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MINNEAPOLIS, Jan 22 (Reuters) - Minnesota would overhaul its state tax system under a $37.9 billion two-year general fund budget that Governor Mark Dayton unveiled on Tuesday.
The Democratic governor called for a drop in local property taxes, an income tax rate increase for higher earners, a lower corporate tax rate coupled with the closure of tax loopholes, a cut in the sales tax rate, and a cigarette tax hike.
Minnesota would gain $2.13 billion from the tax changes, allowing the state to eliminate a projected $1.1 billion deficit in the fiscal 2014-2015 biennial budget, while increasing funding for education, according to budget documents.
But Republicans, the minority party in the Legislature, blasted the plan for increasing both spending and taxes.
"Get ready for more taxes," Senate Minority Leader David Hann told reporters, adding that services such as oil changes and haircuts would be subject to the sales tax.
Under Dayton's proposal, the sales tax rate would fall to 5.5 percent from 6.875 percent, while the tax base would be broadened to include certain goods and services. For instance, clothing is currently exempt from sales tax, but the revision would tax clothing that costs more than $100.
Dayton and budget officials said that middle income consumers could expect the sales tax changes to be a wash, with the lower rate overall offsetting the broader base for the tax.
The income tax rate on single residents with taxable income of $150,000 or more and married couples at $250,000 or more would increase by 2 percentage points to 9.85 percent.
Minnesota's corporate tax rate would fall to 8.4 percent from 9.8 percent, but tax breaks benefiting some businesses would be eliminated.
Property taxes would fall by $1.4 billion in the upcoming biennium, which begins July 1, through increased state aid to local governments and other measures.
Minnesota would join other states in overhauling its tax system, including Massachusetts where the governor last week proposed an income tax rate hike and a lower sales tax rate. Nebraska's governor proposed a plan to eliminate personal and corporate income taxes, covering the lost revenue by ending sales tax exemptions. Likewise Louisiana Republican Governor Bobby Jindal called for ending the state's income tax and corporate taxes with sales taxes compensating for lost revenue.
California voters in November approved temporary hikes in the sales tax and in the income tax rates for the wealthy.