Reactions are mixed as business and academic leaders, city officials, and others mull the series of tax reforms, increased spending, and other changes outlined in Minnesota Governor Mark Dayton’s new budget proposal.
Dayton on Tuesday released his budget recommendation for the two-year period beginning July 1—one that reduces the corporate tax rate, increases income taxes on the wealthiest Minnesotans, freezes property taxes on businesses, and makes dramatic changes to the state’s sales taxes.
In a Wednesday webinar, Minnesota Chamber of Commerce officials said that the chamber supports several portions of Dayton’s plan, including the corporate tax cut, the business property tax freeze, and increased investments in student grants.
But chamber leaders said they have an “over-arching concern” about tax increases, adding that they would prefer a “much more concerted effort on spending reform.”
Among Dayton’s proposals is an increase in income taxes for the wealthiest 2 percent of Minnesotans—married couples earning at least $250,000 or individuals earning $150,000 or more. But Beth Strinden Kadoun, the Minnesota Chamber’s director of tax and fiscal policy, said that rate increases will have a detrimental effect on businesses, as roughly 92 percent of the state’s business entities pay their taxes through the individual income tax, a method called “pass-through taxation.” Higher taxes will also make Minnesota less competitive in attracting a talented work force and likely decrease investments, she added.
Dayton’s proposed elimination of certain tax provisions will also hurt the state’s business climate, chamber officials said. For example, they contend that Dayton aims to eliminate existing provisions that help keep research and development activities in the state and help Minnesota businesses sell products internationally.
The governor’s plan makes two major changes to the sales tax system: It lowers the tax rate to 5.5 percent while also expanding the tax base by collecting taxes on additional products and services, including clothing items that cost more than $100.
“We don’t like the clothing tax, but we’re trying to be judicious and look at the entirety of the proposal,” Minnesota Retailers Association President Bruce Nustad told the Pioneer Press. Nustad said his association “loves the idea” of dropping the state sales tax rate to 5.5 percent, but “we need to look at the concept of how you get there.”
Chamber officials said that, while Dayton’s plan increases taxes on consumer goods such as clothing and cigarettes, the changes are even greater with respect to business services. Sales taxes would be extended to include legal, accounting, advertising, and public relations services, among other things. Boosting business-to-business costs will likely result in increased costs for consumers, and chamber officials said they don’t believe the benefit of a sales tax reduction will negate the negative effect of expanding the tax base.
The Chamber, however, supports a proposed requirement for online retailers like Amazon.com to collect sales taxes, a move that many contend would level the playing field for Web and brick-and-mortar retailers in Minnesota. (Residents are currently expected to self-report online purchases in their annual tax filings and pay state taxes on them, but many aren’t aware of that requirement and few actually do.)
Richfield-based Best Buy Company, Inc., which in the past has voiced support for similar legislation, also supports that portion of Dayton’s plan, a company spokeswoman told the Pioneer Press. Target officials echoed Best Buy’s sentiment in a statement to the St. Paul newspaper.
Twin Cities Business' most recent Quarterly Economic Indicator report, which is based on survey responses from hundreds of Minnesota business leaders, found that leaders expect Minnesota’s economy to regress this quarter. Among the most-cited reasons for pessimism was fear that the new Democratically controlled state legislature and Democratic governor would make moves that have a negative impact on business.
Meanwhile, several Minnesota city leaders were quick to trumpet support for Dayton’s budget pitch, which includes a roughly $120 million increase to local government and county aid.
St. Paul Mayor Chris Coleman said in a statement that the proposal issues “a clear message that the state will responsibly deal with its budget challenges rather than asking cities to bear the burden alone.” The budget also includes “reasonable changes to the state’s tax system that stabilizes property taxes, recognizes the importance of local government aid to Minnesota cities, and includes the largest sales tax reduction in Minnesota history,” he added.
Minneapolis Mayor R.T. Rybak, meanwhile, said Dayton’s plan incorporates many of the suggestions put forth by a “mayors tax reform advisory group,” including “reducing Minnesotans’ property-tax burden, broadening the tax base, and making [local government aid] more reliable.”
Dayton’s budget, which boosts K-12 funding and invests an additional $80 million in the Minnesota State Grant Program for higher education, also received support from the academic community.
University of Minnesota President Eric Kaler said in a statement that the budget proposal “is good news for Minnesota students, their families, our research enterprise, and the university system as a whole.”
MaryAnn Baenninger, president of the College of Saint Benedict and chair of the Minnesota Private College Council, said Dayton’s education spending “is the kind of targeted investment that our state needs to make to ensure we have a highly educated work force.”
The Counties Transit Improvement Board, a five-county consortium that uses state sales taxes to invest in transit projects, said it “strongly applauds” Dayton’s proposal, which includes a quarter-cent local sales-tax increase for improved transit systems. Board Chair Peter McLaughlin said in a statement that new transit options will help Minnesota attract new businesses.
To view the governor’s budget recommendation at the Minnesota Management and Budget website, click here.