Is the timing right to cut corporate taxes?by Tom Scheck, Minnesota Public Radio
Gov. Tim Pawlenty is scheduled to release his two year budget proposal Tuesday. He has said that it won't raise taxes and that some of his proposed cuts will be "difficult." The plan will also include cuts in business taxes which Democrats argue will only increase the state's budget deficit. But to date, Pawlenty's tax cut plan is the only tax proposal on the table.
St. Paul, Minn. — Gov. Pawlenty argues that Minnesota's corporate income tax of 9.8 percent is keeping businesses from relocating or expanding in Minnesota. He wants to cut the tax in half over the next six years. Pawlenty said the plan would help bring needed jobs to the state.
"It's a challenge to do it in these times, but I think it's strategically important for the future of the state," he said. "Because if all we do is make the numbers balance on the balance sheet for the budget and we don't do some things to better prepare Minnesota for the future, we'll be back in the soup down the road and we want to be thinking ahead a little bit."
Charlie Weaver, who heads the Minnesota Business Partnership, said he thinks that Pawlenty's plan will attract greater investment in the state. He cited several examples where he believes Minnesota's business tax is deterring investment in Minnesota. Weaver said State Farm Insurance shifted jobs from the state and other companies like Arctic Cat expanded elsewhere because of Minnesota's tax climate.
Weaver believes Pawlenty's proposal will attract attention.
"Does it mean we're going to build a plant in the next six months? Probably not," he said. "But in this global environment which is super competitive and information is passed along so quickly, there are lots and lots of businesses, fewer today because of the economic times. But businesses are always looking to locate where there's a better opportunity for them to grow jobs. So I think you would see a pretty quick result."
Art Rolnick, an economist with the Federal Reserve Bank of Minneapolis, said he doesn't think a cut to the corporate tax will mean an immediate job infusion. But he thinks it's good public policy.
Rolnick, whom Democrats have praised for calling for increased investment in early childhood education, said the plan would create long term business investment and would also make the state's budget more stable.
Rolnick said the corporate income tax is a volatile tax because it goes sky high when the economy does well and bottoms out when an economic downturn occurs. He also argued that the tax just makes goods more expensive for consumers.
"They're not efficient taxes," he said. "They're a form of double taxation. They tend, on average, the studies show to be regressive. The incidence of that tax tends to fall on workers and consumers in a regressive way."
In other words, Rolnick said, products are more expensive and wages are lower because of the tax.
Democrats on the House and Senate Tax Committees agree that the corporate income tax is is a bad way for the state to raise money. The problem is that the tax is scheduled to bring in $1.4 billion over the next two years. Cutting it would put additional pressure on an already shrinking budget.
"What becomes a problem for the governor today is timing," said Rep. Ann Lenczewski, DFL-Bloomington, who chairs the House Tax Committee.
Last year, Lenczewski proposed an across the board cut to the corporate income tax, but she also wanted to eliminate every business tax break in state law.
Lenczewski isn't certain that Pawlenty's proposal will get much support in the Legislature.
"We know in the Legislature that if you want to cut somebody's taxes, you have to pay for it," she said. "So without cutting something deeper or raising a revenue to pay for that corporate tax cut, it just grows the deficit."
Lenczewski said she isn't sure how she'll tackle the state's $4.8 billion dollar deficit. But she said before she considers any tax increases her committee will examine tax exemptions.
For example, things like clothing and services like hair cuts are exempt from the sales tax.
Sen Tom Bakk, DFL-Cook, who chairs the Senate Tax Committee, said he also wants to look at tax exemptions. Bakk said he's open to cutting the corporate income tax but only for Minnesota-based businesses or businesses that promise to expand in Minnesota.
"If it's going to be promoted as a job stimulus piece then we need to make sure that the companies that aren't domociled here that will receive benefits of it, the 46.5 percent of the benefits, that there is some assurance that they will reinvest those new corporate profits in Minnesota and not somewhere else," he said.
Republicans in the House and Senate are also working to entice businesses to relocate in Minnesota through a corporate income tax break. That proposal would create a five year corporate income tax holiday for any business that relocates or expands in Minnesota.
- Morning Edition, 01/26/2009, 7:25 a.m.