Some say Minnesota's sales tax didn't go far enough when enacted

Richard Hanson of Hermantown served one term in the House as an independent conservative representing Duluth. The raucous 1967 session was his first.

Hanson, 81, said machinations surrounded the bill to establish a new state sales tax in the final hours of the session. Republicans covered up the clock in the House chamber to keep debate going, he said.

“I don’t know how legal that was,” he said with a chuckle.

One representative was fetched from a hospital to get his vote in, Hanson said.

On the last day of the session to approve bills, May 20, Democrats in the Senate staged what was called a “silent filibuster” by refusing to vote on an override to Harold LeVander’s veto of the sales tax earlier that Saturday. The House had already passed an override.

The session ended without a sales tax bill.

But because many other bills also went unfinished, a special session was called. A similar chain of events occurred and eventually Republicans got their way and the governor’s veto was voted down.

Minnesota became the 44th state to enact a sales tax. Only one state has enacted one since then.

But some experts believe Minnesota made a mistake creating a sales tax that looked like previous taxes established in the 1930s. The world was changing, and the Minnesota sales tax ignored it by exempting services just as most other states were doing.

Michael Mazerov, a senior fellow with the Washington, D.C.-based Center on Budget and Policy Priorities and an expert on state fiscal policies, said the exemption of most services in the 1967 bill was a “historical coincidence.”

He said lawmakers should have known by then that the service economy would catch up with one based on over-the-counter goods. The state was likely simply mimicking laws made in other states decades before, he said.

“There was the impression that (taxing services) was a tax on jobs,” Mazerov said. “It’s not surprising. It was a historical accident. They wanted to get things up and running quickly.”

The regressive nature of the sales tax kept it out of Minnesota for more than 30 years as state after state adopted the tax during the Depression and into World War II. Gov. Floyd B. Olson vetoed a sales tax in 1935. Iowa, South Dakota and North Dakota were part of the 1930s wave. Wisconsin got a sales tax in 1961.

Minnesota Democrats fought hard against a sales tax but were met with a swarm of date on how a sales tax would relieve the burden on property tax payers. And the 1967 Legislature was led by Republicans in both chambers.

Gov. LeVander was also a Republican and in his first term in 1967. But he said he would veto any sales tax bill that didn’t include a referendum for voters. Some called him too vague on his stance toward the new tax and some Democrats thought his veto threat was a ploy for them to back down.

In the end, Minnesotans perhaps unfairly referred to the new 3-cent tax on every dollar spent as “LeVander pennies,” the Minnesota Historical Society wrote in a biography of the governor. Stickers were made caricaturing the governor with a “lavender penny.”

Now a Democratic governor is proposing the most intricate change in the sales tax since its inception. Minnesota Department of Revenue Commissioner Myron Frans, one of its architects, said the fever in the Legislature and with the public is likely to match that of 1967.

Frans said three governors before Dayton have floated the idea of lowering the rate and broadening the base. Tim Pawlenty ordered a panel to study the sales tax, and it came up with the same conclusion Dayton is trying to implement.

“It’s tax reform 101,” Frans said.

But it won’t be an easy process.

“It’s a very tough sell,” Frans said of broadening the base and asking people to pay sales tax on more items.

It’s his hope that the draw of fixing property taxes and lowering the sales tax will win the day.

He said reform can’t please everyone.

“It is an imperfect tax, but all of them are,” Frans said. He said change has to be attempted because “people tell us they don’t think our current system is fair.”

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