Throughout the 2018 legislative session, Gov. Mark Dayton sought to balance the massive corporate tax cuts bestowed at the federal level with tax breaks focused on lower- and middle-income families, while protecting the state’s long-term fiscal health. The tax bill sent to him on the last day of the session ignored these priorities, contrary to criticism (“The governor’s objections stand on shaky ground,” May 24). The governor was right to veto it.
The governor’s veto needs to be considered in the context of the federal Tax Cuts and Jobs Act (TCJA) passed by Congress late last year. In the short run, the TCJA gave massive tax breaks to businesses and relatively little to individuals and families. In the long run — after temporary features of the act expire — the TCJA is expected to result in tax increases for individuals and families, while most of the corporate tax breaks will remain intact. Experience has taught us that such trickle-down economics produce little benefit for working households but do create more wealth for shareholders and exacerbate income inequality.
At the center of Dayton’s tax proposal was an increase in the Working Family Credit and a new Personal and Dependent Credit. Both targeted tax relief to lower- and middle-income families.
By conforming to many of the federal tax changes, the governor’s proposal would have increased Minnesota corporate taxes, but this tax hike would have been small compared with the federal corporate tax cut. For example, in 2019 the governor’s proposed state tax increase would have amounted to only about 18 percent of the federal corporate tax reductions received through the TCJA. Minnesota corporations would have still enjoyed a large overall tax reduction.
The claim that the vetoed tax bill would have also increased corporate taxes deserves more scrutiny. By the time the full corporate income tax rate reduction in that bill was phased in and the temporary tax increases terminated, the vetoed bill would have provided additional corporate tax breaks above and beyond the windfall already received through changes in the federal tax code.
The state’s economy would be better served by increasing the purchasing power of Minnesota families and through increased investment in education, affordable health care and other essential public services, not by more corporate tax breaks. Minnesota’s state and local business effective tax rate is equal to the national average, and total state and local business taxes per private-sector worker are already below average, according to the most recent 50-state business tax study prepared by Ernst & Young.
It is clear that some attempts to tax the profits of multinational corporations — including those proposed by the governor and to a lesser extent those in the vetoed tax bill — could be subject to legal challenges. It is equally clear that a significant portion of these profits are in fact domestic income that has been squirreled away in offshore tax havens to avoid paying state taxes that are reasonably and legitimately due. State policymakers would be remiss in their duty to other Minnesota taxpayers if they did not make every attempt to access the portion of such offshore profits that can be legally taxed.
Finally, the governor is correct to be concerned about the long-term sustainability of some of the tax cuts in the vetoed tax bill. This is especially true of the corporate income tax rate reduction, which more than quadruples in 2020. The state general fund is projected to have a structural deficit in the next biennium, after accounting for the impact of inflation on state expenditures as recommended by the nonpartisan Minnesota Council of Economic Advisers. Large tax breaks — especially those that mushroom in future years — could imperil the state’s long-term fiscal health.
The governor, after 7½ years of working to put Minnesota’s finances on sound footing and championing policies that promote prosperity for our state’s residents and businesses, understands that more tax cuts targeted to corporations — on top of the windfall they received through the TCJA — are not in the long-term interest of the state’s budget or economy. His approach is to reclaim a small portion of the corporate tax breaks bestowed by the federal government to fund tax relief for Minnesota families, make critical investments in education, and enhance the state’s long-term fiscal stability. The tax bill sent to the governor’s desk ignored these priorities — and it was in the best interest of the state to veto it.
Jeff Van Wychen is tax policy fellow, North Star Policy Institute.