Gov. Tim Walz wants to tax people when they get financial and legal advice, a proposal that critics say hurts vulnerable residents while leaving businesses unscathed.

“The proposal would be extremely detrimental to the Minnesotans who can least afford it, especially during the most stressful, challenging and unexpected moments of their lives,” said Samuel Edmunds, president of the Minnesota State Bar Association, in testimony before the Senate Taxes Committee on Tuesday.

But Walz’s revenue team says it would make the state tax system fairer, plus add over $200 million a year to state coffers, even as the governor’s budget also would slightly decrease  the state’s sales tax rate from 6.5% to 6.425%.

“Cutting the tax rate and broadening the base to include professional services will help right-size our sales tax to a more service-oriented economy,” Shane Delaney, an assistant commissioner at the Minnesota Department of  Revenue, wrote in an email to MinnPost.

The prospect of a sales tax expansion illustrates the unpleasant decisions facing Walz and the Legislature as they hammer out their two-year budget that would begin in July. The Senate and House are debating the governor’s budget proposal amid forecasts the state is veering from a net surplus in its next budget to a deficit four years from now. And that’s without factoring in the looming threat of Minnesota losing billions of dollars in federal money under the Trump administration and a Republican-controlled Congress.

At the Taxes Committee hearing, Sen. Carla Nelson, R-Rochester, acknowledged the “tough spot” Paul Marquardt, the Revenue Department’s commissioner, is in.

But Nelson also called the tax on advisory services “regressive” and “not a good policy.”

Under the plan, a Minnesotan who purchases accounting, banking, financial brokerage or legal services would pay state sales tax.

For instance, say a person hires a personal injury attorney on contingency after hurting their back in a fender bender and obtains a $100,000 settlement. If the injury lawyer’s cut is $33,000, the individual would pay sales tax on that $33,000, adding $2,120 to state coffers under the proposed 6.425% tax rate.

Other legal and financial advice, such as helping someone select an investment portfolio or retirement fund, would have more layered cost structures, often based on the outcome of said advice.

Delaney at the Revenue Department did not see enforcing sales tax on a world based on commissions and contingencies as a problem.

“The tax would be calculated based on the price the consumer pays for the service,” he said. “How the service provider is compensated is not relevant.”

If the measure is included in the final budget the Legislature must pass, it would go into effect Oct. 1 and generate $136 million over its first nine months and $211 million in the subsequent year, according to Revenue Department projections.

The Revenue Department estimates that, thanks to the lower overall rate, the average Minnesota family would pay $37 less a year in sales taxes, assuming they do not hire legal or professional services. If they do use such services, a family is projected to pay $550 more in taxes.

The big-picture complaint with the tax expansion is that while it may appear to go after well-compensated lawyers or investment brokers, it really targets consumers who try to access these white-collar arenas, while exempting businesses.

“The consumer-only nature of the proposal means that individuals will often have to pay taxes on legal resources in disputes against better-resourced entities that will not,” testified Edmunds of the State Bar Association.

For example, if a person sues their employer for unpaid wages, sexual harassment or any other alleged misconduct, they would pay sales tax on the lawyer they hire. But the company defending itself would not pay taxes for its legal costs.

Similarly, a person filing taxes who hires an accountant would pay sales tax on the service. That could hit seniors or first-time taxpayers seeking tax help, while exempting a business hiring an accountant to help it claim tax exemptions.

This line of criticism created a situation at the hearing where Republicans such as Nelson pushed for a more progressive tax structure, while DFLers like Marquardt said it was time to face chilly realities.

“There are already a lot of situations where we tax people in tough times,” Marquardt said, citing funeral processions and tree removal after a storm as two such occasions.

According to Delaney, Walz’s aversion to expanding the tax to business-to-business transactions is that businesses continually contract out services.

Taxing each time a company uses a new vendor for a service like payroll processing would lead to “tax stacking” and that the costs of those taxes “would likely be passed to the consumer, who would be essentially paying the sales tax multiple times as a result,” Delaney said.

Also, there are exceptions made in the proposal including for consumers seeking legal or financial services when applying for a child tax or working family credit, or an individual who seeks help with origination, overdraft and late fees.

Ann Rest, president pro tem of the Senate and Taxes Committee chair, said in an interview that the measure is far from finalized, especially with the 67-67 GOP-DFL tie in the Minnesota House.

Rest would like to see some of the tax proposal language around what is exempt reworked. She also raised the issue of consumers hiring advisers based in other states to escape the sales tax.

But the committee chair expressed conditional support for the measure. Asked if she would like to expand the tax to include some business-to-business transactions, Rest said that Minnesota tried that 10 years ago and the results were disastrous, with Gov. Mark Dayton and the Legislature swiftly repealing three business tax statutes.

“That model does not work,” said Rest, DFL-New Hope. “Businesses will just threaten to bring more services in-house.”

Walz’s tax proposal reflects an economy that is becoming less based on the purchase of material goods, Rest said.

“The notion that we should not pursue services is really counter to what our economy has become.”

This article first appeared on MinnPost and is republished here under a Creative Commons license.