Tax cut championed as way to improve state’s business climate

Rep. Sarah Anderson (R-Plymouth) hopes Gov. Mark Dayton will reverse course on some provisions of the fourth-tier tax rate enacted by the DFL-controlled Legislature in 2013.

The side effects of the law, she says, negatively impact small businesses by taxing what’s known as pass-through income.

Rep. Sarah Anderson

She sponsors HF63 “to help small businesses to start up, to grow and stay in Minnesota,” Anderson told the House Taxes Committee on Tuesday.

Held over for possible inclusion in an omnibus tax bill, HF63 would chip away at the fourth-tier income tax rates paid by business owners with net taxable income over $250,000.

According to a Revenue Department fiscal note, more than 33,000 taxpayers would be affected by the change, at a $172 million cost to the state’s General Fund in fiscal year 2016 and $182.7 million in fiscal year 2017.

The bill would lower the maximum income tax rate from 9.85 percent to 7.85 percent on active pass-through income from sole proprietorships, farms, S-corporations and partnerships. The change would spill over to reduce income tax bracket indexing and the marriage credit for qualifying taxpayers.

“Minnesota is a great place to live and work, but our business tax climate is challenging,” said Beth Kadoun, Minnesota Chamber of Commerce director of tax and fiscal policy. “We have the fourth-highest rate in the nation. About 55 percent of the employment comes through pass-through entities.”

She said the more businesses pay in taxes, means less for business reinvestment.

However, the bill does not spell out how the tax cut would be used, said Rep. Ann Lenczewski (DFL-Bloomington). “There is no requirement to create a job. .... There is only a hope and a prayer. … They could put it back in the company or buy a yacht.”

Since the fourth-tier rate was the cornerstone to many of Dayton’s 2013-14 budget objectives, Lenczewski questioned how Anderson intends to get the bill passed by a DFL-controlled Senate and off the governor’s desk into law.

Anderson noted Dayton’s change of heart when he recognized the “disastrous effects of the warehouse tax. He recognized it was not smart tax policy for the state and reversed it. This is not a foreign concept to him, and he has shown that he is willing to look at things differently. This is a starting point.”

A companion, SF102, is sponsored by Sen. Terri Bonoff (DFL-Minnetonka). It awaits action by the Senate Taxes Committee.