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A Reward for Job Creators: Higher Taxes?

By John Spry

St. Paul Pioneer Press (MN) – Sunday, October 21, 2012

Jobs are the leading concern of voters as the election nears. People want to get the economy moving again. So why are some of Minnesota’s leading lawmakers sponsoring bills to create a “jobs tax” on Minnesota payrolls?

Jobs tax” is the term Rep. Ann Lenczewski, DFL-Bloomington, uses to describe a poorly written corporate income tax code that penalizes the expansion of payrolls in Minnesota.

State corporate income taxes are based on the share of a firm’s payroll, property and sales that are located within the state.

Bills by DFL leaders Rep. Paul Thissen and Sen. Tom Bakk would base a third of the state corporate tax on the size of firms’ Minnesota-based payroll.

Corporations creating more jobs in Minnesota would get a larger tax bill as punishment for their expended payrolls. Minnesota would have the worst corporate tax environment in the industrialized world under the DFL leaders’ proposal.

These bills lack economic or common sense.

When you tax something you get less of it.

Taxing firms based on their Minnesota payroll sends a powerful message that Minnesota doesn’t want job-creating investments. Accounting firms will warn their clients against growing jobs in Minnesota.

The effect of the DFL leaders’ tax bill would be significantly higher taxes on Minnesota-based firms, like General Mills, and lower tax bills for their out-of-state competitors, like Michigan-based Kellogg’s, because of the larger Minnesota payroll of our homegrown companies.

Democratic economists agree with the common-sense notion that taxing Minnesota payrolls is harmful to our state economy.

Taxing the payrolls of corporations in Minnesota would reduce employment in Minnesota, according to research published in the peer-reviewed Journal of Public Economics by Professors Austan Goolsbee and Edward Maydew. Goolsbee was chairman of President Obama’s Council of Economic Advisors.

The proposed tax hike on Minnesota payrolls would cost Minnesota around 70,000 permanent jobs in the long run, according to the Goolsbee and Maydew estimates.

They also warn policymakers to consider the lost individual income tax revenue from lower Minnesota payrolls when evaluating a corporate tax increase.

Former Rep. Julie Bunn, DFL-Lake Elmo, a former Macalester College economist, sponsored legislation to end this tax on Minnesota job creation. She says ending the corporate tax formula that penalizes Minnesota-based payrolls will “make Minnesota more competitive relative to other states.”

In-state payrolls are reduced by taxes on in-state payrolls, according to data from individual businesses analyzed by non-partisan economists Kelly Edmiston of the Kansas City Federal Reserve and Javier Arze del Granado of the International Monetary Fund in the peer-reviewed journal Public Finance Review.

Thissen says he wants to tax “rich corporate interests” instead of ordinary Minnesotans. He may believe that government can collect taxes from the legal fiction of corporations without ever having to impose a tax burden on ordinary people. Nevertheless, experience and evidence reject this.

Professor James Hines of the University of Michigan and Kansas City Federal Reserve economist Alison Felix observe, “It has long been understood that it is nonsensical to say that businesses bear tax burdens.” Instead, real people bear the entire tax burden.

The Minnesota Tax Incidence Study says the corporate income tax is a regressive tax. A regressive tax hits the poor and the middle class harder than the rich. The DFL leaders’ tax bill disproportionately increases taxes on lower-income workers.

If we really want job growth, we should move from taxing jobs, investment and saving toward taxing consumption.

The 21st Century Tax Reform Commission proposed replacing the corporate income tax with broader consumption taxes to modernize our tax code. Political leaders should take another look at its evidence-based recommendations if they want to maximize Minnesota’s job growth potential.

John Spry is an associate professor in the Opus College of Business at the University of St. Thomas and was a member of the 21st Century Tax Reform Commission.