## Walz’s Budget Proposal: A Smart Approach to Sales Tax Reform?
The opening week of Trump’s second term cast a shadow of uncertainty over the future of vital public services. The unpredictable nature of the federal government underscores the critical role of state funding in maintaining essential programs. However, a glimmer of positive news emerged from Minnesota’s 2025 legislative session. Governor Tim Walz’s budget proposal includes a potentially bipartisan solution: broadening the sales tax base while simultaneously lowering the overall rate. This proposal warrants serious consideration.
Minnesota’s current sales tax system disproportionately taxes goods over services. Excluding groceries and clothing, most tangible purchases are subject to a 6.875% state sales tax, plus applicable local taxes. Conversely, services – encompassing everything from legal advice to hair appointments – largely remain untaxed. This disparity reflects an outdated model from a time when consumption primarily involved physical goods, and tax collection was more challenging.
Today, with the widespread use of debit cards, collecting sales taxes on services is significantly easier. Moreover, given the growing prominence of services in the modern economy, it’s become increasingly important to address this imbalance.
Governor Walz’s proposal aims to modernize the system by extending the sales tax to consumer purchases of legal, accounting, banking, and bookkeeping services. This expansion alone would generate an estimated $450 million in the 2026-27 biennium. The governor proposes using approximately half of this revenue to lower the statewide sales tax rate to 6.8%, a decrease from the current rate.
While specifics remain open to negotiation, the core concept is both intelligent and necessary. It offers a potential compromise that even a divided legislature could support. Broadening the tax base and reducing the rate is generally considered sound tax policy. It promotes fairer treatment of taxpayers irrespective of their spending habits and reduces the overall tax burden on each transaction, thereby stimulating economic activity.
Simply put, Walz’s proposal challenges the current inequity: Why should average citizens pay 6.875% to nearly 10% in state and local sales taxes on everyday items like books and children’s toys, while higher-income individuals face no sales tax on their legal or financial services? This exemption constitutes an unfair advantage for wealthier consumers and businesses, imposing an implicit cost on everyone else. The Minnesota Department of Revenue’s tax expenditure budget demonstrates that for every percentage point of tax base exempted, the state must proportionally increase its tax rate to compensate for the lost revenue.
Beyond fairness and efficiency, a broader sales tax base is fiscally essential. Recent forecasts from the Minnesota Management and Budget (MMB) highlight the long-term budgetary pressures stemming from rising healthcare costs, special education expenses, and other critical public services. While some may attribute these deficits to specific political leadership, the reality is that they result from demographic shifts and bipartisan decisions spanning over a decade. While debate on recent budgetary choices is valid, the long-term fiscal challenges are inevitable and will soon affect every state.
Progressive advocates might initially hesitate due to the common criticism of sales taxes as regressive. However, the true impact of any tax must consider the essential services it funds. The potential for bipartisan compromise on this issue might lie in addressing such concerns.
Meeting future demands in healthcare, education, and other vital areas requires increased revenue from diverse sources. Recent state tax increases targeting high earners have improved tax fairness but have also reduced stability and increased reliance on a smaller segment of the population. Walz’s proposed changes would enhance both stability and horizontal equity – the principle that similarly situated individuals, such as a lawyer and a hardware store owner, should face comparable tax burdens.
While Governor Walz’s base expansion proposal is a strong starting point, it’s not the only avenue for reform. The sheer scale of existing sales tax exemptions (over 120% of the current tax base) suggests that eliminating all exemptions could theoretically reduce the sales tax rate by more than half. While a complete elimination is unrealistic, this illustrates the potential of a broader tax base.
Further consideration should be given to additional categories of goods and services, potentially offering greater revenue generation, larger rate reductions, or a combination of both. For example, taxing business-to-business sales of advertising and management consulting services is a possibility, although concerns about tax pyramiding and disproportionate burdens on small businesses need careful evaluation. However, the potential revenue is significant, and certain categories might be less susceptible to these concerns.
Tax policy decisions require a thorough analysis of who bears the burden. Eliminating the food exemption, for example, could significantly lower the overall tax rate but would disproportionately impact low-income households. Conversely, ending exemptions on clothing or personal services, as proposed by Walz, would disproportionately affect higher-income individuals.
Predictably, industry groups affected by any tax changes will voice opposition. While no one welcomes tax increases, a fundamental principle should guide our decisions: Treat individuals in similar circumstances equally. Taxes are not punitive; they are the means by which we collectively fund a prosperous and resilient society. The more individuals contribute, the lower the individual burden becomes. Governor Walz has initiated a critical conversation that deserves thoughtful discussion and legislative action.
(Note: The original text referenced charts and tables. Those would need to be recreated and included for a complete reproduction.)