Horner's tax plan typical in most of U.S.

If Independence Party candidate Tom Horner becomes Minnesota's next governor and is able to convince the state Legislature his sales tax plan is the way to go, you could end up paying tax on many things that have never before been taxed in Minnesota.

The big item would be clothing, but beyond that Horner isn't being specific.

That could put many personal services on the table, from haircuts and self storage, to shoe repair and horse training.

Horner said he can't nail down specifics without sophisticated economic modeling he would have access to only if he gets elected. Still, Horner often finds himself fielding the 'What are you going to tax?' question.

"I'm not trying to be coy with this," he said at a news conference this week. "We are going to tax, we're going to get revenue, from a lot of personal services. I mean that's the reality of moving more toward a consumption-based tax system."

Horner said expanding the sales tax makes sense, and not only because it would raise more money. He said relying more on sales tax revenue would help stabilize Minnesota's budget as the income tax is not the dependable source of revenue it once was.

"When you look back over the last 10, 15 years what you see is this roller coaster ride," Horner said. "Some years we have surpluses. Some years we have steep deficits, largely because we're so heavily dependent on the income tax. So we need to break that dependency because that's not where the economy is today."

SALES TAX EXPANSION, WITH SOME EXCEPTIONS

Minnesota introduced its sales tax in the mid-1960s. It started off at 3 percent and has been incrementally increasing. It currently stands at 6.875 percent.

That's among the highest in the nation, but unlike many states, Minnesota does not tax clothing.

Although Horner wants to expand the tax to cover clothing and personal services, he also wants to lower the rate by 1 percent. But another part of his plan would almost certainly lead counties to increase local sales taxes. That would leave an effective rate cut of 0.5 percent.

Horner's sales tax would continue to exempt groceries, prescription drugs and business-to-business services.

Chicago-based business tax consultant Diane Yetter said Minnesota isn't the only state debating the sales tax.

"Certainly with the economic situation that the states are in right now exactly what Minnesota is talking about is what's happening nationally," she said.

But other states largely are considering expanding the tax to cover more services, without planning to reduce the sales tax rate as Horner would, Yetter said.

Michael Mazerov, a tax policy analyst at the Center on Budget and Policy Priorities, a non-partisan Washington, D.C. think tank, agreed. He said applying the sales tax to more services makes sense.

"If you don't, the tax base will fall further and further behind the cost of the services that the sales tax is supposed to pay for, because consumption is shifting away from things that are taxed, like goods and towards things that currently largely aren't taxed, like services," Mazerov said.

Forty-five of the 50 states have sales taxes and most of those states tax clothing.

While Minnesota is among the few states that do not tax clothing, a study from the Federation of Tax Administrators shows Minnesota is already in the top third of states when it comes to taxing services. That said, several states tax many more services than Minnesota does.

CRITICS SAY SALES TAX IS REGRESSIVE

Critics say the burden of expanding the sales tax would fall disproportionately on middle- and low-income Minnesotans, giving the wealthy something of a free ride when it comes to the budget fix.

That's a legitimate argument, said David Sjoquist, director of Georgia State University's Fiscal Research Center.

"It's hard to construct any kind of sales tax, regardless of how broad-based it is, that isn't regressive," he said.

But Horner said he's built a protection in for low-income Minnesotans -- $350 million to offset the higher taxes they would pay. Horner said the money could be used for a tax holiday, or maybe to exclude clothing purchases below $100.

Another option would be to give low-income Minnesotans tax credits to offset the additional sales tax. Horner hasn't said who would qualify for such credits if that ends up as part of his plan.

Mazerov, of the Center on Budget and Policy Priorities, said that would be the best approach to addressing the greater effects of additional sales taxes on people who are not wealthy.

"The other ways of doing it, like exempting just children's clothing or sales tax holidays, are really inferior because not everybody's in a situation to take advantage of that kind of credit," he said.

Mazerov notes many low income people don't have children or might not be able to afford to shop during a sales tax holiday.

Sjoquist, of Georgia State, said Horner's proposed lower tax rate could make Minnesota's sales tax less onerous on the poor.

"You could also identify items which are more heavily purchased by people with lower incomes and eliminate those from the sales tax base which would reduce the burden on the lower income more than the upper income," he said. "But it would be hard to do."

According to the Horner campaign, the Minnesota Department of Revenue estimates that decreasing the sales tax but broadening it to include clothing and personal services could indeed raise the $1.3 billion per biennium Horner claims it would.

But Mazerov said it's risky to make revenue projections for new taxes. He said it's difficult to know, for example, just how much money people are spending to repair shoes or clean swimming pools. He also said it could prove difficult to ensure that all service businesses collect the sales tax.

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