Tax overhaul: How Minnesota compares to other states

In Minnesota, Gov. Mark Dayton has proposed to expand the sales tax, and lower the corporate tax rate while eliminating loopholes and raising tax rates on the wealthiest individuals in the state. But other states are taking different approaches.

Most of the nation's governors are gathering in Washington, DC this weekend for an annual meeting of the National Governors Association. While not formally on the agenda, many states -- at least a dozen -- are in the middle of major tax overhauls.

What's prompting this spate of tax changes?

One theory is that the political polarization that has gripped Washington has also led to Democrats and Republicans strengthening their hold over many statehouses.

"There are many states with super-majorities now, so they can do big things," said Norton Francis, who researches state and local tax issues at the nonpartisan Tax Policy Center in Washington.

In Louisiana, Republican Gov. Bobby Jindal is talking about eliminating the income tax and replacing the lost revenue by increasing the sales tax. GOP governors in Kansas and Nebraska are also considering similar policy shifts that make big income tax cuts.

Meanwhile, Democratic-controlled states such as Minnesota are considering higher taxes on the wealthy to help fill the budget gaps.

Voters in California decided last year to significantly increase taxes on the wealthy in order to pay for the state's education system.

That has led Republican governors to declare their states "open for business" and to try and lure businesses into relocating. A cheeky radio ad aired in California earlier this month, in which by Texas Gov Rick Perry encouraged listeners to "visit TexasWideOpenforBusiness.com and see why our low taxes, sensible regulation and fair legal system are just the thing to get your business moving...to Texas."

Many Republican governors are following Perry's lead and arguing that a low tax environment will draw new businesses to the state and boost employment.

Joe Henchman runs the state tax policy program at the conservative-leaning Tax Foundation, but even he says lower taxes don't necessarily mean more jobs.

"I don't want to overstate the case, taxes are not the only thing that affect individual and business location decisions. A lot of things affect that," Henchman said.

Those factors include location, weather, roads and the level of educated workforce.

But that said, Henchman said tax rates do matter and if they are kept low, it can mean a boost for a state's economy.

"What makes taxes different is that taxes are something a state can do something about right now," Henchman said. "A tax change, for good or for bad, can have instantaneous effects on a state's business climate."

"What makes taxes different is that taxes are something a state can do something about right now. A tax change, for good or for bad, can have instantaneous effects on a state's business climate."

While that claim appears to make sense on its face, Michael Mazerov at the liberal-leaning Center on Budget and Policy Priorities isn't buying it. The average corporation pays just 2 to 3 percent of its expenses on local taxes, he said.

"State and local taxes don't matter very much and this constant tinkering with tax systems as the be-all and end-all of economic development just does not make sense," Mazerov said.

Instead, Mazerov views the moves towards tax cuts and the less-lucrative sales tax in Republican-controlled states as part of a larger, ideological project.

"I certainly see some of these proposals as an attempt to reduce revenues to prevent any restoration of the services that were cut in the recession," Mazerov said.

Like in Minnesota, many of these states legislatures are still working out the details and few, if any, of these proposals has become law.

Francis said many of these plans will likely get watered down in order to pass because state lawmakers know their budgets have to balance.

"At the end of the day, it's going to be about the money and where you're going to find the money," Francis said.

He says the lesson from past state tax reforms is clear: lawmakers often do a bad job of accurately estimating how much their overhauls will bring in.

"The worry is that they pass major legislation based on one or two year estimates and then find themselves in a bind in three or four years," Francis said.

In some cases, the governors and lawmakers pushing for these tax overhauls have higher offices in mind and may not still be serving if the estimates turn out to be low.

Gov. Dayton argues that raising taxes in Minnesota will end the recurring budget shortfalls the state has seen over the past decade.

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