business

With state revenue cratering, Gov. Tim Pawlenty's call for major corporate tax cuts represents a doubling down on the concept of supply-side economics. Would the tax cuts bring the payoff he promises? Hard to say. But what is certain is that his latest proposals do not go nearly as far as those of a commission he empowered more than a year ago to recommend ways to overhaul business taxes in Minnesota.

This year, Pawlenty wants the Minnesota Legislature to cut the Minnesota corporate income tax by 20 percent from 9.8 percent of adjusted net profits to 7.8 percent, cut income taxes for small businesses by 20 percent, and exempt local investors from capital gains taxes made on certain local investments.

A year ago, Pawlenty's own "the Governor's 21st Century Tax Commission" recommended eliminating the corporate tax altogether. To pay for the tax cuts, the commission recommended extending the sales tax base to more consumer products and consumer services and boosting the excise tax on cigarettes.

Some in business are amenable to that swap. The Minnesota Chamber of Commerce and Minnesota Business Partnership are discussing it. But they are holding off taking a position, in deference to Pawlenty, whose presidential ambitions make him wary of embracing reforms that could undermine his ''no new taxes'' position.

The state's take from the corporate income tax peaked at $1.1 billion in 2007, according to the Minnesota Department of Revenue. It is expected to be $600 million this year. That's real money, but a small piece of a $50 billion, two-year budget.

A broader sales tax would offset the abolition of the corporate income tax, which experts say often is reduced to as low as 2 percent for profitable companies through exemptions and deductions and which is passed on to consumers in the end.

There's legitimate disagreement over how best to use taxes to stimulate employment growth. And the governor has embraced some of the tax commission's recommendation. For example, the governor supports bipartisan bills that would create an "angel investment tax credit" to prompt well-heeled individuals to invest in Minnesota-based start-up companies.

This is the least controversial proposal, and would cost the state kitty about $20 million over two years.

"There's bipartisan agreement that Minnesota's tax system is costing us jobs," Pawlenty said this month. "In addition to balancing the budget without raising taxes, we need to improve our tax system if we are going to compete for jobs."

In all, Pawlenty's proposed tax cuts would cost the state more than $300 million.

Wage subsidies debate

Others say the best way to stimulate hiring among the small businesses that generate three-quarters of new jobs is through targeted wage subsidies or job-tax credits to encourage hiring, rather than short-term general tax cuts.

"Nobody likes taxes," said Clayton McNeff, a scientist and executive with a family owned companies that employ 65 people. "But if you're trying to stimulate hiring ... job credits or wage subsidies ... are definitely the better choice than general tax cuts."

McNeff added 20 high-paying jobs in 2009 through his Isanti-based Ever Cat Fuels, a $9 million private investment that will cut oil imports by up to 5 million gallons this year. And he's raising private capital for a tech-licensing firm to help other operators build small waste-to-diesel fuel plants.

Narayana Kocherlakota, the new president of the Federal Reserve Bank of Minneapolis, said last week that the most efficient way to stimulate hiring is through tax breaks targeted at hiring. That echoes Upjohn Institute economist Tim Bartik, whose studies conclude that targeted federal-state wage subsidies or tax credits to small businesses worth several months' pay produce jobs more cheaply than big tax cuts or more general-stimulus spending. They repay over several years through increased payroll taxes, less jobless benefits and increased economic output.

Tom Hesse, the tax policy expert at the Minnesota Chamber, said the chamber generally doesn't support wage subsidies because they can be tough to administer and it's unclear whether the jobs would have been created anyway.

Dan Carr, CEO of the Collaborative, which helps match investors with promising Minnesota entrepreneurs, said that venture capital-backed companies account for about 20 percent of the nation's economic output through fast-growing companies and that Minnesota already is "the largest recipient of venture capital among 12 Midwest states, raising $700 million in new venture capital over the past two years.

"The angel investment tax credit is a good idea and gets Minnesota in sync with neighboring states," Carr added. "Keep in mind [though] ... Minnesota garnered 10 times as much venture capital investment as Wisconsin in 2009."

The Legislature is likely to pass the angel tax credit but end up at loggerheads with Pawlenty over his other cuts.

This all raises the question of why the governor, if he really wants more jobs, hasn't embraced his 21st Century Tax Commission's recommendations of last year.

Pawlenty's commitment not to raise any taxes also has handcuffed him from adopting common-sense reforms of the business-driven tax commission.

"Corporate taxes, in general, aren't as progressive and put us in a negative light in comparison with states such as Texas or South Dakota," said Carr, also a CPA. "Capital gains tax adjustments actually reward investment success ... and likely result in jobs."

Tax commission offers cover

In my view, most Minnesotans would support dropping the volatile corporate income tax if the governor would embrace modernizing Minnesota's tax system. The tax commission gives him political cover and legitimacy.

The governor intends to close the entire $1.2 billion budget gap this year with more cuts, disproportionately affecting the working poor, more hits to hard-pressed cities that generate most of the income and sales taxes that flow to state coffers, and more accounting shifts.

The economy is improving, but not fast enough for thousands of unemployed Minnesotans.

Pawlenty should consider short-term credits or subsidies that reward small employers for hiring. And he would be wise to set the stage for fairer taxation and a more-stable revenue base, starting with the findings of his tax commission.

Neal St. Anthony • 612-673-7144 • nstanthony@startribune.com