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Plan expands sales tax to cut corporate tax

Duluth accountant Danielle Buchberger of Eikill and Schilling served on Gov. Tim Pawlenty's 21st Century Tax Reform Commission that recommends eliminating the state corporate income tax and making other tax changes designed to spur business growth. The panel recommends paying for the changes by expanding the state sales tax and by raising the cigarette tax. Staff photo by Scott Wente

ST. PAUL - Minnesota should eliminate its corporate income tax and make other changes to spur business growth, a governor-appointed panel recommended.

The just-completed recommendations could struggle to become law, however, as they are paid for with a controversial sales tax expansion and a cigarette tax hike.

The proposals are designed to position Minnesota to compete internationally for businesses and jobs in the long term, said Michael Vekich, 21st Century Tax Reform Commission chairman.

"They will be controversial and it will take leadership to enact," Vekich said Friday.

Minnesota's corporate tax policy is hindering growth, Vekich said. The commission recommends increased tax incentives for corporate research and development and tax credits for new-business investment.

The report was released as the state faces a deficit of as much as $7 billion for the next two-year budget period, making major tax reforms politically difficult.

The commission's plan costs money - $300 million in 2010 and $900 million in 2011 - since the state would collect less tax revenue. The panel suggests broadening the sales tax, possibly to include clothes and consumer services, and raising the cigarette tax by up to $1 per pack.

Gov. Tim Pawlenty "does not like the idea of raising sales taxes on consumers and is not embracing that portion of the commission's proposal," spokesman Alex Carey said.

Carey would not say whether Pawlenty is ruling out a cigarette tax increase for the commission's proposal or other budget purposes.

The commission also recommended simplifying the tax code by reducing the number of land classes in the property tax system. That, too, could be controversial.

"The more simple you make something, there's always a potential of making it more unfair," said Rep. Paul Marquart, a Dilworth Democrat and House property tax committee chairman.

Marquart said he will review the recommendations and is open to tax reform proposals, but quickly concluded that there is not support for taxing clothes.

"Quite frankly, the political fallout that would occur from putting sales tax on clothing would be too great," he said.

The tax changes are meant to spur business growth throughout the state, one commissioner said.

"Economically and academically, all the evidence points toward you don't want to pick winners and losers," said Duluth accountant Danielle Buchberger.

The tax changes would benefit businesses, workers and consumers, said David Beito, a commission member and president of Northern State Bank in Thief River Falls.

Beito described the corporate tax as a "hidden" charge that can be passed on to consumers or can limit wages. Eliminating that tax would benefit consumers, create jobs and boost wages, he and other commissioners said.