Setting the Record Straight on Business Taxes

A common Minnesota GOP talking point is that Minnesota has an unfriendly tax environment for business.  It’s taken as an article of faith by Republicans, and many in the media and the general public just accept it as fact at this point.  Carver County Republicans, in particular, really love this talking point.  One just posted something on this very point the other day, and our representatives in the state legislature have all backed bills designed to help with this problem.

The reality, though, is quite different from the rhetoric.  In fact, significantly different.  The data shows that Minnesota — in most respects — has a tax climate that is better than the national average.

Let’s talk about some specific points as it relates to this.

Minnesota businesses pay less in state and local taxes than the national average

Republicans are correct that Minnesota does have a high base corporate tax rate — at 9.8%, it is the third-highest corporate income tax rate in the nation.  But it’s just one element in the overall state and local tax picture for Minnesota businesses.  Keep in mind that businesses here and in other states pay a wide variety of taxes: state and local property taxes, sales taxes, excise taxes, unemployment insurance, licensing fees, and for some types of businesses the income goes to the owner’s individual income tax return.

If you look at the picture in its totality — despite the high corporate income tax rate —  Minnesota business still pay less (as a percentage of gross state product (GSP), or the sum of private sector economic activity) in state and local taxes than the national average.

A study by the Council on State Taxation (a consortium of 600 major corporations) and the accounting firm Ernst & Young found that Minnesota businesses pay 4.3% of GSP in state and local taxes.  That’s less than the national average of 4.7%.

It’s also less than South Dakota — the place Minnesota Republicans and the Sioux Falls radio guy love to cite as a tax haven — which comes in at 4.9%.  It’s less than North Dakota (8.2%).  It’s less than Wisconsin (4.6%), and it’s less than Iowa (4.6%).  It’s less than Florida (5.3%), Texas (4.9%), and Nevada (4.9%).  The closest states where businesses pay a lower percentage of GSP in state and local taxes are Missouri at 4.0% and Indiana at 4.1%.

Business taxes in Minnesota are growing more slowly than taxes on individuals

The same study also looked at the five-year trend is business taxation by state (not adjusted for inflation).  In 2009, Minnesota businesses paid $900 million more in state and local taxes than they did in 2005, a 10% increase.  Again, this figure was lower than the national average, which saw a 15.5% increase in business taxes over that time. 

The 10% growth rate was also lower than that for individuals in Minnesota, who saw a 12% growth in their state and local taxes paid over that time.  So, the tax situation for Minnesota businesses isn’t getting worse compared to national average, nor are Minnesota businesses taking a larger hit than individuals in the state over recent years.

Republican plans to lower business property taxes will actually have the opposite effect

Legislative Republicans have touted their plans to cut state property taxes for businesses as part of their budget bills.  However, research by the state Department of Revenue shows that the other provisions in the bill — specifically the cuts to local government aid included in the bill — will result in Minnesota businesses paying $63 million per year more in property taxes.

A better path forward

A  factor that does make the tax situation in Minnesota problematic is that we’ve built a corporate tax code littered with the deductions and credits.  While this does lower the tax burden on business, it does increase costs of compliance and can — in some circumstances — cause a situation where government is favoring some businesses over another.  Instead of blanket cuts to corporate income or property tax rates, as Republicans have proposed, we should take a smarter look at business taxes.

We should look at removing the specialized credits and deductions instead.  This would allow the state to lower the rate across the board while maintaining the same level of revenue that state takes in today.  This would be a fairer — and more fiscally responsible — approach, given our current budget crisis.

Advertisements

4 Responses to “Setting the Record Straight on Business Taxes”

  1. Well written summation and analysis of the EY report. I do think, however, it is worth mentioning some additional items from the report to provide proper context to the numbers.

    First, there is a graph on page 8 of the report that normalizes business taxes to directly received benefits. This is based on the assumption about business taxes quoted from the report below:

    “What, then, is the rationale for taxing businesses? The basic rationale for business taxes, recognizing that the
    economic burden of business taxes are ultimately borne by consumers or owners of factors of production (including workers),
    is to pay for government services that directly benefit businesses. This section provides a comparison of business taxes to these benefits in each state. If state and local business taxes were equal to the value of the benefits business received from state and local public services, they could be considered a payment for services and taxes would not influence business location decisions or impact competitiveness.”

    Whether or not you agree with the EY assumption (which I do), the chart on page 8 provides valuable context to the overall discussion and should be presented.

    Second, presenting the net business taxes normalized to GSP is accurate, but it also confounds direct versus indirect taxes. I recommend presenting three charts. One composed of the net taxes, and separate charts for both direct and indirect taxes. Why is this important? To isolate how a change in indirect taxes (e.g. business property) changes the overall tax picture.

    Here is the point from the executive summary in the EY report that speaks to direct v. indirect:

    “Due to the decline in income taxes, indirect taxes (taxes not based on income) represent a larger share of the total state and local tax burden than in recent years.” pg. 3

    Finally, I do disagree with one particular statement you make in your analysis. The statement is as follows:

    “Republican plans to lower business property taxes will actually have the opposite effect”

    There is no analysis to my knowledge correlating lowered business property taxes with increased personal taxes. Rather, (and per your explanation of that heading), it is the decrease in LGA which has correlated with higher personal property taxes. I absolutely agree with this second statement. One could argue that since both measures are in the same bill, the “plan” is the same, but I don’t buy that as valid. These are clearly two distinct measures in the given bill and cannot be substituted one for the other.

    Keep up the good work.

    • Let me just respond to the last part. I think you have to take the GOP budget proposals in their totality. It’s not accurate for them to claim that their state business property tax cut is a boon, because they’ve simultaneously passed other provisions that will result in net increased taxes for businesses in this state.

  2. I absolutely agree the GOP has no right to make a statement that the cut is a boon, given the other provisions present in the bill. That same logic, however, must then be applied to the contrasting statement that the cut is only a detriment.

    I guess my point was that I felt your original line painted with a bit too broad of a brush. Rather than trying to causally tie the two sections of the legislation together, I would present them both, with the argument that the perceived bad (LGA cuts) far outweighs the perceived good (lower business property taxes).

Trackbacks/Pingbacks

  1. Setting the record straight on business taxes again | Brick City Blog - January 29, 2013

    […] take a deep breath here and look at some numbers.  A couple of years back, I looked at a study by the Council on State Taxation ( a consortium of 600 businesses) regarding state and local….  What we found in that Minnesota had lower taxes as a percentage of economic activity than the […]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: