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What’s Included in Horner’s Expanded Sales Tax Base?

September 29, 2010 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

Independence Party gubernatorial candidate Tom Horner aims to balance the budget by expanding the state's sales tax base while reducing the sales tax rate.  Horner has talked about expanding the sales tax to include clothing and some services, but he's yet to release a comprehensive list of taxable items.

Mr. Horner's budget document does not explicitly list the new revenue that his proposal to expand the sales tax base and lower the rate would generate. However, this base expansion/rate reduction is one of the multiple changes that would reportedly generate $2.15 billion in new revenue for the state during the upcoming FY 2012-13 biennium. "Step 3" of Horner's budget document describes these changes.

The new revenue raising options in Horner's "step 3" includes a $600 million increase in liquor and tobacco taxes and $200 million to be generated through the elimination of "tax expenditures."  According to the Minnesota Department of Revenue, "Tax expenditures are statutory provisions which reduce the amount of revenue that would otherwise be generated, including exemptions, deductions, credits, and lower tax rates." Although the Horner budget document does not explicitly state which tax expenditures would be eliminated, Horner has said he favors reducing the homeowners' mortgage interest deduction, which would have the effect of increasing homeowners' income taxes.

While the new liquor and tobacco taxes and elimination of tax expenditures would generate $800 million in new revenue, it would be more than offset by approximately $900 million in new spending and new tax reductions. These include $425 million in corporate tax reductions and business tax credits, a new $350 million sales tax credit, and $125 million for "property tax reform."

Excluding the sales tax base expansion/rate reduction, changes outlined in step 3 of Horner's budget plan reduce total state resources by approximately $100 million.  Thus, for total new revenue generated by step 3 to reach $2.15 billion, the sales tax base expansion/rate reduction would have to generate approximately $2.25 billion.

Using data from the 2010 Minnesota Tax Expenditure Budget (TEB) and other sources, Minnesota 2020 has attempted to determine the degree of sales tax base expansion that would be necessary in order to reduce the sales tax rate by one percent and still generate $2.25 billion in new revenue. 
Click here for technical notes on the methodology used in this analysis.

Based on this analysis, all of the sales tax exemptions listed in the 2010 TEB would have to be eliminated--with the exception of food, business services, and other exemptions that Horner specifically said would not be eliminated--in order to generate an amount that approaches the dollars specified in Horner's budget. A list of goods that would have to be taxed to reach the Horner budget goals includes:

  • Clothing and Wearing Apparel
  • Medical Devices
  • Prescription Eyeglasses
  • Baby Products
  • Feminine Hygiene Items
  • Caskets and Burial Vaults
  • Publications
  • Textbooks Required for School Use
  • Personal Computers Required for School Use
  • Residential Heating Fuels
  • Used Manufactured Homes
  • Capital Equipment
  • Accessory Tools
  • Special Tooling
  • Telecommunications Equipment
  • Resource Recovery Equipment
  • Used Motor Oil
  • Wind Energy Conversion Systems
  • Air Cooling Equipment
  • Solar Energy Systems
  • Airflight Equipment
  • Large Ships
  • Repair and Replacement Parts for Ships and Vessels
  • Light Rail Transit Vehicles and Parts
  • Petroleum Products Used by Transit Systems
  • Ski Area Equipment
  • Logging Equipment
  • Farm Machinery
  • Repair and Replacement Parts for Farm Machinery
  • Farm Conservation Programs
  • Horses
  • Prizes at Carnivals and Fairs
  • Television Commercials
  • Advertising Materials
  • Court Reporter Documents
  • Patent, Trademark, and Copyright Drawings
  • Automatic Fire-Safety Sprinkler Systems
  • Firefighter Personal Protective Equipment
  • Parts and Accessories to Make Motor Vehicles Handicapped Accessible
  • Maintenance of Cemetery Grounds
  • Trade-In Allowances
  • Motor Fuels

The last item on this list, motor fuels, is currently subject to a separate excise tax, commonly known as the "gas tax." This analysis assumes that motor fuels would also be subject to the state general sales tax in addition to the excise tax.  Currently the state excise tax on gasoline is 27.5 cents per gallon.  Assuming that a gallon of gas costs $2.50 (pre-excise tax), a 5.875 percent sales tax on gasoline would increase the total tax per gallon by 14.7 cents per gallon or about 53 percent.  Because a sales tax is based on the price of gasoline, the sales tax per gallon would rise and fall as gas prices fluctuate.

By some interpretations, revenue generated from a sales tax on motor fuels would be constitutionally dedicated to transportation.  If this interpretation is correct, the base expansion and rate reduction would generate just over $1 billion less for the general fund than estimated here, although transportation funding would increase by over $1 billion.  It may be necessary to pass a constitutional amendment to send revenue from a sales tax on motor fuels directly to the state general fund.

In addition to the goods listed above, the following consumer services would also become taxable:

  • Residential Water Services
  • Sewer Services
  • Legal Services
  • Accounting and Bookkeeping Services
  • Brokerage Charges
  • Investment Counseling
  • Bank Service Charges
  • Trust Services
  • Safe Deposit Box Rental
  • Advertising and Related Services
  • Employment Services
  • All Other Miscellaneous Professional and Technical Services
  • Automotive Repair and Maintenance
  • Repair and Maintenance of Personal Property
  • Personal Care Services
  • Funeral Services
  • Other Personal Services

Based on this analysis, extending the sales tax to the goods and services listed above would generate an estimated $2.13 billion, which is $120 million short of the full amount needed to meet the revenue goal stated in the Horner budget document.

Not included in the above analysis is the impact of the new county option sales tax proposed in the Horner budget.  Assuming that the county sales tax would apply to the same base as the state sales tax and that all counties adopted this sales tax, statewide sales tax collections would increase by another $1 billion.  Revenue from the county option sales tax would presumably be used to pay for Horner's "redesign of state/county services."  Including the new county sales tax, about $3.1 billion in new sales taxes could be collected in Minnesota under the Horner budget proposal.

The current state sales tax rate, including the 0.375 percent rate authorized in the 2008 legacy amendment, is 6.875 percent.  The state rate would drop to 5.875 percent under the Horner proposal.  However, in each county that adopts the county option sales tax, the rate would be 6.375 percent.  (This analysis ignores all existing local option sales taxes.)  Under the Horner proposal, the sales tax rate would fall by a half to a full percent, depending on whether counties exercise the 0.5 percent sales tax option.

From a policy perspective, expanding the sales tax base has both pros and cons.  On the positive side, broadening the sales tax base makes sales tax collections more stable.  In addition, extending the sales tax base to services links sales tax collections to the portion of consumer purchases that is growing most rapidly.  In addition, the state certainly needs some new revenue to help address its massive $6.8 billion budget deficit.

On the negative side, sales taxes tend to fall most heavily on low-income households.  A $2.1 to $3.1 billion expansion in statewide sales tax collections would make Minnesota's tax system more regressive than it already is by shifting more of the tax burden on to those families with the least ability to pay.  While Horner is proposing a $350 million sales tax credit, it is not known if this credit will be sufficient to fully offset the regressivity from a potential $3 billion plus increase in sales taxes. Currently no details are available about the Horner sales tax credit.

Also on the negative side is the fact that the Horner sales tax base expansion/rate reduction proposal apparently comes an estimated $120 million short of generating revenue stated in his budget document.  Combined with the $429 million overestimate of the revenue that would be generated through delayed repayment of the education funding shift, the Horner budget is more than half-a-billion dollars shy of the amount it estimates is needed to close the FY 2012-13 budget deficit. Another problem is the potential constitutional dedication of motor fuels sales tax revenue, which could add another $1 billion plus to the Horner budget hole.

The verdict of many Minnesotans regarding the Horner sales tax proposal may not be based on these broad public policy concerns, but on the answer to a simple question: Will the tax relief received through a 0.5 to 1.0 percent reduction in the sales tax rate on all items currently taxable outweigh the tax increase resulting from a new 5.875 to 6.375 percent sales tax paid on a variety of goods and services that are currently exempt?  The fate of Horner's sales tax proposal may hinge on the answer to this question.


Technical Notes
Minnesota 2020's analysis of Tom Horner's sales tax base expansion/rate reduction proposal is based primarily on data from the 2010 Minnesota Tax Expenditure Budget (TEB).  Methods and assumptions used in this analysis are described here.

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