Taxes and poor business climate

Not only is Minnesota’s corporate tax rate among the highest in the nation, but it tops Japan, putting the state at a competitive disadvantage.

Scott Hodge, president of the Tax Foundation, gave the sobering news to the House Taxes Committee Feb. 1, and urged them to consider reducing both the state’s income and corporate tax rates, and replacing them with a broader sales tax. No action was taken.

“Minnesota has adopted a Neiman Marcus corporate income tax when you need Walmart tax pricing,” he said.

Not only does the current system make the state less attractive to new businesses, he said the burden of corporate taxes passes through as higher prices and lower worker wages. He encouraged lawmakers to “get to tax reform as soon as possible” and look at broadening the sales tax rate.

Rep. Ann Lenczewski (DFL-Bloomington) agreed that the state’s corporate and income tax structures are out of line, particularly as other states move to make their systems more business friendly.

“A little less than half of all our revenue is from the corporate and income tax. How would a state throw out half of its revenue stream without converting to a much more regressive system? This would only leave consumption taxes,” she said.

Hodge argued against raising income taxes because it would hit entrepreneurs. “You are essentially telling them to go someplace else.”

From a purely economic perspective, income taxes are far more harmful for economic growth than consumption taxes, he said. “This becomes the trade-off, and at some point you have to pick and choose.”

Rep. Keith Downey (R-Edina) wanted to know if businesses are more concerned about taxes than before.

“The answer to that is a clear yes,” Hodge said. “That’s because capital is more mobile than it ever has been, while people aren’t.” He explained that it is easier for a company to open a factory where it will have lower costs than for people to move to the job.

Founded in 1937, the mission of the foundation is to educate taxpayers about sound tax policy.