As they review lawmakers’ performance at the Minnesota Legislature, business advocates have new worries about the impact of higher taxes on the state’s competitiveness and job growth. They’re worthy worries: Weakening the business climate weakens the jobs climate.
“Every Minnesotan will pay more — in the form of higher taxes, higher prices or higher fees,” says the Minnesota Business Partnership, which includes the CEOs of the state’s largest companies.
There’s added concern that higher income taxes and new business-to-business taxes will make Minnesota less attractive, and ultimately undermine the jobs, jobs, jobs goals that most politicians ran on in recent elections. “It was a great session for South Dakota,” the organization’s executive director, Charlie Weaver, told us. Results offer “very little that’s encouraging to the business community.”
The session leaves Minnesota with one of the highest income-tax rates in the nation, the Minnesota Chamber of Commerce says in its assessment of the 2013 Legislature’s legacy. The top tier is now 9.85 percent, a 25 percent increase from the existing 7.85 percent. It will hit, among others, 20,000 small businesses whose owners run their income through personal income-tax returns, according to the Chamber.
“They’re mom-and-pop operations that will see a significant tax increase and be forced to pass that on to their customers,” Weaver explains.
New sales taxes on business services were dropped from earlier proposals after strong objections from business interests; they resurfaced late in the session. Taxes on telecommunications equipment, and repair and maintenance services for electronic and precision equipment, will be effective on July 1. The sales tax will be extended to warehousing and storage services next April. Senate Majority Leader Tom Bakk has indicated that there will be time next session to address unintended consequences, including impact on the state’s farmers. An aside: If a tax increase is bad for farmers, isn’t it also bad for everybody else?
Business advocates tried to make the case for competitiveness — “that these are costs notimposed by other states,” said Beth Kadoun, the Minnesota Chamber’s director of tax and fiscal policy.
Lawmakers don’t really understand these industries and sectors, Kadoun told us. The state’s April unemployment report, which showed the loss of 11,400 jobs, highlighted several areas of weakness, among them trucking and warehousing.
A jobs bill that targets warehousing and storage among categories to encourage in the state points to the inconsistencies in policies, Kadoun said. “You can’t be taxing something and at the same time encouraging that industry to come here.”
Jobs also are an issue where the equipment-repair tax is concerned: Weaver asks, “What happens if you’re a medium-size company? You’ll bring the work in house, rather than pay almost 7 percent in tax. A lot of companies that provide these services will go out of business.”
Elimination of a foreign-royalty deduction also is among the Business Partnership’s concerns. The policy, fostered by the late Gov. Rudy Perpich, encourages businesses to bring royalties back to Minnesota, Weaver said. The change will have an “extremely negative impact” on the state’s innovative companies.
In a conference call with Dayton-administration leaders, Revenue Commissioner Myron Frans said that objectives included helping “level the playing field from a tax perspective,” eliminating some deductions so all corporations paid “their fair share.”
Positives for business include an upfront sales tax exemption for capital equipment purchases that long has been sought, Frans said. Other legislation that puts money “right into the pockets” of business interests includes an unemployment tax reduction and property tax relief for businesses.
Two east metro Democrats voted against the tax bills: Sen. Susan Kent of Woodbury, whose concerns included the income tax increase, and Rep. Laurie Halverson of Eagan, who said the business-to-business taxes were “absolutely a factor” in her decision.
The governor’s decision to drop the business-to-business proposal — a concern among business in her district — “felt like the right thing to do,” she told us. It seemed that the business community “had been heard” — temporarily.
It remains to be seen if Minnesotans in border communities, including the east metro, will leave the state to buy cigarettes, once taxes increase by $1.60 a pack.
Business, too, might cross the border for more favorable taxes.
They are “making decisions right now,” Sen. Julianne Ortman of Chanhassen, the Taxes Committee’s ranking Republican, told us. “They’re assessing the impact” of lawmakers’ work.
This editorial originally appeared in the May 22, 2013 edition of the St. Paul Pioneer Press.