Gov. Mark Dayton portrays his budget as transparent, free of gimmicks and protecting middle-class Minnesotans. Look closely, however, and his plan is lacking on all counts. The shortcomings are most glaring in the sales tax on business-to-business transactions. The proposal is part of a budget that includes huge increases in taxes and spending with little reform in either.
Make no mistake about the importance of higher taxes to the governor’s budget. All Minnesotans will feel the impact.
Minnesota faces a projected $1.1 billion deficit for the two-year cycle beginning July 2013. His plan seeks to eliminate the deficit, spend $1 billion more and transfer $1.4 billion in property tax rebates to homeowners. The additional spending would come primarily from two taxes – raising a net $2.1 billion by expanding the sales tax on business-to-business services plus another $1.1 billion by raising income taxes on the wealthiest Minnesotans.
The proposed fourth tier in the personal income tax especially hits successful small companies that run their business income through personal taxes. Minnesota’s top rate is currently 7.85 percent or eighth highest in the nation. The governor’s recommended rate of 9.85 percent would push us to fourth. While some folks don’t like to hear it, successful businesses and people make business decisions based on tax rates.
The business-to-business tax impacts are extremely harmful – affecting all sizes and types of Minnesota companies from Main Street stores to multinational corporations and ultimately is a hidden and regressive tax on consumers. Think about it.
A hardware store contracts with a third party to manage its payroll and benefits and buys ads in the local paper and on the local radio station will pay a new tax on both transactions.
A manufacturer creates a new product, contracting with engineers to develop the assembly line, hiring outside legal counsel to help secure a patent, and securing an ad agency to implement a marketing campaign. Three new taxes here.
A salon relocates and hires an architect to remodel the space. Like the hardware store, it advertises the opening in the local paper and on local radio. At least three new taxes to pay here.
From accounting to engineering, technical consulting to employment, small and large businesses contract for a range of services as part of their everyday operations. All of these would be subject to the new sales tax that becomes another overhead expense.
Businesses cannot simply absorb the added cost, so what do they do? You guessed it. The additional sales tax is built into the final price of a product or service. But there is a ripple effect, only to a point as there’s a limit to how much companies can raise prices and still remain competitive. Then the consequences escalate. In the short term, they may have to cut costs which starts with reducing payroll costs and benefits but could well include laying off employees. In the long term, they will look at restructuring operations to avoid the new tax or, in the worst-case scenario, sell or leave Minnesota. All the results are bad for Minnesota jobs.
There are two other near certainties if the sales tax is expanded. First, many businesses will need outside counsel to interpret the tax code, and, second, they will need accountants to sift through the bookkeeping nightmare. The governor has you there, too. Most companies will have to contract for this help, which will be subject to the new sales tax.
The governor is recommending the sales tax be reduced from 6.5 percent to 5.5 percent as part of his package, but that doesn’t minimize the impact of this new tax. On the surface, consumers will pay the sales tax on the final sale of a product or service. After all of the new taxes are paid along the way, those prices will be higher due to the pyramid effect of this hidden tax. Business-to-business taxes are regressive, hurt the everyday consumers, and are bound to take a toll on Minnesota jobs.
David Olson is president of the Minnesota Chamber of Commerce