Senate Dems take up tax on clothing, personal services

Even though Gov. Mark Dayton has dropped the idea, Democrats in the Minnesota Senate will push for an expansion of the state sales tax to clothing and many personal services while also lowering the tax rate.

The Senate Tax Reform Division plan announced Thursday would lower the sales tax from 6.875 percent to 6 percent, repeal the sales tax exemption on clothing and create a new income tax credit that low-income Minnesotans could claim for their clothing purchases.

Personal services that would be subject to the sales tax for the first time include haircuts, spa services, tattoos, piercings, sports and dance instruction, cosmetic surgery and personal shopping services.

Electronically-transferred digital books, music and movies also would be taxed. City and county government purchases would be exempt from sales taxes.

State Sen. Ann Rest, the division chair, said she believes most Minnesotans are open to the proposed changes.

"I am a prime example of somebody in the middle class. It's OK with me to pay a sales tax on my pedicure," said Rest, DFL-New Hope. "That's OK. It's OK to pay a sales tax on the tattoo I'm going to get on my neck."

Under the plan, businesses would lose a tax deduction for foreign operating corporation income. The corporate franchise tax rate would decrease, while the research and development tax credit would increase. It would also provide more money for angel investment credits that provide incentives to investors or funds that put money into startup and emerging companies that focus on technology.

"I am a prime example of somebody in the middle class. It's OK with me to pay a sales tax on my pedicure... It's OK to pay a sales tax on the tattoo I'm going to get on my neck."

Dayton took a lot of heat when he proposed applying the sales tax to business-to-business transactions, and dumped his sales tax plan last month. In the Senate plan, business-to-business transactions remain largely exempt, although warehouse and storage businesses would be added to the list of taxed services.

Dayton spokesman Bob Hume said the governor is still not interested in doing anything with the sales tax. But Rest remains hopeful.

"We hope to convince the governor that we have a good balance," she said.

The tax rate on cigarettes would increase 94 cents per pack, which mirrors the governor's proposal.

The Senate also included taxes on sports memorabilia and stadium suites that recently surfaced as potential financing backups for the new Minnesota Vikings stadium. Rest said those provisions will get further attention in the coming weeks.

"We want that on the table so that we can fully vet that," she said. "We wanted people to know we're thinking about it. But that will come up much more in the full committee when the bill gets there."

Senate Democrats will release the remainder of their tax plan later this month. That measure is expected to include an income tax increase on top earners, which would provide most of the revenue party leaders plan to invest in public education and other budget priorities.

State Sen. Dave Thompson, R-Lakeville, said Democrats are using big tax increases to grow government and nothing more.

"Their program right now is 'let's engage in more 1960s-style liberalism,' which is if you see a problem throw more money at it," Thompson said. "I think the taxpayers are going to think, 'What am I getting for that money?' Until we can eliminate the waste, until we can go through the budget and figure out if we're using the money as best we can, probably they shouldn't be asking for more."

A public hearing on the Senate plan is scheduled for Tuesday. Democrats in the House are planning to release their full tax bill proposal next week.

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