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Minnesota’s Mr. Wrong: Gov. Dayton’s Math and Reasons for Vetoing Tax Bill Don’t Hold Water

Mark Haveman, our friend who runs the Minnesota Center for Fiscal Excellence, penned a brilliant op-ed in today’s Star Tribune that blows up Gov. Dayton’s stated main reason for vetoing the 2018 tax bill.

Haveman devastated Dayton’s main criticism that “misguided priorities for corporations” emphasize “tax cuts for corporations over real people.”

For starters, the claim of excessively favorable treatment of corporations doesn’t match the reported numbers. Conforming to the federal government’s broadening of the corporate tax base actually exposes more Minnesota corporate income to the state’s tax rates. According to nonpartisan legislative staff, the vetoed tax bill was projected to increase Minnesota’s corporate franchise tax collections by nearly $50 million in the state’s next two-year budget cycle.

That doesn’t exactly meet the test of a huge giveaway to big corporations.

And what about the phased-in corporate rate reductions?

According to a study by the accounting firm Ernst and Young, even if a state decides not to conform to any of the new provisions imposing a tax on foreign source income, the increase in the state corporate tax base from other federal conformity provisions is likely to average 10 percent. Applying that estimate to Minnesota means that even if we left foreign earnings alone, lowering the corporate tax rate to 8.8 percent would still have kept us revenue-neutral.

Since the tax bill did capture some of these foreign earnings and would have brought the corporate rate down to only 9.1 percent by 2020, there’s an argument to be made that it would have increased state taxes on corporations over the long term.

Dayton wanted to aggressively tax foreign profits to raise an estimated $378 million to permanently expand a government program but the Legislature “unwilling to be as aggressive in laying claim to multinational corporate profits” whose “constitutional authority and legal framework for states to tax these earnings is far from settled.”  The last thing Minnesota needs is to add new permanent spending and then find out the taxes used to pay for it were unconstitutional and must be returned.

Plus corporate income taxes are highly unpredictable, twice as volatile as individual income taxes and almost five times more than general sales taxes.

Haveman closes with more wise advice that Minnesota governors and legislatures should take to heart:

The fiscally irresponsible action would be to march full speed ahead and bank on hundreds of millions of inevitably litigious, uncertain, volatile — and in many cases one-time — revenues to pay for permanent spending increases and individual income tax relief. That would jeopardize the very fiscal stability the governor applaudingly wants to leave as his legacy.  …

Big multinational corporations might always be great villains and foils for politicians, but the income taxes they pay will always be lousy foundations for ensuring state fiscal stability.

Peter Zeller is Director of Operations at Center of the American Experiment.

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