Minnesota Governor Proposes to Eliminate Business-to-Business Taxes, Gift Tax, Marriage Penalty

March 12, 2014

Last year, Minnesota passed a large package of tax 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 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 penalty;” eliminate sales taxes on equipment repair, telecommunications equipment, and warehousing; eliminate the gift tax; reduce the estate tax; and also expand several tax credits for families and businesses.

The marriage penalty occurs when tax brackets 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 pyramiding 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 taxes 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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