Economic bait and switch

Rather than help, the IRA does the opposite — hitting Minnesota’s manufacturing industry particularly hard.

On August 16, President Joe Biden signed into law the Inflation Reduction Act (IRA). Since then, lawmakers representing Minnesota in the U.S. Congress — like Ilhan Omar — have touted the bill as a victory for Minnesota. According to the Minnesota Democratic-Farmer-Labor Party, not only will it lower inflation, but it also won’t raise taxes.

The IRA does do many things, but despite its name, it will not lower inflation. And, not only will the IRA not reduce inflation, but it will raise taxes. In fact, Minnesota will probably be among the highest burdened states with these new taxes.

Why is this the case?

What the IRA actually does

Minnesota is a manufacturing-intensive state. In 2021, for example, 14 percent of the state’s GDP came from manufacturing, compared to 11 percent of the national GDP. In fact, Minnesota had the 16th highest share of manufacturing GDP in 2021.

Under a preliminary assessment, the Joint Committee on Taxation estimated that the 15 percent minimum tax on book (or pre-tax) income would disproportionately affect the manufacturing industry. The committee estimated that the manufacturing industry was poised to pay about 50 percent of the new taxes.

This was due to the fact that the earlier version of the IRA eliminated the 100 percent bonus depreciation — which allows companies to fully and immediately deduct the cost of their purchases from their book incomes. Without the bonus depreciation, capital-intensive companies — like manufacturing — would report higher book incomes and thereby pay higher taxes under the IRA.

Since then, the IRA has gone through some changes, and the final version of the bill still retains the 100 percent bonus depreciation. This effectively reduces new taxes that would fall on subject companies.

There is a catch, however. The bonus depreciation provision will be phased out between 2023 and 2026. This means that after the phaseout, with a normal depreciation schedule, the IRA will work as originally intended: disproportionately raising taxes for the manufacturing industry and other capital-intensive industries.

Moreover, as the Daily Signal estimates, even with the bonus depreciation in place, manufacturing would still “bear at least 2.5 times as much of the burden of the tax, relative to the sector’s size as a share of the economy.”

Manufacturing is already troubled, new taxes won’t help

Research already shows that high corporate taxes are bad for the economy. They discourage investment, job creation, and income growth.

But for manufacturing, things will get worse. Manufacturing has been in decline both nationally and in Minnesota. As the Daily Signal also notes, “Employment in U.S. manufacturing dropped by about 33 percent between 2000 and 2010. Since then, manufacturing’s steep decline has reversed slightly, but manufacturing jobs remain more than 25 percent below 2000 levels.”

In Minnesota, the manufacturing industry has followed this trend, losing more than 20 percent of its jobs between 2000 and 2020.

Furthermore, between 2018 and 2020, GDP in the manufacturing industry declined. While in 2021 the industry started to recover, these high taxes will potentially negatively affect that recovery.

Minnesota businesses do not need new taxes

Minnesota is already a high-tax state. Any new taxes at the federal level would affect our state’s businesses and workers disproportionately negative compared to other low-tax states.

And despite its many promises and applause by members of Congress, the IRA will impact one of our most important industries — manufacturing — more heavily, further hurting Minnesotans and Minnesota business already suffering under burdensome taxes.