Minnesota’s tax system is center stage at the Legislature following passage of federal tax reform. The debate was put into high gear with Gov. Mark Dayton’s release of his supplemental budget, along with an overall tax increase.
With yet another state budget surplus on hand, there is simply no reason to make our state less competitive by significantly raising taxes on Minnesota businesses and unwinding the business tax relief measures that Dayton negotiated and signed into law last year.
We encourage policymakers to seize the real opportunity — and real need — to rightsize Minnesota’s tax system for the benefit of employers and employees.
Returning a significant portion of the state revenue gains from federal tax reform, and the resulting state surplus, to the private sector will help grow jobs and strengthen our economy. A tug of war between spending and tax relief is certain. And the lines will typically be drawn as Democrats versus Republicans.
That doesn’t have to be the case. Remember 1986, when President Reagan — a Republican — spearheaded the last major overhaul of the federal tax code. Minnesota responded in 1987, under the leadership of Gov. Rudy Perpich — a Democrat — by reducing both corporate and individual tax rates.
Many other states have cut their rates since then, while Minnesota’s tax system has become more complicated and expensive. It’s time to get out of the top five in so many tax rankings.
Our top individual income tax rate is fourth highest in the nation. In fact, our lowest rate is higher than the top rate in 23 other states. Our floor is above the ceiling in other states. And our high income-tax rate affects more than just the wealthy.
More than 90 percent of all Minnesota business owners pay their taxes through their personal income returns. These businesses line Main Streets from International Falls to Worthington, Winona to Duluth. Every dollar that goes to taxes is one less dollar available to invest in employees and operations. Moreover, our high rates exacerbate companies’ challenges to recruit and retain talent.
Our top corporate tax rate is third highest in the nation. Minnesota is blessed to be home to many Fortune 500 companies. However, the vast majority of Minnesota’s 35,000 C-corporations are small businesses dotted across the state. High corporate rates harm entrepreneurship and investment. The tax is ultimately paid by individuals through lower employee wages and benefits, and higher prices for goods and services.
There’s no better economic engine than putting money in the hands of the private sector. We’ve all seen the headlines following passage of federal tax reform. Xcel Energy and Minnesota Power have both indicated that savings could be passed to customers through lower electric rates. Best Buy is paying bonuses to full- and part-time employees. Hormel Foods is passing along benefits to employees, communities and shareholders. The list goes on.
The governor and Legislature truly face a once-in-a-generation opportunity to rightsize our tax system. Federal tax reform reduces taxes for many Americans, but it also exposes more income to state income taxes. If Minnesota does not enact any of the lower rates or bracket changes that reduce the federal taxes, Minnesota taxpayers will pay an estimated $1.6 billion in additional taxes over the next four years.
Minnesota enjoys another state surplus — the fifth in five years. Spending is up more than 11 percent, and the state’s rainy day fund is approaching $2 billion. It’s time to pass that prosperity on to employers and employees alike. Together, we can grow our economy for the long-term benefit of all Minnesotans.
Doug Loon is president of the Minnesota Chamber of Commerce (mnchamber.com).