(C) Tax Analysts 2013. All rights reserved. does not claim copyright in any public domain or third party content.

Minnesota’s Three-Legged Stool: An Interview With Revenue Commissioner Myron Frans

by Billy Hamilton

Minnesota Revenue Dayton also believed tax fairness had been eroded Commissioner, Myron by the shift in the tax mix. Frans said that the Frans, has spent many Department of Revenue prepared an analysis of the hours over the past two state tax incidence that clearly documents the prob- years traveling the state lem. It shows that with the shifting balance among and talking to Minneso- the major taxes, there was a worrisome shift in tax tans about tax policy. ‘‘We incidence as well. ‘‘We’ve published an incidence held 160 meetings in 50 study every two years since 1990,’’ Frans said. ‘‘It’s cities,’’ he told me when been pretty successful at tracking trends.’’ The most we talked recently. By the recent study, released earlier this year, showed that time he was through, he the distribution of tax burden is broken into deciles had met with more than — essentially 10 equal groups divided by income 7,000 Minnesotans, including more than 80 state levels. Middle-income households paid 12.2 percent lawmakers, about a topic that doesn’t receive of their income to state and local taxes, while the top enough calm discussion these days — what is a fair 1 percent paid just 9.6 percent.1 The governor was tax system? convinced the tax system needed to be overhauled to create greater balance. Frans’s favorite prop during his travels was a three-legged stool, representing the traditional bal- When Frans joined the Dayton administration in ance in Minnesota’s tax system between the prop- 2011, it was the first time he had ventured into erty, income, and sales taxes. ‘‘From a tax policy public service, at least in many years. He grew up in standpoint, Minnesota has always relied on the Kansas and earned a bachelor’s degree in sociology three taxes in about equal balance — a third, a at Washburn University in Topeka in 1972. He then third, and a third,’’ he said. That balance created worked as a probation and parole officer for three stability and balance. Over time, though, the bal- years before enrolling at Sam Houston State Uni- ance had begun to unravel. ‘‘Our research showed versity in Huntsville, Texas, where he received a that in 1999, we had a balanced distribution be- master’s degree in criminology. Thereafter, he tween the three taxes — a third of the total each,’’ he taught at colleges in West Virginia and Michigan for said. ‘‘By 2010, the property tax accounted for 40 two years and then returned home to attend the percent of the total, the income tax a third, and the University of Kansas Law School, where he was a sales tax 27 percent.’’ classmate and friend of Kansas Gov. Sam Brown- back (R). Frans explained that the shift was partly a result of changes in the economy affecting the sales tax. Frans entered law school intending to pursue a ‘‘There had been no changes in the sales tax base in career in criminal law but was attracted to tax law a decade,’’ he said. ‘‘Our sales tax covers mostly instead. When he graduated in 1983, he began his goods and not services. While the importance of tax practice at Miller & Chevalier in Washington, services in the economy increased, the sales tax was D.C., which represents large national and interna- stuck and basically static.’’ tional corporations. There, according to one news story, he focused on research and seldom saw clients. The same wasn’t true of the property tax. With Hoping for more direct contact with clients, he the state growing and property values rising, prop- shopped around for a ‘‘good-sized city’’ with enough erty taxes shot ahead of the other two taxes, and the Fortune 500 companies to support a tax practice. In three-legged stool suddenly had three legs that weren’t of equal length. For Frans’s boss, Gov. Mark Dayton (DFL), the result wasn’t acceptable. ‘‘The governor,’’ Frans said, ‘‘believes the tax system 1Minnesota Department of Revenue, ‘‘2013 Minnesota Tax should be more balanced than it had become.’’ Incidence Study’’ (Mar. 1, 2013).

State Tax Notes, November 11, 2013 355 State Tax Merry-Go-Round

1985, he landed a job at Gray Plant Mooty Mooty & event hosted by the Center for the Study of Politics (C) Tax Analysts 2013. All rights reserved. does not claim copyright in any public domain or third party content. Bennett in Minneapolis. He worked there for 14 and Governance at the University of Minnesota’s years and then spent 10 years at the Minneapolis Humphrey Institute of Public Affairs (now called firm of Faegre & Benson. Slowly, he developed a Humphrey School of Public Affairs) in September reputation as a ‘‘tax guru’’ — although in a nice way. 2010, Dayton defended his plan, calling taxes ‘‘the Looking for new challenges, Frans left his prac- lubricant for the machine of our democracy’’ and ‘‘the tice in 2009 to become president of Leeds Precision fuel for our social engine.’’ He also laid out his Instruments, a Minneapolis manufacturing com- arguments for why his income tax plan was both pany. After Dayton was elected governor in 2010, necessary to help cure the state’s budget deficit and Frans’s name surfaced on a list of possible choices to the fair thing to do. head the Department of Revenue. Frans met with Dayton called his tax plan ‘‘healthy for a society’’ Dayton. ‘‘We just really connected,’’ he recalled. ‘‘At and a ‘‘moral responsibility for those making tax the end of the interview, I knew I really wanted the policies.’’ When an audience member posed the ques- job.’’ He says he has always liked tax policy, and tion about whether Dayton was engaging in class always wanted to spend some time in public service. warfare, he responded: ‘‘Well, I didn’t start the war. The time was right, and as it turned out, there Back under a DFL governor, Rudy Perpich, and a couldn’t have been a better time for a ‘‘tax guru’’ with Republican governor, Arne Carlson, there was fairly Frans’s background to step into the revenue com- good tax equity. And look where it is today. And I missioner’s job. His boss, the newly elected governor, haven’t had anything to do with any of those poli- had big changes in mind, and they most emphati- cies.’’ cally involved taxes. In 2010 Dayton’s views on state finances put him While Dayton was running for governor in 2010, well outside the political mainstream nationally. it was clear that the state faced serious budget The economy was just recovering from a devastating problems that a new governor would have to tackle. recession, and states were approaching every tax The state’s budget shortfall then was estimated at policy change as though it were a bomb that might $5.8 billion and was later increased to $6.2 billion.2 shatter the fragile recovery into a million pieces. The shortfall’s daunting size was partly a result of Moreover, 2010 was the year of the watershed Red structural problems in the state finances and partly Tide election that swept conservative lawmakers a result of the fiscal cliff created by the end of federal and governors into office across the country and stimulus funding under the American Recovery and fundamentally changed the legislative balance in Reinvestment Act of 2009. The state’s problems, many states. Dayton believed, weren’t temporary. The state had The results in the gubernatorial races that year faced shortfalls in each of the preceding eight years, demonstrate the political mood and show what sort and prior governors and legislatures had failed to of head wind Dayton and his proposals faced. The address the problem. GOP won a net five gubernatorial races, including When then-Gov. Tim Pawlenty and the Legisla- Ohio, Michigan, Pennsylvania, and Wisconsin. They ture, which was controlled at the time by the DFL, also won, for the first time in decades, the governor- balanced the budget in 2010, they relied heavily on ship of Maine, regained the governorships in Iowa, the one-time federal stimulus money and delayed Kansas, and Tennessee, won the governorship of payments to school districts. That ‘‘solution’’ solved New Mexico, and held critical governorships in Ne- nothing. It simply papered over the problem tempo- vada, Georgia, Texas, and Florida. Many of the new rarily, and the situation Dayton inherited wasn’t governors came to office promising to cut taxes, promising. In December 2010, Steve Sviggum, sometimes radically, to boost jobs and investment. Pawlenty’s commissioner of management and bud- Higher taxes were on the agenda in at best a handful get, described the state’s fiscal situation as ‘‘unfin- of states. ished business,’’ and noted the structural problems Minnesota often goes its own way, and in 2010, it that lay ahead. He had no ideas to offer. ‘‘The did so again, electing Dayton with 43.6 percent of Legislature and the governor have played all of the the vote out of field of candidates from seven politi- cards that are available,’’ he said. cal parties. Dayton beat Republican Tom Emmer, Well, not all. Running for governor, Dayton called who came in second, by fewer than 9,000 votes for higher taxes to fix the structural problems and statewide. By the same token, the Legislature, proposed taxing the wealthiest Minnesotans to pro- which had been controlled by the DFL, was turned duce the revenue needed to fill the budget gap. At an over to Republican control, setting up a situation where a new governor wanted to fix a large deficit with a controversial tax plan and needed the help of a potentially hostile Legislature. 2The shortfall estimate was later reduced again, to $5 billion, in the state’s February 2011 forecast, which came out It wasn’t a recipe for success. In February 2011, after the governor’s initial proposal. The governor issued his Dayton announced his budget plan. As promised, it supplemental (revised) budget after the forecast. looked to the wealthy to erase about half of the $6.2

356 State Tax Notes, November 11, 2013 State Tax Merry-Go-Round

billion budget deficit. He pro- (C) Tax Analysts 2013. All rights reserved. does not claim copyright in any public domain or third party content. posed a new top tax bracket and an income surtax that to- gether would give Minnesota one of the nation’s highest in- come tax rates. (The surtax, as proposed, would have been temporary and only apply to taxpayers with income of more than $500,000.) The plan would have raised nearly $2.9 billion from the top 5 percent of taxpayers, includ- ing a new property tax on homes valued at more than $1 million. It also would have in- creased taxes on healthcare providers and corporations with foreign operations, while cutting almost $1 billion in spending for programs, includ- ing MinnesotaCare healthcare and nursing homes. The tax in- Myron Frans creasesandspendingcutswere contained in Dayton’s proposal for a two-year, $37 billion bud- ments to local school districts and by borrowing get that would have channeled more money into edu- money against expected future payments from the cation but also would have shrunk the state’s labor tobacco industry. force by 800 jobs. ‘‘This is a very tough budget for very The governor said he still believed that revenue to hard economic times,’’ the governor said. pay for crucial services for the state’s most vulner- Republican lawmakers weren’t buying. ‘‘I don’t able people should come from the wealthiest Minne- want to say it’s dead on arrival. I don’t think it has sotans. However, he said he was out of options and much of a heartbeat,’’ said Deputy Senate Majority could see that people wanted the deadlock to end. ‘‘I Leader Geoff Michel. am willing to agree to something I do not agree with — your proposal — in order to spare our citizens and Michel was right. The governor and Legislature our state from further damage,’’ he wrote to the wrangled over the budget and taxes for most of the Republican leadership. legislative session — and well past its official end. In Dayton did extract three conditions for final ap- late May, the governor vetoed the Legislature’s no- proval, including the removal of any non-budget tax budget, beginning a race against a government policy matter — some lawmakers had wanted to add shutdown that would occur on July 1, when the issues like embryonic stem cell research — from any state’s new fiscal year began. That race was lost as deal, the abandonment of plans to make an across- negotiations dragged on into the new fiscal year. the-board cut of 15 percent of state workers, and Eventually, Dayton signed the budget into law on support for a bonding bill of at least $500 million ‘‘to July 20 after a 20-day state government shutdown. put people back to work throughout Minnesota.’’ For nearly three weeks, state parks were closed, and Lawmakers worked through the night on July 19-20 19,000 state workers were furloughed. to pass a total of nine budget bills. The governor In the end, Dayton gave up his goal of raising signed the bills hours after they were passed, and taxes on the wealthiest Minnesotans and agreed to a the $35.7 billion budget took effect. plan that Republican leaders had offered him two Dayton and his revenue commissioner weren’t weeks earlier. It was a rough compromise, heavy on giving up on reform, though. Frans went on the road cuts and short on taxes. Republican leaders said in the summer and fall of 2012 laying the ground- they, too, had not gotten all they had wished for in work for what some observers speculated could be terms of deeper spending cuts. Instead, the agree- the most significant overhaul of the state’s tax code ment repeated the patchwork approach of recent in a generation. legislative sessions, finding an additional $1.4 bil- On his state tour, Frans wasn’t selling a particu- lion in revenue to balance the $35.7 billion budget lar tax plan, although he said that everyone knew through accounting gimmicks such as delaying pay- what Dayton stood for and had run on. Regardless,

State Tax Notes, November 11, 2013 357 State Tax Merry-Go-Round

Frans said he began his travels with no fixed tax costing less than $100 would continue to be exempt (C) Tax Analysts 2013. All rights reserved. does not claim copyright in any public domain or third party content. reform ideas in mind. He wanted to talk about the from sales tax. Burial services would also be exempt situation with as many people as possible and see from the expanded sales tax, and the governor joked, what sort of response he received. ‘‘We explained the ‘‘you only get to take that exemption once.’’ He also tax system,’’ he said. ‘‘I gave them the facts about proposed raising the cigarette tax by 94 cents per what was going on. I outlined the problems we faced. pack from $1.23 per pack. I was listening, and for me, it was a wonderful The centerpiece of the tax changes was a revised experience.’’ tax on the wealthiest 2 percent of Minnesotans. The groups Frans met with weren’t bitterly op- Dayton proposed creating a new, fourth-tier income posed to having a discussion that might result in tax bracket of 9.85 percent, which would apply to higher taxes. ‘‘I was welcomed, and people listened. taxable income of more than $250,000 for married I believe they did so because they — we — are all joint filers and more than $150,000 for single filers. tired of hostility and incivility in the political pro- He stressed the new rate would apply to only a small cess.’’ Or maybe it’s because Minnesotans are just portion of Minnesota’s taxpayers. The tax change nice people. Or, more likely, it’s because they real- was estimated to produce about $1.1 billion in the ized that the quality of state services — and particu- next budget cycle. larly of the public school system — might be riding The payoff for the tax changes was higher state on the outcome. spending on public and higher education. The gov- Whatever was the case, Frans was able to make ernor said his education investments were needed to his points, and he found that people contributed improve Minnesota and its economy. Education ideas of their own. ‘‘People actually offered a lot of spending accounted for almost two-thirds of his suggestions. Some would work, and some wouldn’t,’’ proposed state spending increases; however, he also he said. ‘‘But that’s just as true of the ideas we proposed using some of the added tax revenue to pay developed. Some were good, and some weren’t. Some for a property tax rebate of up to $500 for all we kept, and some we didn’t.’’ Minnesotans starting with their 2013 bill, depend- On the road, Frans was a happy warrior, which ing on their income. The plan also restored the full probably eased his task immensely. According to one funding of a property tax credit for renters, which news account, ‘‘Democrats and Republicans alike had been cut in earlier budget battles. describe the state’s top tax collector as smart, savvy, The governor also called for a 14 percent cut in friendly, hardworking, respectful and — the adjec- Minnesota’s corporate business tax rate — the larg- tive most often applied — cheerful.’’3 House Taxes est cut in state history. He proposed lowering the Committee Chair Ann Lenczewski (DFL) said of corporate income tax rate from 9.8 percent to 8.4 Frans, ‘‘He’s effervescent, always up, always posi- percent — a change that would drop Minnesota from tive.’’ the fourth highest rate to 12th. Frans believes the miles of travel and the give- ‘‘Those who say spending is too high, I challenge and-take with several thousand Minnesotans paid you to say exactly where more cuts should be made,’’ off. When the governor and his staff began to once Dayton said. ‘‘And to those who say we need to spend again fashion a fiscal plan in late 2012, they had a more, I challenge you to say exactly where the lot of ‘‘real world’’ data and public opinion on which money should come from.’’ to draw. It was a large bite to chew, and even the gover- nor’s fellow DFLers, having just retaken control of Dayton announced his new plan last January. the Legislature, were hesitant to buy in immedi- Calling for an end to ‘‘gimmicks and fiscal games,’’ ately. House Speaker Paul Thissen (DFL) said he he proposed an overhaul of Minnesota’s tax and thought Dayton delivered what he said he would. He budget system that would raise hundreds of millions said Minnesotans would let lawmakers know in the more from high-income taxpayers and high-dollar coming weeks whether it was too much, adding, clothing sales, and pump much of the new revenue ‘‘What the governor is doing is laying out choices for into education and property tax relief. The plan also the people of Minnesota, and I think that hasn’t included a lower tax rate on an expanded sales tax been done in a long time.’’ base. Republican lawmakers were far less enthusiastic, The plan called for lowering the sales tax rate calling the plan a job killer dressed as fairness. from 6.875 percent to 5.5 percent and adding cloth- House Minority Leader Kurt Daudt (R) criticized it ing above $100, digital goods, and Internet sales to as a plan to create ‘‘a better Wisconsin,’’ a twist on the tax base. Food, medicine, and clothing items Dayton’s budget theme of ‘‘creating a better Minne- sota.’’ In the end, the governor mostly got his way. The 3Bill Salisbury, ‘‘Minnesota’s ‘Tax Guru’ Myron Frans tax bill lawmakers passed is projected to raise Leads Dayton’s Overhaul Effort,’’ TwinCities.com, Jan. 21, approximately $2.1 billion in additional revenue and 2013. eliminate the state budget deficit. The 552-page bill

358 State Tax Notes, November 11, 2013 State Tax Merry-Go-Round

is massive, and the Department of Revenue is work- about the tax changes and the agency’s proposed (C) Tax Analysts 2013. All rights reserved. does not claim copyright in any public domain or third party content. ing on rules right now, Frans said. rules. ‘‘We’ll see what’s working and what’s confus- As Dayton had proposed, the legislation increases ing, and we’ll fix the problems going forward,’’ he the income tax rate for the top 2 percent of wage said. earners by 2 percentage points to 9.85 percent on One place the state has heard some criticism is in taxable income of more than $150,000 for singles the national tax rankings created by the Tax Foun- and more than $250,000 for couples, effective for tax dation and other groups. This year’s Tax Foundation years beginning July 31, 2012. Minnesota will have ranking had Minnesota slotted at 47th worst, ahead the fourth highest state income tax rate in the only of California, New Jersey, and New York. The nation as a result. Cigarette taxes will increase by increases have also stirred rumors of a border tax $1.60 a pack, higher than the governor proposed. with Wisconsin, which has taken the tack of cutting Also, the sales tax base was expanded to several taxes and services to make the state more attractive business-to-businesses goods and services, including to business investment. Frans and Wisconsin Secre- new taxes on warehousing and storage services, tary of Revenue Richard Chandler recently debated electronic equipment repair, and telecommunica- their state’s respective approaches during a ‘‘Border tions equipment. In a procedural simplification, the War’’ forum at the University of Minnesota’s Hum- law provides an upfront exemption for capital equip- phrey School of Public Affairs. ment purchases instead of the requirement to pay The contrast in approaches between the two tax and file for a refund. states is stark. Wisconsin, under Gov. Scott Walker Also, Internet retailers will have to start collect- (R), cut taxes by nearly $1 billion earlier this year, ing sales taxes for online transactions. The legisla- and Chandler said that has become a major selling tion included an ‘‘Amazon Rule,’’ providing that an point for the state. ‘‘We want more people to find our out-of-state business making retail sales — but with tax reductions attractive,’’ he said. Frans said his no physical presence in Minnesota — is presumed to state’s tax and spending increases are not only have a Minnesota sales tax collection requirement if necessary to the state’s fiscal health but will pay off a Minnesota resident or business directly or indi- economically. ‘‘The key for us is to get policies where rectly solicits on its behalf and $10,000 of Minnesota people know the taxes they are paying are making sales are generated by the referrals. the investments they want to make,’’ he said at the Under the legislation, more homeowners and conference. renters will be eligible for property tax refunds, and When we talked, Franz expanded on that theme. refund checks will be larger for many of them. Cities ‘‘Our view of the border war issue is that we believe and counties are exempted from state sales taxes, investors and people who create jobs look at a and local governments will receive an additional number of factors,’’ he said. ‘‘Taxes most certainly $130 million in state aid over two years. The legis- are one issue. I ran a small business and certainly lation also includes a 3 percent limit on local prop- am familiar with their impact. But business people erty tax levy increases. In response to protests from also look for financial stability, quality of life, the the business community, Dayton scrapped his plan quality of the workforce, and a dozen other factors. to expand the state sales tax to clothing and a wide That’s what Minnesota offers, and that’s what we’re range of business and consumer services while low- investing in.’’ ering the tax rate. Franz said Minnesota is the fifth fastest growing ‘‘What we wound up with,’’ Frans said, ‘‘was a state in the country for a reason. ‘‘People and busi- much fairer distribution of taxes in our tax system. nesses want to be here,’’ he said. ‘‘I don’t think a Today, all of the top income brackets pay about 11 little difference in taxes is going to change that.’’ percent of their income in state and local taxes — far Nothing he’s seen in his travels has changed his closer to the 11.9 percent paid by those in the middle mind about the importance of the state’s three- brackets. It isn’t a matter of trying to punish any legged stool, either, and if you doubt that, he’ll be group. We are trying to balance the load, which is more than happy to explain. Where the three-legged what the governor wanted.’’ stool is concerned, he stands by it — or even on it — I asked Frans what sort of reaction the revenue now that it’s balanced. ✰ department was getting from taxpayers, and the answer is not much so far. ‘‘In a way, I’m surprised to say that people are just moving on. Maybe next year Billy Hamilton was the deputy comptroller for the Texas in an election year we’ll hear more,’’ he said. Office of the Comptroller of Public Accounts from 1990 Frans said that in November, his agency would until he retired in 2006. He is now a private consultant. meet with taxpayers to see what they have to say

State Tax Notes, November 11, 2013 359