Editorial: A state tax to whack for growth's sake

Organizers of last week's program at the TwinWest Chamber of Commerce may have been hoping for a tax policy fight. The lineup featured state Rep. Ann Lenczewski, DFL-Bloomington, head of the House Taxes Committee, and Mark Haveman, head of the business-oriented Minnesota Taxpayers Association.

But instead of an argument, chamber members heard considerable consensus around a key proposition: Minnesota's corporate income tax is too high, and it should be either reduced or scrapped. That would not be the universal view among DFLers at the Legislature. It might not be the first choice of Republicans or of most Minnesota businesses, since many small businesses don't pay corporate tax.

But it's an idea Minnesota policy leaders should seriously consider. State corporate income taxes generally top "worst tax" lists when economists and tax experts from around the country convene to dispense policy advice. State taxes on corporate profits are faulted for several reasons. They're highly volatile, rising and falling dramatically with the economic cycle. They're costly to collect, especially from big businesses that employ high-powered legal talent to dodge them. They're regressive -- invisibly so. They are paid by customers in the form of higher prices and by workers in the form of reduced wages and fewer jobs, all of which hits the poor disproportionately hard.

Minnesota's corporate income tax has one other defect -- its 9.8 percent rate. That's among the highest in the country. It's also deceiving because of adjustments that have been made through the years to the income base that's taxed. The effective rate most businesses pay is a good deal lower, particularly among those with foreign operations or those based in Minnesota with sales elsewhere. But the high rate creates a damaging impression among would-be out-of-state investors.

Those flaws were cited by the Governor's 21st Century Tax Reform Commission in a report last February. The commission called for the tax's repeal, calling it "the largest anti-competitive gap for any tax between Minnesota and overseas competitors."

But, to its credit, the commission also acknowledged that the state revenue derived from the corporate tax -- $770 million in fiscal 2011 -- would need to be replaced, at least in the near term. If that was true last February, when state spending was forecast to run more than $4 billion ahead of revenues in 2010-11, it's more so today. Projections of the state's 2012-13 revenue shortfall are running as high as $7 billion. A reduction in the corporate income tax might stimulate economic growth in years to come. But it likely would not generate an immediate bounce.

The commission, which included Haveman as one of 15 members, proposed expanding the sales tax to more consumer-purchased goods and services. The most obvious addition to the sales tax list would be clothing purchases. Minnesota is one of only five states that exempt clothing from sales taxes. (Five other states have no sales tax at all.)

Lenczewski has been open to an expanded sales tax, though she said simply putting the tax on clothing would be a missed opportunity for wider reform. She's interested in expanding the tax to consumer services as well, while building in credits for low-income people to blunt the tax's regressive impact.

The House taxes chair is keener on another reform measure. In her sights are tax "expenditures," the income tax breaks, exemptions and exclusions that spare some income from taxation. That kind of targeted tax relief isn't free, she noted. "It only means that someone gets a preference while someone else doesn't."

Those breaks have accumulated through years of legislative logrolling to cost the state $11 billion every two years in lost revenue, by her tally. Now would be a fine time to sort through that load of logs, and discard those that have not lived up to their promised benefit for Minnesota.