Legislative leaders have named cuts in business taxes as one of their priorities for the 2011 Legislative Session. Senate File 1 proposes to gradually cut the corporate tax in half over a six-year period, and ratchet back the statewide business property tax. The proposals reduce state revenues in FY 2012-13 revenue by $200 million, according to the bill’s authors. Because the corporate tax cuts are phased in, the size of the tax cuts will increase in future years.
- Corporate tax cuts are no guarantee for job growth. As the Congressional Budget Office wrote: “Increasing the after-tax income of businesses typically does not create an incentive for them to spend more on labor or to produce more, because production depends on the ability to sell.”
- State corporate taxes are a minor expense for corporations. All state and local taxes represent two to three percent of corporate expenses on average, the Center on Budget and Policy Priorities found, and the corporate income tax is only a fraction of that. (Further, Minnesota’s corporate taxes have been on the decline for years as a share of state and local revenue.)
- In the real world, tax cuts have not brought about stronger-than-average economic growth. Check out Ohio. It eliminated its corporate income tax yet its economic performance has been average at best.
- Mulitstate corporations could use their tax breaks elsewhere. There is no guarantee that money from Minnesota corporate tax cuts will be reinvested in Minnesota.
- Multistate corporations already are receiving a tax cut. Since “single sales tax apportionment,” or “Single Sales Factor,” passed in 2005, Minnesota has been gradually changing its corporate tax to be based more on a company’s sales in Minnesota. This translates into a $406 million drop in state corporate taxes in FY 2012-13, the Minnesota Department of Revenue says.
Some will argue Minnesota has a poor business climate. But as we have written before, there are many business climate studies and the rankings are all over the map.
The proposed tax cuts would create a deeper budget hole now and add to the challenge policymakers already face to close a $6.2 billion budget deficit. In an age of accountability and transparency, it raises questions about whether these tax cuts are the most effective way to promote job growth and shared prosperity in Minnesota.