A tax reform in Minnesota that's badly needed, long overdue

Tax bills can be sorted into two different buckets. Bucket A contains high-profile proposals to increase, cut or shift various taxes. They get media coverage and public attention, create end-of-session drama and often influence elections.

Bucket B contains all the more seemingly minor bills that critically affect how our tax system works. These proposals deal with tax policy administration and implementation. They get little if any media coverage, capture mostly the attention of accountants and lawyers, and are impossible to turn into a campaign slogan.

But as technical and boring as Bucket B content might be, it is a mistake to treat these bills as an afterthought. The stuff in Bucket B has power to influence our economy.

Such is the case with a "Bucket B" fix included in the 2020 tax bill now in limbo at the Legislature. It corrects a problem that has been around for many years. There is broad bipartisan agreement that this fix is needed. In fact, this fix has the distinction of having been included in the governor's 2019 tax proposal and both the House and Senate final tax bills last year.

But when pen was put to paper, it was nowhere to be found — once again a casualty of higher-priority spending increases and tax cuts. It has become the Charlie Brown's football of state tax policy — always promised, always pulled away at the last minute.

The fix is full conformity with federal tax law allowing farmers and small- and medium-sized businesses to fully and immediately deduct the cost of new and used equipment on their tax returns.

Businesses need to regularly invest in equipment to modernize, enhance productivity and improve competitiveness. In today's world, high-tech equipment becomes obsolete at an increasingly rapid rate. "Expensing" capital investments saves on taxes and facilitates modernization by allowing businesses to recover the costs more quickly.

But now thanks to the interactive effects with 2017's changes in federal tax law, the issue has become more serious for many of Minnesota's farmers and small businesses. That's because gains on their equipment trade-ins are now fully taxed, with no way for businesses to offset that obligation.

Imagine a tax rule in which the value of a trade-in you make to purchase new equipment is treated as a capital gain on which taxes must be paid — even though you never see a dime of actual income, since every dollar of trade-in value went straight to the new purchase. Such "phantom income" is analogous to the situation Minnesota small-­business owners and farmers now face.

The size and scale of business investments are routinely in the hundreds of thousands of dollars, and the resulting state tax bills reflect that. This is a huge deal, especially for Minnesota's beleaguered farm economy. Without corrective action, the economic welfare, and in some cases viability, of Minnesota farms and small businesses will be threatened, exacerbating the injuries businesses have already sustained because of the pandemic.

Corrective action does have mostly one-time, near-term costs — about $200 million to $250 million for the current biennium. That's obviously a concern, given our budget situation. But the budget implications should not be decisive. There are ample opportunities to adjust rate schedules or other tax system features to accommodate revenue neutrality while pursuing this conformity action. It's that important.

The temptation to pull the football away once again will be great. But if lawmakers are sincere about putting real substance behind ideas like "One Minnesota" and doing whatever they can to help business through these exceptionally challenging times, there is no better way to demonstrate it than by tackling this issue once and for all.