doing business. The Commission's summary report notes these broad categories of changes:
  • Reduce business tax burdens
  • Improve the transparency of business taxation
  • Promote investments in innovation, entrepreneurship and emerging/high-tech companies
  • Pay for reform while aligning the tax system with consumption

Specific recommendations include:

  • repeal the corporate income tax
  • exempt 20% of active business income from pass-through entities
  • simplify property taxation
  • improve the R&D tax credit including making it refundable
  • increase the cigarette excise tax
  • broaden the sales tax to include more types of personal consumption (the commission explains why, but wisely left the decision of what exactly to add, to the lawmakers)

The report also explains economic and global changes that warrant tax law changes. It also explains some tax law ideas to ignore (such as a gross receipts tax) and the rationale for the law changes recommended. It's a very good report.

What's next?

Hopefully, the legislators will hold hearings on the report. I think a public education campaign would help because some of the changes likely won't be well received, such as the repeal of the corporate income tax and the broadening of the sales tax for consumers. That may be a tough sell because most people don't appreciate that all taxes are ultimately paid by individuals. There is also a need to be sure there is no abuse, such as people incorporating to try to avoid paying income taxes. An educational campaign effort should be helpful.

I think Minnesota has made a great step forward with the commission and its bold suggestions that indicate they realize that the global economy of today warrants a tax system different from the systems most states have that assumes borders are still important and businesses don't operate globally.

California has its own Commission on the 21st Century Economy underway to make recommendations to the governor and legislature on how to improve the state's budget and tax systems. The Commission should find much helpful information in the Minnesota report. That's good because the California commission has a much shorter time frame to get its work done - about 3 months.

What do you think?


Unknown said...

I have sent Professor Nellen a separate email requesting the Minnesota report.

What suggestions do you have for the public educational campaign?

Also, is there any way to build in regressive protections to a sales tax plan?

I eagerly await responses to the report request and these questions.

Professor Nellen said...

Responses to John's comment:

The report link on the Minnesota website is broken. I've sent an email to the Dept of Revenue asking for the new one. I'll get it fixed once I have it. Thanks for catching this.

Public educational campaign - how to do it? Good question. A few things I've thought about. First, I think tax agencies need to reallocate much of their budget for printing pubs to having online ads that ask a question that will then get the person to click the link to get more information. For example, have you paid your taxes for your online purchases? Click here to be sure you're covered.

I also think there needs to tax education in high school that includes how to prepare a basic tax form and explains how the tax system works and its place in the government budget and in providing benefits to taxpayers. To be sure it is taught, there probably need to be questions on this topic on the standardized tests!

Addressing regressivity of a broad-based sales tax? Create a refundable income tax credit. The credit amount can be a slideing scale based on income which is already noted on one's personal income tax form.