Last year, Minnesota passed a large package of taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. increases on high-income individuals, tobacco products, and business inputs. These tax hikes amounted to a projected $2.1 billion in new expected revenues. Some of those new taxes, especially taxes on business inputs like warehousing and equipment, proved uniquely burdensome for the business community, and led to rapid calls for repeal.
Governor Mark Dayton (DFL) unveiled a supplemental budget proposal yesterday including the repeal of those business-to-business taxes, and other tax reforms. The Governor’s tax plan would result in $616 million in tax cuts, and much of that would come through truly valuable tax reforms. It mostly focuses on fixing components of last year’s tax reform that were added in at the last minute, such as taxes on business inputs, and a gift taxA gift tax is a tax on the transfer of property by a living individual, without payment or a valuable exchange in return. The donor, not the recipient of the gift, is typically liable for the tax. . The plan identifies a projected surplus of $1.2 billion, and also increases spending by $162 million (and puts $455 million in the budget reserve).
These windfalls are thanks to Minnesota’s relatively strong economy, due in no small part to its role in supplying sand for hydraulic fracking in North Dakota. According to Bureau of Labor Statistics figures, since Minnesota’s low-point for employment in September 2009, mining and logging employment has grown 73 percent (the next highest growth is in education, with 19 percent growth, and then professional and business services at13 percent). Mining’s share of Minnesota’s employment has risen 61 percent. With so much money coming into the state, Governor Dayton would be hard-pressed not to give some kind of tax relief after last year’s tax hike. Especially given the Chamber of Commerce’ consistent campaign to get relief from damaging B2B taxes, some kind of tax relief was inevitable. Indeed, with a $1.2 billion surplus, just $616 million in tax relief is a bit underwhelming.
However, the Governor’s plan does have some important structural changes. It includes a provision to eliminate the “marriage penaltyA marriage penalty is when a household’s overall tax bill increases due to a couple marrying and filing taxes jointly. A marriage penalty typically occurs when two individuals with similar incomes marry; this is true for both high- and low-income couples. ;” eliminate sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. es on equipment repair, telecommunications equipment, and warehousing; eliminate the gift tax; reduce the estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. ; and also expand several tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s for families and businesses.
The marriage penalty occurs when tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. s do not double for married joint filers relative to single filers. This means that when two working people get married, they face significantly higher taxes. This is unfair to married people, and can lead to distortions in how people treat their family status for tax purposes. It’s not clear precisely what Governor Dayton means by eliminating the marriage penalty: it should involve restructuring tax brackets. While credits and deductions could be offered to approximate this, such a method would merely increase the complexity of the tax code, creating an inefficient solution to what is ultimately a simple problem to fix.
A major component of the plan is elimination of new taxes on business-to-business transactions. Taxes on business inputs create tax pyramidingTax pyramiding occurs when the same final good or service is taxed multiple times along the production process. This yields vastly different effective tax rates depending on the length of the supply chain and disproportionately harms low-margin firms. Gross receipts taxes are a prime example of tax pyramiding in action. and violate the neutrality principle, as they can distort the structure of businesses by encouraging economically inefficient vertical integration.
Finally, the estate tax is a damaging tax that disproportionately falls, not on the truly wealthy (who can often shift wealth through creative tax planning in order to avoid taxes), but on family businesses and farms (who are not as mobile). Fewer and fewer states levy estate and inheritance taxAn inheritance tax is levied upon an individual’s estate at death or upon the assets transferred from the decedent’s estate to their heirs. Unlike estate taxes, inheritance tax exemptions apply to the size of the gift rather than the size of the estate. es each year, and Indiana repealed its inheritance tax last year. Minnesota’s estate tax cut would follow the national trend of reducing this inefficient tax. As a corollary, the gift tax, slated for elimination, is also a dying tax, with only Connecticut levying it if Minnesota repeals.
The plan also includes unnecessary carve-outs and tax credits, but, overall, serves to make valuable, if incremental, adjustments in Minnesota’s tax code. These changes won’t fully undo the negative impact on the state’s business tax climate caused by last year’s sizable tax increases, but they do serve to mitigate some of the worst effects, and improve the overall structure of the tax code.
Read the full State Business Tax Climate Index here.
For more on Minnesota, see here.
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