Variety of taxes on menu at Capitol

Facing a statewide budget deficit of nearly $4.6 billion over the next two years, state lawmakers want to take a variety of initiatives to raise revenue for the state.

The House of Representatives passed a tax bill on Saturday that would increase taxes on tobacco products and alcohol in the state, as well as extend the state sales tax to digital products downloaded on the Internet — the so-called, “iTunes tax.”

Taxes on alcohol products would increase between 7 cents and 68 cents per liter depending on the product , should these taxes pass the Legislature and the governor. Total increased alcohol revenue for the state would total more than $209 million during the upcoming two years.

Taxes on cigarettes would increase by 54 cents, to $1.77 per pack, in addition to the state’s sales tax . The state would receive more than $207 million in cigarette taxes under the plan.

On the floor of the House on Saturday, the bill’s author, Rep. Ann Lenczewski , DFL-Bloomington, defended the initiatives, which are part of a bill that would raise more than $1.7 billion in tax revenue during the upcoming biennium.

“If you are a cigarette smoker, we’re going to bring you up to just the Wisconsin level [of taxation],” she said. “On the alcohol tax, which has not been raised for 22 years … this is a voluntary part of the economy. There is nobody requiring anybody to buy alcohol.”

Republicans attacked the tax increases in the bill.

“This bill isn’t about a more progressive system,” Rep. Laura Brod , R-New Prague, said on Saturday. “This bill is actually about a more regressive tax code.”

A regressive tax places a higher burden on people with a lower income, University of Minnesota public affairs professor Jerry Zhao said. For example, if consumption of cigarettes is the same between someone with a high income and someone with a low income, the tax on the product will hurt the person with the lower income more.

Taxes on cigarettes, alcohol and other products get the distinction of being called “sin taxes,” because they tax socially taboo behavior such as smoking or drinking.

Sin taxes generally are more acceptable ways to raise revenue without gaining the ire of too many taxpayers, Zhao said.

Raising sin taxes has been a trend since the 1970s, he said, when states had different rules regarding raising property taxes.

Today, even though they can bring in smaller pots of revenue, Zhao said they can help states reach the ultimate goal of closing budget shortfalls.

“Many states use it to close the budget gap,” Zhao said. “In this kind of situation, every little bit helps.”

“iTunes” Tax

Should the Legislature adopt the House’s version of the tax bill, Minnesota would join about 20 other states that apply sales taxes to downloads of digital products such as music, movies, audio books, software and ringtones.

Rep. Jim Davnie , DFL-Minneapolis, said the plan would be fairer than the one now — taxing DVDs purchased in stores but not those purchased online is like applying taxes to those sold in Minneapolis but not St. Paul, he said.

The final tax would be applied to the purchaser of the music, so those purchasing online products using a credit card based in Minnesota would be affected by the tax, Davnie said. Other states, such as Washington, South Dakota and Wisconsin, apply this tax.

The tax is only expected to bring in $3.1 million next biennium, but Davnie said any bit helps.

“These really are drops in the ocean,” he said. “I’m not claiming that I’ve solved the budget deficit.”

On the floor Saturday, Brod took aim at the proposed tax increases.

“The iTunes tax, starting to tax downloads for music, which will hurt kids and adults, the cigarette tax … the alcohol tax increases,” she said. “I notice that there are tax increases for pretty much everybody.”

Proponents of the tobacco, alcohol and digital product taxes face plenty of opposition, however. None of the provisions are in the Senate’s tax bill , and Gov. Tim Pawlenty has threatened to veto tax increases should they come to him.

Like with other bills, members of the Senate and House will meet in a conference committee to reach an agreement on the tax proposals before sending it to Pawlenty.

-Devin Henry is a senior staff reporter