The Regressive Tax Incidence of H.F. 2480; anticipating a DFL Legislature in 2013
The non-partisan Research Division of the Minnesota Department of Revenue has analyzed the tax incidence of part of H.F. 2480 that would directly tax Minnesota jobs by penalizing firms that increase their payrolls in Minnesota.
Some of the highlights from the Minnesota Department of Revenue’s analysis:
The share of a multistate corporation’s total income that is taxed in Minnesota is defined by Minnesota’s corporate apportionment formula. The share taxable in Minnesota is based on a weighted average of the shares of the corporation’s (1) sales, (2) property, and (3) payroll that are located in Minnesota.
Under current law – for tax year 2013 – the Minnesota share of sales is weighted 96% and the Minnesota shares of property and payroll are each weighted 2%. Starting in tax year 2014, under current law, the weight on the Minnesota share of sales will increase to 100%. The proposal would repeal replace current law apportionment it with an equal-weight apportionment formula – 1/3 sales, 1/3 property, and 1/3 payroll.
The move to an equal-weights apportionment formula would have no effect on the taxes paid by a “100% Minnesota” corporation. All of its sales, property, and payroll are located in Minnesota, so all of its income is subject to tax regardless of the apportionment formula.
The change would increase tax for corporations whose payroll and property are more concentrated in Minnesota than their sales. For example, a manufacturer with all of its production in Minnesota and only 2% of its sales in Minnesota would see an increase in tax when the production factors (payroll and property) are weighted more heavily....
Many states have moved from equal-weight apportionment to (or toward) 100% sales apportionment in the belief that it provides an incentive for businesses to move (or keep) production facilities in the state. Although the estimated impact on revenue is not adjusted for behavioral changes, the incidence analysis below does assume that behavioral changes will reduce wages for Minnesota workers….
The proposal is estimated to increase tax year 2013 liability by $252.8 million. The industries with largest tax increases include manufacturing ($149 million), retail ($48 million), banking ($26 million), and transportation and warehousing ($16 million). Industries that would see a net reduction in tax include telecommunications (-$10 million), professional, scientific and technical services (-$2 million), utilities (-$1 million), and accommodations and food service (-$0.2 million)….
The business incidence model estimates that the $252.8 million net tax increase will be borne as follows:
o 40.3% will be borne by nonresidents (including the federal government’s loss in revenue)
o 59.7% will be borne by Minnesota residents.
- 24.8% will be borne by Minnesota consumers in higher prices
- 34.6% will be borne by Minnesota labor in lower wages
- 0.3% will be borne by Minnesota investors in lower profits…
The high share borne by workers is mostly due to the relatively large share of the tax increase that would fall on manufacturing.
The proposal would increase the regressivity of the overall tax system.
The entire analysis is available here: HF2480_Article_1_Section_8-9__Incidence_Analysis_1
John A. Spry is an associate professor in the Department of Finance at the University of St. Thomas. Find him online at twitter.com/ johnaspry.