July 1st was the date that much of the Minnesota’s 2014-15 tax plan began to be enacted. This includes the new tobacco taxes, the corporate loophole closings, and, of course, the increased income tax on the top 2%. As we pass this milestone, expect critics to make their complaints known. At this point their threats are pretty familiar: taxes force the rich to move out of state and take their jobs with them.
Nowhere was this refrain more tired than in the debate over corporate taxes. For example, this year, the Legislature and Governor faced relentless lobbying from no fewer than four business associations that wanted to preserve a jumbo-sized tax loophole known as the Foreign Royalty Subtraction. This loophole, in essence, created an in-state tax haven for intellectual property. The theory was: if Minnesota shelters certain royalty payments for intellectual property, businesses will create more jobs, and not just any jobs, but high-paying, high-tech jobs in research and development.
As it turns out, this tired theory of taxes was no truer here than it has been in Ireland, Bermuda, or Vanuatu. During the final days of the recent Conference Committee on Taxes, non-partisan staff from the Department of Revenue explained that only three of the top twenty corporations that claimed the Foreign Royalty Subtraction actually had R & D operations in Minnesota. In the case of the other seventeen, Minnesotans were on track to spend $132.8 million over 2014-15 to subsidize corporations in places like Cupertino, Seattle, and Manhattan. Much like a haven in the Cayman Islands, these corporations relocated their tax bills to Minnesota, but not their jobs.
Exemptions for foreign source royalties were part of the Minnesota tax code since 1984. This misguided tax policy stood for nearly thirty years. Up to the last minute, powerful business lobbies worked hard to keep it that way. Our Legislature and Governor deserve credit for standing up to special interests this year: the new plan closed over $411 million in corporate tax loopholes. As a consequence, many of those who will pay more will spend more too: first, to lobby for new loopholes and, second, to unseat the policymakers who closed them.
While the problem with foreign source royalties was an expensive one, it was not the only one. Three decades of failed tax policies can’t be undone in a single session. Our tax system is still burdened with (at least) six major dysfunctions that need to be addressed to make Minnesota’s state budget more fair and sustainable. These challenges include corporations that:
1) Shift Profits Overseas: Corporations have been artificially shifting profits overseas to avoid taxes with increasing frequency since 1983. This trend’s impact in Minnesota has been substantial. When factoring for tax losses at both a state and federal level, estimates place Minnesota’s costs as high as $1.3 billion per year.
2) Incorporate to Avoid Taxes: In 1986 the Tax Reform Act made the federal individual income tax rate became lower than the corporate income tax rate. In the wake of this change more and more large businesses began incorporating using legal structures commonly call ‘pass-through’ entities that are taxed at the individual rather than the corporate rate. The share of our nation’s business revenues that flow through these pass-throughs has roughly doubled since 1986.
3) Pass Costs onto Taxpayers: Low-road employers systematically pass costs onto government by paying so little that their employees remain eligible for basic work, family, and food supports. Per a recent Congressional estimate, taxpayers are subsidizing Wal-Mart by up to $5,815 per employee annually when you add up the housing, food, health care, and child care support the employees need from state and federal.
4) Create ‘Nowhere Income’: Many large corporations structure themselves in a way that they can sell their goods into other states while remaining un-taxable in those states. This tax strategy has led to a proliferation of profits that have escaped the tax codes of our, or any, U.S. states. While 24 of the 47 states that have a state income tax have closed this loophole, Minnesota has not.
5) Demand One-Sided Tax Deals: Minnesota has made limited progress in creating standards and reporting requirements for certain kinds of tax breaks, like tax increment financing deals and certain tax credits. Still, other tax spending that corporations receive comes with no-strings-attached. Our corporate tax system offers too many exclusions, exemptions, subtractions, deductions, apportionment deals, and preferential valuations for which Minnesotans ask nothing in return.
6) Pay $0 in State Income Taxes: Minnesota has created a three layer system to try to ensure that all business in Minnesota pay something for the roads, schools, and social service systems they rely on. The state has a corporate franchise tax, an alternative minimum tax, and minimum fees. Even with these fail-safes in place, 32% of corporate filers pay none of these taxes.
The tax changes coming on July 1st are not overreach; they’re overdue. They only begin to fix the failed tax policies of the last thirty years. This new tax plan will help break our run of chronic state budget deficits. Here’s to hoping that it will also break the spell that anti-tax ideology has cast over our state’s political debate.
— Chris Conry
Chris is TakeAction Minnesota’s Organizing a New Economy Program Manager.
