Published on Wednesday, 30 November -0001 00:00
The Governor's business tax reduction commission--can we dispense with the "21st Century Tax Reform" bit and call a spade a spade?--released its report on Friday, Feb. 13 with the lead recommendation of repealing the state corporate franchise (income) tax. Another recommendation would exempt from taxation 20 percent of "pass-through" business income to individuals. Given the Republican and business tilt of the group, the panel's report is not surprising--but predictable is not the same as wrong. You won't hear complaints from this quarter about its assessment of Minnesota's economy, the need for investment in education and academic research and the importance of business in creating wealth and well-being in the region. And you won't even get much argument with ending the corporate franchise tax, either. If you have to cut a tax, it's not a bad one to choose. It's regressive, volatile and has a negative--though over-dramatized, in our view--effect on some business decisions. But as we must learn over and over, not everything that's good for business is unfailingly good for the public. In good times, the corporate franchise tax contributes a lot of revenue to the state. The recommended cuts would cost the state about $1 billion a year. The glossed, the obscured and the skirted The commission was originally charged to cover the costs of reform in its proposal, but the final report avoids a specific tally of how proposed taxes would counter the cuts--settling for recommendations to expand the sales tax base and increase the tax on cigarettes by up to $1 a pack. The commission says Minnesota's high corporate income tax rate puts the state at a disadvantage. It seems to acknowledge that our poor business tax climate is more perception than reality, but believes we must address it. (Why the financial types who drive business decisions can't see the difference between a statutory tax rate and actual total tax burden is a subject for another day.) In support of the competition argument, since 2002, the report says, six states have reduced corporate tax rates or replaced the corporate income tax. We looked up the most recent growth rates for those states and threw in other states with no corporate income tax, plus our business-friendly neighbor, South Dakota. The growth picture for those states is definitely mixed. To its credit, the commission did not try to oversell the stimulative benefits of its corporate tax cut and other reforms. We believe they are likely to help business. The open question is how much. And the unanswered question is how even revenue-neutral reforms will help address the state's revenue shortfall. Another point, with which we agree, is Chairman Mike Vekich's "Businesses don't pay taxes. You and I do. Where we tax businesses, we are taxing our own wealth." But on the other hand, the commission seems reluctant to tax that wealth. According to a Star Tribune article on the report, where income flows from businesses to people, the Commission also wants to see a cut. It amounts to a backdoor personal income tax cut for higher earners. "Small businesses would get a special boost--one-fifth of owners' profits would be exempt from taxation," states the article which quotes House Taxes Committee Chairwoman Ann Lenczewski, DFL-Bloomington, as being "stunned" by that recommendation. "What it means is a managing partner at a small law firm will pay a smaller top rate on income than the associate partner who makes less," Lenczewski said. "The boss gets a big tax break because he owns the business, but the secretary doesn't. I agree with some of the commission's recommendations, but this one just confounds me." And this is really the most disappointing aspect of the report. The commission skirted the issue of fairness to individuals, only acknowledging that replacing a regressive business tax with regressive sales taxes probably wouldn't make the system more regressive. Fair seems to mean fair for business. Indeed, the word "fairness" appears only three times in the report's 34 pages, always in a list of general principles. The commission's second principle for reform is: Tied to benefits received.There should be a strong, direct relationship between the nature and level of business taxation in the state and the cost of benefits and services provided to businesses by state and local governments. This so-called benefits principle is a particular favorite of conservative theorists, but the devil is in the details. It wasn't the commission's charter to think about business tax reform's impact on a single, unemployed mother with a child in public school, but the legislature will. In all, the commission's report adds another useful, philosophical perspective to the budget discussions. Progressives--and the governor--should open their minds to what it has to say. Charlie Quimby is a communications fellow with Growth & Justice. A non-partisan advocate for fair taxation and smart public investment, Growth & Justice believes a sustainable economy provides the foundation for a just society.