A Minnesota Policy Proposal for Seniors’ Sales Tax Relief

On November 24 Minnesota Gov. Tim Walz (DFL) announced a package providing pandemic relief via credits and direct payments¹ and indicated an openness to novel ideas. One such idea may be age-restricted sales tax reductions or moratoriums for older adults, who may be more vulnerable to the economic impacts of COVID-19.

Authors from the LeadingAge LTSS Center at the University of Massachusetts Boston and the National Council on Aging recently examined the effects of the 2008 recession on adults 60 and over.² Their findings included a significant drop in financial assets and an increase in mortgage debt, likely to make up cash shortfalls. In sum, the strain of economic decline is often disproportionately borne by older citizens.

The coronavirus may be novel but the idea of a sales tax discount for seniors is not. In South Carolina, state law provides for a 1 percent exclusion on state sales tax for individuals 85 and over.³ Establishments must post a flyer indicating the right to a 1 percent exclusion, and the customer must request the exclusion and provide proof of age at the time of the purchase. While an age-targeted sales tax exclusion is not ideal, it is more administratively feasible than other alternatives that might better hew to need and progressivity. It allows for a rapid rollout and low informational costs, as small businesses will be encouraged to advertise their participation in the program.

Proposal

The state sales tax rate in Minnesota is 6.875 percent.⁴ As of the 2010 census, 12.9 percent of Minnesotans are over 65, for a target population of about 685,000.⁵ In 2017 sales tax revenue in Minnesota was about $5.7 billion.⁶ Assuming for the sake of argument that Minnesotans purchase taxable consumables at equal rates across age brackets, this would suggest sales tax revenue from residents over 65 to be somewhere in the vicinity of $730 million.⁷ The state has already invested $100 million for small business pandemic relief and another $840 million to support local governments.⁸ Providing for age-based exclusions could provide immediate access to some of that estimated $730 million in the form of tax savings and help prop up both small businesses and local governments.

Providing a 3.44 percent exclusion, or effectively halving the 6.875 percent rate, for older Minnesotans could inject as much as $365 million directly into the economy at points where it can do much good — namely the pockets of older residents and the businesses they frequent.⁹

Aid to Businesses

An age-based exclusion for state sales tax will provide a boon to businesses as the tax savings provides more expendable income for their proven customers. Rather than credits and grants to businesses, which are administratively costly and rely on arbitrary qualifications and cutoffs, providing an age-based exclusion wrangles the market to increase efficiency — businesses that can benefit will. These increased revenues can be used to offset shortfalls resulting from reduced traffic or increased costs resulting from the need for personal protective equipment and other pandemic countermeasures. And businesses will be encouraged to advertise their participation in the program, thereby increasing public awareness of its availability.

Preventing a Senior Housing Crisis

The study by the National Council on Aging suggests that older Americans are typically less liquid than their younger counterparts and so if unable to work are forced to turn to the only source of capital at their disposal, their homes. By taking steps to offset cash shortfalls, the age-based exclusion will help keep older Minnesotans in their homes and prevent a senior housing crisis following the public health crisis.

For both macroeconomic and humanitarian reasons, targeting tax exclusions to vulnerable populations may be a more efficient method of delivering relief to those groups than credits and grants. Older Minnesotans are in a more precarious position than their younger neighbors, not only from a public health perspective but from an economic perspective as well. Economic harm suffered during the pandemic will be worse because of the reduced amount of labor capacity and, frankly, time that older Minnesotans have to make up those losses. A state tax cut puts money in their pockets immediately, while credits and grants for individuals on a fixed income likely won’t be received until filing time — short-term shortfalls will need to be made up by borrowing against equity. Sales tax dollars invested now will pay dividends for Minnesota in the future.

Minimal Administrative Cost and Timeline for Implementation

The weight of the pandemic rests more heavily on taxpayers and businesses by the day. Key features of any proposed tax provisions for pandemic relief must be rapid rollout and low administrative costs.

A sales tax cut can be rolled out immediately, albeit with an information campaign lagging behind. The administrative cost of a sales tax cut for older Minnesotans is limited to the aforementioned information campaign and a similar one for businesses; merchants will need to post an informational flyer and ask for identification from customers seeking to take part in the program — that’s it.¹⁰

(Relatively) Small Opportunity for Fraud

No tax proposal seeking to treat one group of individuals more preferentially than another will be completely fraud-proof. However, an older-Minnesotan sales tax cut does not provide the opportunity for large-scale aggregate fraud at the merchant level. Frauds will fall into two broad categories: First, individuals falsely claiming to be 65 or older and having false identification, and second, merchants collecting the full 6.875 percent from a customer, recording it as a sale to a senior, and pocketing the other 3.44 percent.

Regarding the first fraud, the faux senior with a fake ID, the impact is likely to be small. There is no current research on the popularity of fake IDs among the Minnesota pensioner population, but it is probably reasonable to assume it’s relatively rare.¹¹

For the second fraud, the merchant-skimmer, a simple recordkeeping requirement would likely suffice to make the fraud unprofitable. Merchants can be asked to record an identifying number such as a driver’s license number or state identification number, for example. And as part of the information campaign, merchants can be warned that audits will be undertaken when there are suspicious numbers of seniors patronizing unlikely establishments. An outdoor laser-tag arena that pulls two-thirds of its customers from the 65-and-over population will raise red flags. The stick to the carrot of increased business would be a penalty provision that would kick the business out of the discount program for failure to hold to the standards of the program. A published list of offending businesses would get the attention of prospective fraudster-businesses, as it would brand said business as elderly-unfriendly.

Caveats and Conclusions

One obvious caveat that likely blunts the benefits of a senior sales tax relief project is that seniors often bear the brunt of an economic downturn because they are disproportionately represented among the poor. In other words, it is likely that the older wealthy won’t be economically harmed by the pandemic at the same rate as the older poor. Thus, if administrative costs and rollout time were no object, relief would be hewed more closely to the economic capacity to bear: essentially a progressive sales tax. The inability to ascertain income at the checkout counter, however, makes that approach infeasible.

Thus, a sales tax relief program for older Minnesotans is in many ways a blunt tool for achieving rough justice. The program’s history in South Carolina, however, should provide some basis for reliance on its workability and relative immunity to rampant abuse. Older Minnesotans are under increased economic strain now, and if history is any guide, they will suffer the most permanent financial effects from the economic fallout of the pandemic. Providing aid now will help offset those effects.