Tax reform could add up to billions for Minnesota's biggest companies

WASHINGTON – Minnesota's biggest corporations will save billions of dollars a year in federal tax payments if a tax reform plan by the White House and Republicans in Congress becomes law.

A Star Tribune analysis of Securities and Exchange Commission (SEC) filings shows that several of Minnesota's top 50 revenue-producing, publicly traded companies would see their effective tax rates cut from a quarter to nearly half of what they now are under a plan to lower the country's statutory corporate tax rate.

Twenty-three of the Minnesota 50 also have foreign profits that could be returned to the U.S. with a proposed one-time lump sum tax payment. The payment would let companies bring those earnings home for a fraction of what they would have paid under current law. The country would then go to a system where U.S. corporations would not pay U.S. taxes on foreign earnings they bring back to this country.

Debate in Congress begins this week on who benefits most from what would be the first comprehensive tax code reform since 1986. The GOP plan to cut the corporate tax rate to 20 percent from 35 percent and to offer a steep discount to U.S. companies that bring foreign profits back to the U.S. has set off a war of words.

Corporations say the U.S. corporate tax rate is the world's highest and hurts their ability to compete in the global economy, expand markets and create jobs.

Minnesota's business community has been largely pleased with the new reform plan.

A 3M spokeswoman said the company "has long advocated for tax reform that will result in a more globally competitive system for U.S.-based manufacturers, including a lower corporate rate, a territorial tax system, greater simplicity and promotion of innovation."

"The overall change in income is going to be tilted to middle and low-income people," Hassett said.

The council released a study last week that claimed the average household would see income rise at least $4,000 as a result of lower corporate rates, with median households seeing an increase of up to $9,000. Hassett said it could take three to five years for the higher incomes to take effect. He also said that businesses bringing profits from overseas will be moved to invest in new facilities, even in rural areas that now have little corporate presence.

Critics say the proposed plan gives giant tax cuts to the top 1 percent of taxpayers while doing little to help people who depend on wages and salaries. And they say tax cuts will explode the national debt because there is no way for the economy to grow fast enough to offset the loss of federal revenue.

Before taking account of economic growth, an Urban-Brookings Tax Policy Center analysis of the total tax plan's 10-year impact found that proposed corporate and business tax reform will fuel a system where "about 80 percent of the total benefit would accrue to taxpayers in the top 1 percent," making more than $730,000.

"Our figures show a very large tax cut for the very richest taxpayers and modest tax increases for the upper middle class," said the center's co-director, Eric Toder.

"People who earn from their own labor don't benefit from pass-through taxes and corporate rate reductions," Roy said. "Joe Six Pack ought to be paying attention to this."

Among the biggest winners in Minnesota would be 3M. The company would see a 31 percent decrease from its average effective tax rate over the past decade. 3M also had $2.35 billion in cash and cash equivalents among the $14 billion in earnings held by foreign subsidiaries at the end of 2016. These assets could be freed up by the one-time foreign profits tax payment in the proposal.

Medtronic, which reincorporated in Ireland to take advantage of that country's lower corporate rate, also welcomes a U.S. tax rate reduction because it still pays U.S. taxes on its continuing U.S. operations, including its operational headquarters in Minnesota.

A Medtronic spokesman said the company supports a lower corporate tax rate, a territorial tax system and "repatriation of existing foreign earnings at a reduced tax rate."

Precise dollar figures for total tax savings of the Minnesota 50 are impossible to calculate because the state's major corporate players do not publicly disclose some crucial data. But if profits the companies collectively reported in fiscal 2016 had been taxed at the proposed 20 percent corporate rate instead of the companies' median effective corporate rate of 30.1 percent, the savings would have totaled at least $3.65 billion.

President Donald Trump continues to promote his reform package as a benefit to the middle class because it doubles the standard deduction. The White House plan also increases the income that people can earn and still claim the Child Tax Credit. Trump further believes that corporate tax cuts will ignite economic growth that will raise wages and create jobs.

Hassett said there's an enormous amount of evidence from around the world that workers see improved wages when corporate rates are reduced.

Whatever happens to the working and middle classes, people with large stock portfolios invested in public companies and owners of large, successful private businesses should do very well because they profit from corporate and business tax breaks in ways that most wage and salary earners do not, Toder and Roy said.

For example, capping the tax rate on income from certain private businesses and partnerships at 25 percent will not help most small business owners, said Toder, because most already are at or below the 25 percent tax bracket. The 25 percent bracket currently extends to married couples filing jointly with a household taxable income of up to $153,100.

Joint filers with taxable incomes over $470,700 will benefit most from capping the tax on their business income at 25 percent. That business income is currently taxed at the top individual rate of 39.6 percent.

Paul Gutterman, director of the Masters of Business Taxation program at the University of Minnesota's Carlson School of Management, noted that it is "hard to figure out how they're doing this without having the individual side pay more toward the tax bill or just running up a huge deficit."

Without factoring in economic growth, the Tax Policy Center estimated the loss of federal revenue from the tax reform plan at "$2.4 trillion over 10 years and $3.2 trillion over the second decade."

The plan hopes to regain much of the federal revenue by killing a popular itemized federal deduction that lets individuals write off the cost of state and local taxes.

Hassett described the deduction as favoring states with larger governments and higher taxes (like Minnesota) at the expense of lower-income states with less government.

But ending the state and local tax deduction (SALT) on federal tax returns has produced some of the hardest pushback of any tax reform proposal. Governors and mayors lambaste the proposal as a form of double taxation that hurts middle- and upper-middle-class taxpayers who now itemize.

Jim Spencer • 202-662-7432 Patrick Kennedy • 612-673-7926 Maya Rao • 202-662-7433