Tag Archives: corporate income taxes

Dayton’s $37.9B budget proposal summarized

This morning, Governor Mark Dayton released his long-awaited 2014-15 budget proposal.  And, true to his word, there’s a lot to chew on here.  Dayton’s proposal contains fundamental tax reform and some new spending initiatives that are sure to raise some eyebrows.  In this post, we’ll summarize the proposal.  In the coming days, we’ll get into more detail on the merits and problems with specific elements of the plan.

The November economic forecast from Minnesota Management and Budget projected $35.8 billion in revenue and $36.9 billion in expenses under current law for the 2014-15 biennium.  Dayton’s proposal wipes out that $1.1 billion deficit by increasing revenue by a new $2.1 billion and increasing spending by a smaller amount: $1 billion.  Total spending for the biennium totals $37.9 billion, much lower than what some GOP sources were floating prior to the proposal being announced.

Revenue:  Net increase $2.1 billion

Dayton has put together a comprehensive tax reform plan in his proposal, with a lot of moving pieces.  Let’s break it down by the type of tax.

Individual income taxes:  Dayton would add a new top bracket to Minnesota’s individual income tax code, a marginal rate of 9.85% on taxable income over $250,000 (couples) or $150,000 (individuals).  This proposal would raise $1.1 billion in 2014-15.  Dayton also proposes a new property tax rebate, which would give back up to $500 on each property.  This proposal would cost $1.4 billion for the biennium.  Net impact: -$300 million.

Sales taxes:  This is the largest component of the tax reform plan.  Dayton’s proposal would remove many of the exceptions from the state’s sales tax code.  Consumer and business services (except for a very limited set) would now be taxed.  This includes legal services, accounting services, haircuts, auto repair, etc.  Most goods would also now be taxed.  Remaining goods exceptions would be food, prescription drugs, and clothing (items that cost under $100).  In return for broadening the base of the sales tax, the rate would be reduced from 6.875 percent to 5.5 percent.  Dayton Administration estimates show that this change would work out to be essentially neutral for most families.  Opponents of the provision have already called out that the sales tax charged on business services will be baked into consumer prices, leading to a net increase in what consumers pay.  Also included is a 0.25% sales tax increase for the seven-county metro area designed to fund transit projects.  Net impact: $2.1 billion.

Corporate income taxes:  Dayton proposes cutting the corporate income tax rate from 9.8% to 8.4%.  Such a change would drop Minnesota to the 12th highest corporate income tax rate.  To pay for the rate change, Dayton’s proposal would eliminate tax breaks for foreign operating companies and foreign royalty payments, making the reform essentially revenue neutral.  Net impact: $5 million.

Cigarette taxes:  Cigarette taxes would be raised by 94 cents per pack under the Dayton proposal, reaching $2.54 per pack.  Net impact: $370 million.

Spending:  Net increase $1 billion.

Most of Governor Dayton’s proposed new spending goes to education.  Let’s see how it breaks down:

E-12 Education:  The two largest components here are a significant increase to special education funding ($125 million) and a 2% increase in the basic education formula ($118 million, or $52 per student).  Additionally, Dayton proposes additional funding for all-day kindergarten ($40 million).  Finally, early education programs get a major boost ($93 million in total, with the largest single element being $44 million in Early Learning Scholarships which fund pre-school for low income families).  Dayton does not propose paying off any of the remaining K-12 shift in the next biennium, waiting to pay it off until the 2016-17 budget. Net impact:  $344 million.

Higher Education:  Dayton proposes an $80 million expansion of the State Grants program, which will allow 5,000 additional students to enter the program, and increase the payout to 90,000 students already on it. Additionally, Dayton proposes $80 million in expanded funding for MnSCU to expand internship and apprentice programs, improve facilities and equipment, and retain faculty (assuming required administrative cuts are made).  Dayton also was going to propose an additional $80 million in funding for the University of Minnesota, but is withholding support for that increase pending the Legislature’s requested review of administrative costs.  Net impact:  $170 million ($250 million if the U of M makes it back in).

Health and Human Services:  Programs receiving increased funding in this part of the budget include child permanency and mental health programs ($44 million), the Statewide Health Improvement Plan ($40 million), and funding for the health care exchange ($29 million).  Net impact:  $128 million.

Local Aids and Credits:  Dayton’s proposal would increase aid to cities and counties by $120 million.

Where are the spending cuts, you may ask?  Dayton points to last session’s budget, where $4 billion in spending reductions were achieved ($2 billion in cuts, $1 billion in additional reductions since the budget was passed, and $1 billion in inflation not added to department budgets).  In his 2014-15 proposal, Dayton cites an additional $225 million in reductions, much of which comes in the Health and Human Services budget, such as $74 million in savings from restructuring in the long term services program and $65 million in negotiated savings with service providers and drug companies.  Additionally, inflation totaling $890 million was not included in the budget for the various departments.

Additional details on the proposal can be found at the Minnesota Management and Budget website.

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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.

Building a better business climate in Minnesota

The new legislative session has started, and even though we’ve got a $6.2 billion deficit to address, there are already calls for tax cuts for business.  It’s seemingly taken as a matter of widespread agreement that Minnesota has an “unfriendly” environment for business.  But is that really the case?  Crunching the numbers indicates that the conventional wisdom on this issue may not in fact be correct.

A recent study by the Council on State Taxation (a collection of 600 large corporations) and the accounting firm Ernst & Young compared states by calculating the ratio of actual tax dollars paid by businesses to states, counties, and cities versus the GSP (Gross State Product) of private sector companies.

This is a different measure used than in most analyses, which merely rank states based on their corporate income tax rate.  Minnesota has a fairly high base corporate income tax rate, and as such doesn’t fare well in these rankings.  As we all know from our personal income taxes, though, the actual tax that we end up paying doesn’t match what bracket we are in because of the various exemptions, deductions, and credits that are in our tax law.  Well, the same things apply to business taxes as well.

When you look at the actual amount of business taxes paid as a ratio the economic activity in the state, Minnesota fares significantly better.  In fact, Minnesota’s ratio of 4.3%, is tied for 16th in the nation, ahead of such purported tax havens as Arizona (4.8%, tied for 26th) or Florida (5.3%, 37th).  Minnesota even fares better than Nevada, South Dakota, and Texas (all at 4.9%, tied for 28th).

Yes, you heard that right.  Minnesota businesses pay less in taxes as a percentage of total economic activity than businesses in Nevada, South Dakota, and Texas.  What’s the Sioux Falls radio guy going to say now?

So the answer to getting Minnesota’s economy back on track isn’t cutting business taxes.  We know that.  All we have to do is look at the experience of the last decade.  Since 2000, we have had five rounds of federal tax cuts and created about 2 million private sector jobs nationwide over that time.  In the 1990s, we increased taxes and created 20 million private sector jobs.  The answer to encouraging economic growth is much larger and diverse than merely cutting taxes.

So what are those answers?  Well, we know what they are.  They are time-tested and proven.  Even with our deficit, we need to protect and promote the societal infrastructure that has given Minnesota such strong economic performance over the last three decades and which has begun to decay over that time.

It’s physical infrastructure (roads and bridges, the electrical grid), it’s education (from early childhood through our colleges and universities) and it’s health care (protecting children and the poor).  As Jeff Rosenberg at mnpublius.com points out, for the cost of the corporate tax cuts, we could make investments that would almost certainly do more to add jobs and create long-term prosperity.


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