Erick Ajax is the sort of employer that Minnesota wants.
The co-owner of the Fridley-based E.J. Ajax and Sons Inc., manages a metal-forming plant that produces, among other things, approximately 70 percent of all the appliance hinges sold in North America.
“If you look at your refrigerator at home, the hinge that holds the door on it was probably made in our plant,” Ajax told members of a House division March 19.
Over the years, Ajax — who boasts of not having any minimum-wage jobs in his company — has watched his employees double or even triple their starting wages, raise their families and “live the American Dream as metal-forming professionals.” Unfortunately, as with so many other companies, E.J. Ajax and Sons has fallen on hard times.
“In November, the bottom fell out of our market worldwide,” Ajax said. “In the last 90 days, we’ve gone from 50 employees to 21 employees — very, very painful changes that have had to take place in my business.”
Those painful changes are not uncommon, as Minnesota and the rest of the country struggle through what many economists are calling the worst recession since World War II. The state’s unemployment rate reached 8.1 percent in February, marking the worst employment figures in more than a quarter-century. In the hardest-hit regions of the state, job-seekers outnumber job openings by a ratio of 11-to-1.
The situation has put job creation at the front and center of the legislative agenda. But while legislators on both sides of the aisle agree that something must be done, they have very different ideas about how to go about it.
Funding vs. fundamentals
As it happens, Ajax was testifying in favor of a bill that could help him hire some of his workers back.
Sponsored by Rep. Tom Rukavina (DFL-Virginia), HF1326 would resurrect a program that helped put some 30,000 unemployed Minnesotans back to work during the tough economic times of the early-1980s. The Minnesota Emergency Employment Development program, as it was called, essentially paid employers a wage subsidy to help them hire new and recently laid-off workers. It lasted from 1983 to 1985, and many of the workers hired under the program were able to keep their jobs after it ended.
Rukavina is betting that a program that worked back then could work again now. He plans to meet with Gov. Tim Pawlenty to discuss the proposal; however, with a state budget deficit looming, he’s also being realistic about his chances of getting the $120 million asked for in the bill.
“If I can’t get the money, I can’t get the money. But I’m not going to sit on my hands while I know people are hurting out there and not try to do something,” Rukavina told members of the House Higher Education and Workforce Development Finance and Policy Division. The division laid the bill over March 19 for possible omnibus bill inclusion.
Earlier this year, House DFL leaders signaled their commitment to job creation by making HF1, the first bill of the session, a vehicle to receive federal stimulus funds. The American Recovery and Reinvestment Act of 2009, better known as the federal stimulus package, will save or create some 45,000 jobs in Minnesota alone, according to an estimate by State Economist Tom Stinson.
Though such programs might help in the short-term, critics see a problem with proposals like Rukavina’s bill and the federal stimulus: they don’t last.
“If we prop (job-providers) up with taxpayer dollars, then the minute those dollars are gone, if the fundamentals aren’t there to support those jobs, they’re going to go away again,” said Rep. Steve Gottwalt (R-St. Cloud).
Gottwalt knows something about “the fundamentals.” Before coming to the Legislature, he spent years helping businesses locate and expand their operations in the St. Cloud area. According to Gottwalt, what businesses are really looking for is an environment in which they can thrive — and that means lowering taxes.
“We do hear from our businesses that they’re concerned about the tax environment in Minnesota,” Gottwalt said. “You go and talk to any manufacturer in this state — anybody who creates jobs — and they will tell you the tax burden in this state is a significant factor.”
A report from the Governor’s 21st Century Tax Reform Commission would seem to confirm this. The commission, a panel of mostly business executives established by Pawlenty to review the state’s business tax climate, puts Minnesota’s combined state and federal corporate tax burden as the third highest in the nation, behind only Iowa and Pennsylvania.
To address the issue, Pawlenty has proposed what he sees as the best way to stimulate private-sector growth: the “Minnesota Jobs Recovery Act,” a package of tax incentives that includes a plan to cut the corporate tax rate in half over the next six years. House and Senate Republicans support the proposal.
Although he said the state needs a multi-faceted approach to economic development that includes a focus on infrastructure and creating an educated workforce, Gottwalt warns that legislators ignore the tax issue at their own peril.
“We’ve got to be careful of how heavy a tax burden and a regulatory burden we place on businesses, because it does make a difference, and they will leave,” he said.
To tax or not to tax
Not everyone with expertise in economic development believes in the power of tax cuts, however.
Ann Markusen, a professor at the University of Minnesota and an expert on regional and industrial economics, calls corporate tax cuts “a terrible idea.”
To begin with, Markusen said cutting taxes at a time when the state already has a record deficit will only leave an even bigger budget hole for policymakers to deal with. That, in turn, will lead to layoffs in the public sector, which will compound the state’s economic problems.
“I don’t think it’s in businesses’ interests to really encourage something that’s going to result in further rounds of people spending less money on retail, more foreclosures and so on and so forth,” Markusen said.
Even in the long-term, Markusen is skeptical that tax cuts will produce the desired effect of spurring job growth, since there is no guarantee companies will use the money to create jobs. Moreover, Markusen said much of the benefits from a corporate tax cut would flow to stockholders outside of Minnesota.
“I’m in the school — and in fact, most public finance economists believe this — that we’re in a race to the bottom on these tax incentives,” she said.
Markusen is not completely opposed to tax breaks for businesses. The key, Markusen said, is that incentives have to be tied to specific goals.
“If companies are promising to create a certain number of jobs and quality of jobs, that’s something that should be monitored,” she said, adding that companies that don’t live up to their end of the bargain should be held to account.
“You only want a tax cut to incentivize behavior,” she said.
For now, Markusen said a temporary wage subsidy program like the one Rukavina proposed wouldn’t be a bad idea. In the long run, she said the state needs to start doing economic development in a way that pays for results, and that looks at all economic development programs, including tax breaks, as state budget expenditures that should be tied to specific outcomes.
Rep. Ryan Winkler (DFL-Golden Valley), who serves with Gottwalt on a key House division dealing with workforce development — and who has engaged in frequent debates with his Republican colleague — agrees with Markusen.
“We need to make sure we have a tax and regulatory environment that is neither too heavy nor too light,” Winkler said.
Winkler believes that the government’s role in promoting economic development should be to ensure that the state has not only a suitable tax environment, but also a robust education system, well-managed infrastructure and other necessities — things that he said the corporate income tax helps pay for.
For the time being, businesses like E.J. Ajax and Sons could continue to hurt.
“We’ve cut all salaried wages for the management team by 20 percent. We’ve reduced all remaining employee wages by 10 percent. We’ve reduced the rent on our building 20 percent. We’ve had to cut back employee hours to 32 hours a week. We have had to reduce the temperature in our building by 10 degrees,” Ajax said. “We’re in the race of our lives right now.”