Business forum: Taxing business services is bad for Minnesota
- Article by: Tom Salonek
- February 10, 2013 - 2:40 PM
Growing up on a family farm in Minnesota taught me a lot about business. Not only do farmers have to make smart decisions about what crops to grow, they have to use natural resources in a sustainable way. Overburden your land and pretty soon your soil is depleted and cannot produce healthy crops. While managing a state undoubtedly is more complicated than running a family farm, I think there’s a parallel lesson here for Gov. Mark Dayton.
His new budget proposal, which includes a 5.5 percent tax on business-to-business (B2B) services, is going to put many small Minnesota companies like mine at a tremendous disadvantage. Our ability to run successful businesses, pay our employees competitively and invest in our communities could be seriously compromised.
Firms like Intertech do business with clients around the country and the world. Likewise, our competition is as likely to be in Bangalore, India, as in Burnsville. Requiring our customers to pay a 5.5 percent tax on our services means our bids will not be as competitive as technology companies based in other states that do not charge a B2B tax.
What are our choices? Continue to price our services competitively and simply swallow the 5.5 percent tax? Pass the cost on to customers and hope they don’t decide to pass on our firm as a result? Either “choice” means that our business — and Minnesota — will suffer. If we begin to lose customers and revenues begin falling, we will have to make tough choices about how many people we can employ, or even whether we can afford to continue operating in Minnesota.
I’m a Minnesotan with deep roots. My family and friends are here. I attended public schools (K-12) and earned my bachelor’s degree at the University of St. Thomas. I live in St. Paul with my wife and children. We love the state and deeply appreciate the quality of life we enjoy here. I’ve had great success in building my business here.
So while I appreciate that some investment of tax revenue is important for our state’s infrastructure — and education in particular — I also strongly believe that the governor’s budget proposal is ill-considered. By imposing a tax on business service providers, he is running the risk of depleting one of our state’s most important resources: small and medium-sized businesses.
From law firms to public relations and advertising firms to technology consulting firms, there are roughly 400,000 small companies employing thousands of Minnesotans in well-paid positions. While the latest monthly jobs report was upbeat, most businesspeople believe the economic recovery is still fragile. Why would the governor want to pile another burden on the very part of the economy that does the most to create jobs?
I understand that the governor’s income-tax proposal will raise $1.2 billion. The current state deficit is estimated at $1.1 billion. For the record, I’m not a fan of the 25 percent tax increase looming for S corporations either. Regardless, I understand that action needs to be taken to get the state back on a firm financial footing. But piling on a B2B sales tax, too, is unnecessary, bad for business and just plain bad policy.
Such taxes create “perverse business incentives,” which means businesses start making economic decisions in an effort to compensate for the new burden. While moving my business to another state is not something I can imagine doing, I do believe that some businesses will do so. Other states, such as Tennessee, already are mounting campaigns to woo businesses like mine.
Why do I mention this if I’m not considering such a move? I want the governor and state legislators to realize that there is fierce competition to attract and keep successful companies. Our government can increase taxes but there will be consequences, just like the soil that can no longer produce abundant crops because it has been drained of the nutrients it needs to thrive.
Average profit margins in privately held firms like mine range from 3 to 9 percent (less in economic recessions and more in expansions), according to Sageworks, a financial information company.
While the governor is claiming to be motivated by a desire to help the middle class, rising prices and fragile job security will do just the opposite.
Investing in our future means making tough, smart decisions, which includes spending less. The governor’s proposed across-the-board $500 rebate to all property owners in the state would be a good place to start.
But treating small and medium-sized businesses like the proverbial goose that lays golden eggs is a dangerous practice. Continuing to demand more and more eggs might just mean one day we find that the goose is dead. Or has flown the coop for a more hospitable business environment.
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