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Commissioner of Revenue talks taxes in Perham

Minnesota Commissioner of Revenue Myron Frans sat in front of attendees at the Perham Economic Development meeting Tuesday with a blank sheet of paper in hand.

The paper served as more than a canvas for scribbling notes - it was, as he put it, a symbol of the state's openness to suggestions for possible tax reform.

In a presentation, Frans described Minnesota's current tax system as a lopsided three-legged stool. The stool's legs, he said, represent the three main avenues of tax revenue: income, property and sales taxes.

Over the last decade, Frans said the balance became lopsided, largely because the portion paid in property taxes skyrocketed.

In 1999, the state achieved a balance that Frans considers near-ideal for optimal function. At that time, property, income and sales taxes each hovered at around 33 percent of the revenue pie. Now, that balance has been compromised. In 2010, property tax accounted for 40 percent, while income tax sat at around 33 percent and sales tax around 27 percent.

The reason?

"Sales tax remained static," he said. "It didn't adjust as the economy was changing around us."

With that perspective, Frans threw out a question: How do people feel about possibly broadening the base of goods subject to sales tax?

He also questioned whether or not people would be willing to give up 'tax exemptions' if it meant an overall decrease in tax rates.

It's feedback from those questions, he said, that's needed for the state to move forward with a plan that residents can get behind.

"We're going to have to get people to agree around the state," he said.

The other piece of the pie, of course, would be legislative support.

Sen. Gretchen Hoffman, R-Vergas, was on hand to provide her perspective of the situation. When talking about tax reform, she said, state spending should be discussed - what she referred to as the stool's other leg.

"It's not just about how much we're collecting," she said, "but whether or not we're spending too much."

Ringing in on the sales tax issue, Hoffman said there could be room for broadening the sales tax base, but she worried about including food, clothing and medical supplies into that mix, especially considering many communities compete with neighboring North Dakota.

Some expressed concern with a complicated sales tax system that often doesn't make sense for business owners purchasing and selling different types of goods, while others said, no matter what reform takes place, tax deductions for charitable contributions must stay.

On the city end of things, Perham City Manager Kelcey Klemm said he would like to see the sales tax raised slightly throughout the state, with a portion of that revenue benefiting Local Government Aid (LGA), a notoriously dwindling state funding source for communities.

Minnesota's sales taxes currently make up three-fourths of the LGA coffers, according to Klemm.

While the state controls sales tax, it has in the last few years given permission to cities to go ahead and collect such revenue for large-scale capitol projects (Fergus Falls' ice arena is a recent example). While that may be good for some communities, Klemm worries the state will eliminate LGA and, instead, allow cities to set and collect their own sales tax as a revenue substitute.

That's a move that wouldn't work so well for Perham, Klemm said. Cities with big box retailers could maintain or increase those replacement funds, but for a community like Perham, with local Main Street stores, it would hurt the city.