ST. PAUL -- Gov. Mark Dayton portrays his budget as transparent, free of gimmicks and protecting middle-class Minnesotans. But a closer look shows his plan to be lacking on all counts.
The shortcomings are most glaring in the sales tax on business-to-business transactions. The proposal is part of a budget that includes huge increases in taxes and spending with little reform in either.
Make no mistake about the importance of higher taxes to the governor's budget. All Minnesotans will feel the impact.
Minnesota faces a projected $1.1 billion deficit for the two-year cycle beginning in July. Dayton's plan seeks to eliminate the deficit, spend $1 billion more and transfer $1.4 billion in property tax rebates to homeowners.
The additional spending would come primarily from two taxes: $2.1 billion by expanding the sales tax on business-to-business services, plus another $1.1 billion by raising income taxes on the wealthiest Minnesotans.
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The proposed fourth tier in the personal income tax especially hits successful small companies that run their business income through personal taxes. Today, Minnesota's top rate of 7.85 percent is the eighth highest in the nation. The governor's recommended rate of 9.85 percent would push us to fourth.
While some folks don't like to hear it, successful businesses and people make business decisions based on tax rates.
The business-to-business tax impacts are extremely harmful, affecting all sizes and types of Minnesota companies from Main Street stores to multinational corporations. Ultimately, it's also a hidden and regressive tax on consumers.
Think about it: A hardware store that contracts with a third party to manage its payroll and buys ads in the local paper will pay a new tax on both transactions.
A manufacturer that creates a new product contracts with engineers to develop the assembly line, hires outside legal counsel to help secure a patent and secures an ad agency to begin a marketing campaign. Three new taxes there.
A salon relocates and hires an architect to remodel the space. Like the hardware store, it advertises the opening in the local paper and on local radio. And, it finds it has at least three new taxes to pay.
From accounting to engineering, technical consulting to employment, small and large businesses contract for a range of services as part of their everyday operations. All of these would be subject to the new sales tax that becomes another overhead expense.
Businesses cannot simply absorb the added cost, so what do they do? You guessed it. The additional sales tax is built into the final price of a product or service.
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But there is a ripple effect, as there's a limit to how much companies can raise prices and still remain competitive. As a result, the consequences escalate. In the short term, a company may have to cut costs; that may mean reducing payroll costs and benefits and could well include laying off employees.
In the long term, the company will look at restructuring operations to avoid the new tax or, in the worst-case scenario, sell or leave Minnesota.
All the results are bad for Minnesota jobs.
There are two other near certainties if the sales tax is expanded. First, many businesses will need outside counsel to interpret the tax code; second, they'll need accountants to sift through the bookkeeping nightmare.
The governor has them there, too. Most companies will have to contract for this help, which will be subject to the new sales tax.
The governor is recommending the sales tax be reduced from 6.5 percent to 5.5 percent as part of his package, but that doesn't take away the impact of this new tax. On the surface, consumers will pay the sales tax on the final sale of a product or service; but after all of the new taxes are paid along the way, those prices will be higher due to the pyramid effect of this hidden tax.
Business-to-business taxes are regressive, hurt everyday consumers and are bound to take a toll on Minnesota jobs.
Olson is president of the Minnesota Chamber of Commerce.
