After five lean years, architects in Minnesota are seeing improvement — and a threat from the governor’s tax plan.
Five years ago, the Minneapolis architectural firm Bentz/Thompson/Rietow had 20 drafting stations. Today just 10 are in use.
The past five years have been lean ones for architects both in Minnesota and across the country.
In the face of a lingering recession, work dried up as developers stopped building, capital markets tightened and self-financed projects were put on hold until the economy strengthened.
“We’re just starting to see daylight,” said Ann Voda, president of Bentz/Thompson/Rietow. “It’s a slow build back.”
It’s no surprise, then, that the prospect of a 5.5 percent business-to-business sales tax has the state’s service industry, including architects, perplexed and concerned.
“We’re trying to reverse a five-year trend that worked against us,” said Voda, who also is president of the Minnesota chapter of the American Institute of Architects (AIA). “Adding cost will not help us grow back any faster.
“When you think of the construction industry as a whole, architects are at the front of a pipeline of jobs. A few design the projects, but it takes thousands to build them.”
Phillip Koski, a Minneapolis architect who works out of his home, agreed. “My profit margin is usually 5 to 6 percent. A tax puts me at a competitive disadvantage.” Koski knows firsthand the financial difficulties his industry has suffered. Koski is a sole practitioner because he got laid off from his job with a national architectural firm in 2009.
Voda’s firm lists the Lake Harriet bandshell and Eden Prairie’s Wooddale Church as part of its body of work. Koski does residential and retail commercial work.
“Fees are a criteria in winning a job,” Voda said in an interview. “It’s so competitive.’’
A recent report by the national AIA said business grew an average of just 2.9 percent in 2012 and that architects expect 2013 to be “only modestly better.”
In January, the institute’s “architecture billings index’’ logged its sixth consecutive month of positive industry growth — the first such stretch since 2007. The index, which comes from a monthly survey of architects, is considered a leading economic indicator of nonresidential construction activity in the next nine to 12 months.
January’s figure of 54.2 was the highest since late 2007. (Any figure above 50 indicates growth; below 50 means billings are falling.)
“We have been pointing in this direction for the last several months, but this is the strongest indication that there will be an upturn in construction activity in the coming months,” said Kermit Baker, the AIA’s chief economist in Washington, D.C., on Wednesday.
One legacy of the Great Recession is fewer practicing architects. The AIA’s national membership survey shows just over 81,000, down about 2.4 percent from nearly 83,000 members in 2007.
The Minnesota AIA chapter has grown slightly, to 2,248 members, from 2,070 five years ago. Minnesota membership likely increased because of outreach efforts it made to help architects during lean times by providing support programs and continuing education classes and networking opportunities, the chapter said.
B2B sales tax
The expansion of sales taxes to the service industry would raise $2.2 billion for the state treasury over the next two years. It is central to Gov. Mark Dayton’s proposal to reform the Minnesota tax system and raise enough new revenue to close a $1.1 billion budget deficit and boost education funding to schools.
In a conference call with reporters last week, state Revenue Commissioner Myron Frans defended the sales tax expansion as an acknowledgment that Minnesota has shifted from a goods economy to a service economy.
“A lot of states are now taxing certain aspects of the service economy, and I predict in the next 10 years you’re just going to see a gradual continuation of this because that is simply the nature of the economy that we have in the United States,” Frans said.
In a clarification of the sales tax proposal last week, the Dayton administration said firms would not have to collect a sales tax from out-of-state clients, only those that reside in the state.
That distinction doesn’t do much for small and medium-size architectural firms such as Voda’s and Koski’s. Out-of-state clients constitute 15 percent of the client base of Bentz/Thompson/Rietow and 25 percent of Koski’s business.
Public agencies another issue
Architect Ellen Luken throws another wrinkle into the debate. Her biggest clients are public agencies, including the Metropolitan Council and the Minneapolis public school system.
“To burden a public agency with taxes doesn’t make much sense to me,” Luken said in a recent interview.
Dane Smith, president of the progressive think tank Growth and Justice, supports the Dayton proposal and called the tax overhaul “long overdue.”
However, Smith acknowledged, the business-to-business section of the sales tax proposal “is problematic.”
“There are significant administrative, economic and legal issues that must be addressed,” Smith said. “In the end, the benefits from broadening the base may outweigh the challenges.”
This isn’t the first year that an expansion of the sales tax has been proposed. Four years ago, a special commission appointed by Gov. Tim Pawlenty to look at tax reform in Minnesota urged the expansion of the sales tax to consumer services but not on business-to-business transactions. But the proposal went nowhere.
The chairman of that commission, Michael Vekich, still believes the commission’s sales tax recommendation was good tax policy. Vekich also still believes that a tax on business-to-business services is not.
“We could find zero support among tax experts for that idea,” Vekich said in an interview. “Experts will tell you that if you want a stable way to collect taxes, a consumer sales tax will work.”
Minnesota’s service industry knows that major tax-and-spend decisions by the state Legislature are likely months away, but the industry isn’t wasting time.
Voda and the AIA earlier this month sent out a letter to its more than 2,200 Minnesota members urging them to contact legislators to express their opposition to the sales-tax proposal.
“Tell your story,” the letter advises. “Describe your projects on hold and how competition from out of state may impact your business and if you have had difficulty finding work, let the legislators know that their efforts should focus on how to improve the business environment — not adversely impact it.”
David Phelps • 612-673-7269