Citing rare opportunity, Minnesota group hopes 2018 brings change to tax structure
Minnesota Chamber of Commerce leaders say a "once-in-a-generation opportunity" has come and which could allow the Legislature to adjust Minnesota's tax structure, which is among the highest in the nation in both the corporate and individual sectors.
With the Republican-backed tax reform passed last year by Congress, Americans will have more spending money via federal tax relief. But that also means more money that can be taxed by states, said Jim Pumarlo, communications director for the Minnesota Chamber of Commerce. Meanwhile, Minnesota also has a projected budget surplus of $329 million.
The Minnesota chamber wants the state Legislature to react by lowering tax rates and thereby—in the chamber's opinion—giving breaks to individuals and businesses. The chamber believes doing so would result in two positive outcomes: First, that the extra money will circulate and grow business in the state; and second, that it will give Minnesota a better competitive edge to retain and attract businesses.
Not since the mid-1980s has there been such a situation, Pumarlo said.
"The reason it's more important this year is that, under the federal tax bill, there is relief for many Americans but it exposes that income to more state income taxes," he told the Herald's editorial board.
Minnesota ranks No. 3 nationally in corporate income tax, at 9.8 percent, just behind Iowa (12 percent) and Pennsylvania (9.99). Minnesota's top individual rate is 9.85 percent, ranking No. 4 behind California (13.3 percent), Hawaii (11 percent) and Oregon (9.9 percent).
Pumarlo said the Minnesota Chamber of Commerce suggests cuts of 1 percent on the state corporate tax, which would then put Minnesota at No. 8. It would affect state revenue by about $110 million annually, but Pumarlo said that when compared to an annual state biennial budget of $46 billion, "the impact is miniscule."
The group also suggests cuts to the individual tax rate in increments of three-tenths to one half of 1 percent.
Below are Pumarlo's answers to various questions from the Herald.
Q: Why the big push for tax relief this year?
Pumarlo: Our point is that you have that additional money coming in from federal tax reform, plus you have the state general fund that is $329 million projected surplus. ... Our goal is get Minnesota out of the Top 5 tax rates.
Q: Where should the state realistically be ranked for tax rates?
Pumarlo: We're not suggesting we can drop from third to 25th. We don't want to be there. We have quality of life we want to support. But we also want to incrementally move ourselves out of the top.
Q: What is the status?
Pumarlo: That tax debate will really start up now because (Gov. Mark Dayton) did a supplemental budget two weeks ago. Actually, we were pretty disappointed by that budget; Minnesota already has passed a budget for these two years, a budget that goes through June 30 of 2019. Our budget spending is going up 11.4 percent.
The governor, in his supplemental budget, not only recommended an overall tax increase, but also specific to business, he wants to unwind some pretty important business tax measures that he negotiated and signed last year. The one big one is the statewide business property tax; we pushed hard to remove the inflator, and we got that inflator removed. But the governor wants to put that inflator back on.
We're a bit chagrined; not only does he want to increase taxes with five straight years with a budget surplus, but he also wants to remove some of the tax relief measures from last year.
One thing that is misunderstood by a lot of people is that 92 percent of Minnesota companies are pass-through companies, meaning they pass their business income through their personal income tax returns. So that's a whole lot of stores on Main Street in East Grand Forks and across the state. The personal income tax is the business tax as well.
The other thing on the personal income tax is workforce shortages. As you look at your top skilled positions, we have the most progressive tax rate—meaning as income rises, tax rate rises. It makes it more difficult to attract and retain talent.
Q: More difficult than in other states?
Pumarlo: We operate in a global economy, but we also operate in competition with our neighbors. North Dakota comes in No. 40 at 2.9 on personal income tax rate, their top rate. And Minnesota's lowest rate is 5.35. With corporate income tax rates, North Dakota is 43rd at 4.31.
The other point on personal income tax, and any tax, is that every dollar that a business pays in taxes is one less dollar to put into investing in other operations, people, equipment and facilities.
Business taxes are regressive. Anybody who oversees a business knows that you just can't accept costs every single year. You have to absorb them and spread them out. So maybe that means less money available for employee wages and benefits, or increasing costs for goods and services you sell. Or if you are a corporation, it might be lower returns for shareholders.
Q: If you were a lobbyist and I a lawmaker at the Legislature, what would you tell me?
Pumarlo: That this is a once-in-a-generation opportunity to right-size Minnesota's tax system for the economic benefit of employers and employees alike.
Q: And what would you want me to do about it?
Pumarlo: Use this year, with this reform, to start Minnesota on a path of reducing rates. Right now, it's very common to do tax policy in increments. Again, we are not suggesting going from third to 25th (on the national list). We never will be at 25th. But start on a path. Use this federal reform to start on a path to reform. Now is the opportunity. We're always pushing to reduce Minnesota's cost of business, but with the federal tax reform, it presents a huge opportunity to right-size our tax system. It's a stronger bullet point this year because of federal tax reform.
Q: You don't mean the government would have the extra revenue and then invest in the private sector. You mean that the private sector would keep it in the first place, right?
Pumarlo: Yes. Instead of increasing the government sector, return it to individuals and businesses and grow the economy.
Q: Do you have legislators ready to help?
Pumarlo: We obviously have talked to a whole host of folks. It will be introduced.
Q: Will it be a partisan issue?
Pumarlo: We have had Democratic support on issues. In 1987, it was a Democratic majority that passed it, taking advantage of the 1986 opportunity that came at the federal level. We're working with both sides.