How should state policymakers approach e-cigarettes?
One of the questions of economics teaches you to ask is ‘compared to what?’ Someone might tell you that a job paying $10 an hour is bad, but any reasonable…
If you drive a car, I’ll tax the street
If you try to sit, I’ll tax your seat
If you get too cold, I’ll tax the heat
If you take a walk, I’ll tax your feet‘Cause I’m the taxman, yeah, I’m the taxman– The Beatles, ‘Taxman‘ (1966)
Being a Minnesotan is to know how George Harrison felt when he wrote that song. Not only do we have the fifth highest rate of state personal income tax in the United States which Gov. Walz wants to push up to third, and not only do we have the fourth highest top corporate income tax rate in which the Governor wants to push up to second, but our state government is also taxing loans which were a vital lifeline for many businesses hit by the pandemic.
Almost a year ago now, I wrote that:
…the government is shutting down large swathes of the economy. As a result, businesses are losing revenues, but they will still have outgoings to cover, such as rent…
Given that government is inflicting this damage upon these businesses and workers — which might be unavoidable if we are to prioritize the fight against the coronavirus — government has a responsibility to help these businesses and workers through it. In practice, this means cash for businesses affected by the shutdown, such as bars and restaurants, preferably in the form of grants rather than loans. These viable, even thriving enterprises do not deserve to be burdened with further debt for no fault of their own.
This is how a small government, free market guy could get behind something like the federal government’s Paycheck Protection Program (PPP):
…as a believer in responsibility — ‘You break it, you pay for it’ — the body which is responsible for this shutdown is responsible for ameliorating its effects.
The PPP loaned businesses money, a loan which would be forgiven if the borrower could prove that they used the funds for qualifying purposes, such as payroll costs, mortgage interest payments, rent, and utilities, within a specified amount of time. It was sound policy, given the circumstances.
Of course, our state government saw it as another way to stuff its own coffers. A forgiven loan ordinarily qualifies as income, but Congress exempted forgiven PPP loans from federal income taxation. Many states, however, do intend to tax them, either by treating forgiven loans as taxable income, denying the deduction for expenses paid for using forgiven loans, or both. As Figure 1 shows, Minnesota is the only state in the entire upper Midwest that currently taxes forgiven PPP loans.
Source: The Tax Foundation
This is hitting some Minnesota businesses hard. As KBJR 6 reports:
…what was meant to be a lifeline for small businesses could now mean financial ruin.
Jason Vincent owns the Boat Club in Duluth and two other restaurants.
“We’re struggling enough,” Vincent said. “Right now 2021 is the year of just surviving and hopefully digging out of holes, not to try and pay back debt that was given to us to actually survive the pandemic.”
Vincent received more than $500,000 in PPP loans.
While loans like that would usually be taxed as income, Congress chose to make PPP loans exempt from federal income taxes.
Though many states adopted Congress’ exemption, at this point, Minnesota still plans on taxing the loans.
“We can’t afford to be taxed almost 10% on help that was given to us to keep our doors open,” Vincent said. “It just doesn’t make sense.”
Small business owners like Vincent might have to pay thousands in state taxes on money meant to help them recover.
Fully exempting PPP loans would cost the state government about $437 million. That sounds like a lot of money – it is – but it wouldn’t be a bad thing to spend some of Minnesota’s forecast $1.6 billion budget surplus on. A bill is moving to make this happen and we hope it succeeds.
John Phelan is an economist at the Center of the American Experiment.