taxtrangle

TANGLED UP IN A SALES TAX MAZE

WHAT AND WHAT NOT TO TAX IS $64,000 (PLUS 6.5%) QUESTION

ST. PAUL -- While state leaders loudly debate the shape of major tax relief for all Minnesotans, a request by Sten Bylund of Duluth looks very small in comparison: Stop taxing my vitamins.
   Bylund is rehabbing three homes these days after closing the tile and stonework business where he worked 12-hour days until two years ago. He's 81.
   The hearty Swede attributes his good health to his liberal intake of vitamins and mineral supplements. He resents that when he buys the supplements, he has to pay a 6.5 percent sales tax to the state.
   ''I'm on Social Security. The only way I can work is by having good health,'' Bylund said Thursday.
   At Bylund's suggestion, Rep. Mike Jaros, DFL-Duluth, presented legislation to a House committee that would make vitamins exempt from the state sales tax.
   After all, Bylund and Jaros argue, groceries are exempt, and so is prescription medicine. Jaros says vitamins are like medicine. Bylund says they're his food.
   But what Bylund calls common sense is going to have to get in a long line at the Capitol this year.
   Special interest groups know that all state taxes, if kept at current rates, would bring in nearly a $3 billion surplus in the next two years, so the groups have proposals to cut dozens of small taxes.
   The little tax cut ideas are likely to be overshadowed as Gov. Jesse Ventura and DFLers argue with Republicans over major, across-the-board rebates and permanent income tax cuts.
   The proposals offer an insight into how a tax system can become more complicated every year. It's easier for legislators to grant little exceptions that are relatively inexpensive and less noticed than to make broad cuts.
   The state's general sales and use tax is second only to individual income tax as a revenue source for Minnesota government. The sales tax brought in $3 billion in 1997, compared with $4.8 billion from income taxes.
   Adopted in 1967, the sales tax applied generally to the purchase of retail goods, with a sentimental exception granted for the necessities: groceries, clothing and medicine.
   In 1981, the Legislature decided that the grocery exemption shouldn't spare smokers, so they made cigarettes taxable. Same with candy and soft drinks in 1982; and, in 1987, over-the-counter drugs.
   Services were not affected by the original tax. But as a manufacturing-based economy gave way to a service-based economy, lawmakers gradually broadened the tax to affect certain consumer services. Lawn care, for one, and car washes.
   But what about a service that deals with clothing? In House File 396, Rep. Larry Howes, R-Hackensack, says clothing repairs and alteration should be exempt from sales tax.
   Should the state put a tax on reading? House File 365 by Rep. Margaret Anderson Kelliher, DFL-Minneapolis, would lift the tax on books and nonsubscription magazines.
   Shouldn't tax policy encourage consumers to support youth athletics? Senate File 259 by Sen. Doug Johnson, DFL-Tower, would exempt tickets to high school league tournaments.
   Another Johnson bill would exempt memberships at health clubs because their nonprofit competitors such as the YMCA are already tax-exempt. Other bills would lift the sales tax on solar energy equipment, smoking cessation devices, and, to draw film production companies, property used for making television commercials.
   Individually, any of the tax breaks would be a drop in the bucket for Minnesota government. For example, Jaros says the vitamin exemption would deprive the state of $8 million.
   A bigger cut is getting a heavy lobbying push from local governments around the state. The plan would make purchases by all local governments exempt from state sales tax, as they were before 1992. The state would give up $90 million a year in revenues.
   The new policy would simplify a confused set of rules. Goods that would be taxed if bought by a city are exempt for a school district. Townships won an exception for certain roadwork purchases last year.
   But the cost could be a problem, said Johnson, who chairs the Senate Taxes Committee. ''That's a major item in a year when individal income taxes and property taxes is the priority,'' he said.
   Most likely, cities and counties will get a roadwork exception like the townships did.
   One tax watchdog group is advising lawmakers to stop the patchwork approach. The Minnesota Taxpayers Association said the state should tax more things, not fewer, but at a lower rate for all.
   ''A principle of good tax policy is to minimize exemptions ... and keep the rate low,'' the MTA warned in a recent newsletter analyzing the plenitude of exemption bills. ''We would urge caution among legislators from using surplus revenues to carve out additional exemptions.''
   The Legislature may have to take a wholistic approach some years in the future. Sales tax collections are growing more slowly than the rest of the economy and could stagnate with the rise of tax-free Internet purchasing, said Tom Ellerbe, a Minnesota Revenue Department analyst.
   ''We're still predicting growth in sales tax revenues, but sales tax revenues are eventually predicted to decrease due to alternate forms of selling,'' Ellerbe said. ''That'll get people's attention.''