Minnesota’s business leaders haven’t minced words about Gov. Mark Dayton’s proposal to tax legal services, advertising, accounting and other such basic functions. The impact: devastating, and a job-killer, they say.
There’s good reason for concern. Businesses would bear most if not all of the cost of the increase in the state’s tax revenue, says Jill Larson, fiscal policy director of the Minnesota Business Partnership, which includes the CEOs of Minnesota’s largest companies.
Dayton’s proposed budget would raise revenue by expanding the state’s sales tax to more goods and services, while reducing the tax rate from 6.875 percent to 5.5 percent. The result is a net tax increase of $2.1 billion “coming at the expense of business-to-business services,” Larson told us.
It’s important to note that the $2.1 billion figure doesn’t cover a full biennium. The total effect of the new rates wouldn’t be felt until 2016-2017, when the net — and the toll on the state’s businesses — would reach $3.5 billion.
The increase is said to be a wash for consumers, but that, too, is debatable. They’ll pay more as consumers, with higher prices, and as employees, with lower wages, Larson said.
What’s more, slamming businesses with a 5.5 percent tax all at once is remarkably punitive. There’s been no mention of an opportunity to phase in such a new tax over time. The immediate, stunning impact of the proposed increase — especially for the many businesses that don’t have margins much higher than 5 percent — can’t help but put the state’s economy and its fragile job-creation momentum in jeopardy.
If only Minnesota lawmakers felt just a bit of the angst federal officials expressed about the fiscal cliff and its potential to cripple the economy.
Business-services taxes are an area where few other states have ventured, and those that have “have a much smaller multi-national business presence,” Larson said.
Only three — South Dakota, Hawaii and New Mexico — tax legal services. No other states tax advertising and public relations services.
The Pioneer Press’ John Welbes recapped a lesson from Florida, which in 1987 approved a tax on advertising and some other professional services. It didn’t last. About six months after passage, lawmakers repealed it, in part because opponents argued that the tax discouraged advertising, which depressed retail sales, which led to reduced revenue from the general sales tax. Job losses were also part of the debate.
There also is concern about how a sales tax on business services would be implemented, especially among Business Partnership members who do business across the nation and around the world.
Issues include how a “use tax” on services purchased outside Minnesota would apply to organizations headquartered here, and how some costs might be apportioned to other locations where companies do business.
Much remains unclear, Larson said, especially in terms of rulemaking to implement such a new tax, sourcing rules about purchases across state lines and how policies will be enforced.
The proposal “appears to single out companies headquartered in Minnesota for punishment,” Larson said, noting that a competitor based in Michigan would have no such business costs. That could create “a real disincentive to be headquartered in Minnesota and put jobs in Minnesota.”
Lawmakers also should be scrutinizing the list of those to be exempt from new taxes, a practice that amounts to government picking winners and losers. Farmers — who already benefit from national farm bill subsidies and ethanol subsidies — get a pass. Should they?
Larson says a larger concern for all Minnesotans is the “pyramiding or cascading” that happens when taxes are paid several times in the process of bringing a product or service to market — “to the point where economists say the effective tax rate is much higher than the statutory rate.”
It’s “truly a hidden tax on people, it’s not transparent, and its an extremely regressive tax,” Larson said.
Economist John Spry explained on these pages what happens when a sales tax applies at several levels of a supply chain: A 5.5 percent sales tax on auto repair that pyramids would result in an 11 percent effective sales tax rate, but the consumer would see only a 5.5 percent sales tax rate on the receipt. The other part of the sales tax is hidden as higher consumer prices.
Business across the state, including this one, are studying the impact of the governor’s proposals on our bottom line. All of us want to remain competitive. So must Minnesota.
This editorial originally appeared in the February 3rd edition of the St. Paul Pioneer Press.