Erasing the Minnesota Corporate Income Tax.

Governor Pawlenty is proposing to reduce the Minnesota corporate income tax by 20 percent. Pawlenty argues that reducing the corporate income tax will increase competitive advantage and create jobs for the state by increasing the number of corporations within the state, and retain existing corporations. [MPR story] The arguments for the reduction in corporate income tax have not been proven and are extremely controversial: [MPR story #2].

However, the impact that the revenue change will have on the mid-term and long-term state budget is not.

Comparatively, MN has a high tax rate. The average combined federal and state corporate tax rate in the U.S. is 39.3 percent. Minnesota’s statutory corporate tax rate is 9.8 percent, among the highest in the United States; the combined state and federal corporate tax rate in Minnesota of 41.1 percent is the third of the highest in the world.

The average corporate state tax is 6.6 percent, and three states have no corporate tax. Iowa (12%) and Pennsylvania (9.99%) are the only two states that have a higher corporate income tax rate than Minnesota.

When considering revenue volatility, of the major sources of revenue for the state of Minnesota, the Corporate Franchise Tax (CFT) is the most volatile. However, since the CFT makes up only 7 percent of all general fund revenue, a 20 percent reduction in business taxation would only reduce the volatility of the tax base modestly.

The corporate income tax has a low efficiency. One of the objectives of Pawlenty`s tax cut is to improve the job climate in Minnesota and the state economy as a whole. However, there are strong arguments that corporate tax cuts would not give benefit to ordinary people but to businesses: Minnesota-based corporations pay only seven percent of corporate income taxes in the state. Large corporations, mostly based out of state, pay 83 percent of corporate income tax in Minnesota. Thus, tax cuts for big businesses may result in shipping tax dollars out of the state.[1]”

Another question is whether corporate tax cuts really create new jobs, and how many jobs would be created if the Governor`s plan comes into effect. The Governor himself has stated that it would be impossible to quantify the amount of job creation his proposal will produce.

The efficiency of the corporate income tax cuts is low because it is unclear how tax cuts create new jobs and stimulate the economy.

Political Feasibility

The Governor’s proposed business tax cuts have received a cool reception from the leadership of the DFL controlled Minnesota House of Representative and Senate. For example, House Speaker Margaret Anderson-Kelliher criticized the Governor’s proposal, arguing that the Governor is cutting health care for the poor while giving a break to "out-of-state corporations[2]." Another DFLer, Representative Loren Holberg, who serves on the House Taxes Committee, said of the Governors proposal, “I think at a time of great financial stress it’s difficult to give tax big breaks to business when it’s questionable whether it would create jobs.”[3] It seems unlikely that the DFL controlled House or Senate will approve the most important components of the Governor’s proposed business tax cuts, in particular the 20 percent reduction of the CFT and 20 percent exemption of pass through income.

Equity

Pawlenty’s proposal to cut corporate income taxes but equalize the balance sheet by increasing revenues from homeowners and renters by reducing the “Renter's Property Tax Credit.” The Renter’s Property Tax Credit is a progressive tax credit given to renters based on the proportion of rent paid to income, as well as the "Residential Market Value Credit," a tax credit for homeowners.

Pawlenty’s proposal will essentially raise taxes on these populations by increasing their tax liability.

The largest reduction in the budget would be from the renter’s credit, with reductions for FY 12 = $52.7 million and FY13 = $53.1 million.

Renters tend to be the lowest income population and will be disproportionately affected by this budget change. The budget change for the “Residential Market Value Credit” will also be reduced, increasing property tax liability, by $24.6 million for FY11, 24.5 million for FY12, and $24.4 million for FY13. Although, homeowners tend to be higher income then renters the cut also raises the amount of property taxes paid for homeowners. The proposed change is also inequitable for businesses receiving the tax cut, as it is 20 percent cut across the board and the tax rate does not account for the amount of income earned by each business.

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[1] The Timberjay.” Typical Pawlenty: Slash the safety net, raise property taxes, and cut taxes for the wealthy”.February 23, 2010.

[2] Busse, 2010

[3] Bily, 2010