Archives for Tax Policy

Minnesota has Fifth-worst Tax Climate Among States

What makes one state more attractive than another as a place to do business? There are a lot of factors, but some, including tax policy, is directly under the control of the Legislature. A new report says that Minnesota’s tax policy is making the state less attractive than it could be for business. In fact, it’s tax policy is the fifth-worst in the country, beating out only Rhode Island (46), Vermont (47), California (48), New York (49), and New Jersey (50).

This morning, the Tax Foundation released the latest edition of its annual publication, the State Business Tax Climate Index. It is “an indicator of which states’ tax systems are the most hospitable to business and economic growth.” The report looks at five taxes as they relate to business: personal income taxes, sales taxes, corporate income taxes, property taxes, and unemployment insurance taxes, using 118 variables to compare the 50 states against each other. The five taxes are weighted in the order given, so that, for example, personal income taxes are 33 percent of the index weight and unemployment taxes are 11 percent. (The authors say the weighting reflects the variation across the states for each kind of tax, so personal income taxes, which range more widely than the others, get the most weight.)

Most of the report is taken up with a description of the economic effects of the various kinds of taxes, how states implement the taxes, and how they vary across states. For example, taxes vary not only by the rate or rates the state applies, but also in the definition of the base (what is taxed) as well as any credits that employers or households may apply against the tax.

The good news for Minnesota is that its standing didn’t fall from the previous year. The bad news is that it didn’t get any better–and scrapes the bottom of the barrel, at 45. Its best showing was in property taxes, where it came in at 26. (Unfortunately, property taxes as only one-third as important in the index as is the individual income tax–for which Minnesota ranks 44.) The rankings are as follows: Corporate taxes: 42; personal income taxes, 44; sales taxes, 36; unemployment insurance tax, 34; property taxes, 26.

The top best states: Wyoming, South Dakota, Alaska, Nevada, and Florida. Some states well-even California improved by letting a temporary tax increase expire. Maryland let its “millionaire’s tax.” Massachusetts is gradually reducing its corporate income tax rate. North Dakota cut income tax rates for both individuals and companies.


Not Enough of the Rich to Close Budget Deficits: Governing Magazine

One problem with covering deficits by singling out the rich for tax increases is that there are not enough of them. So says Governing magazine–hardly an outlet of the so-called “1 percent.”

The magazine, in its December 2011 issue, also says “The more progressive the income tax rates, the greater the volatility is going to be.” That’s one reason, I argue, why depending on the income tax, especially “soaking the rich,” is an unwise policy. The magazine cites this volatility as one reason for the recent budget deficits of California (top rate: 10.3 percent) and New York (top rate: 8.97, introduced on January 1, 2009).

While raising the taxes (only) on high-income earners is “a relatively palatable idea politically,” says Governing, “there aren’t enough wealthy people around to make up most deficits through a 2 or 3 percentage point hike on a limited pool of individuals.”

The Star-Tribune, meanwhile, says that increasing tax rates on a few people is the centerpiece of Gov. Dayton’s legislative agenda … for 2013. The governor is correct in saying that the state needs to get away from “one-time gimmicks like school shifts and tobacco borrowing.” But, to borrow from the article from Governing, the solution is not “a more progressive state income tax.” A far better path would be to some reforms to state government (also mentioned in the Strib) that would lower the cost of government.


Update: MinnPost notes this commentary, but says that “Mr. LaPlante excludes a bit of the nuance of the article.” Well yes, I did. The fundamental point of the article is that people who expect “soak the rich” tax increases to adequately address budget deficits will be disappointed. The fact that estimates aren’t always right is a minor point. After all, you might say that another name for an estimate is a “scientific guess.” Are estimates more likely to be wrong in a recession? I don’t know. But the problem addressed in the article is more than a measurement error. As the Kellogg School of Management at Northwestern University points out, “those who experienced the greatest shock to their incomes [during the recession] were likely the top 1 percent of earners.” Legislators, overload your expectations on them at your peril.

What’s Good for ObamaCare is Bad for Minnesota Jobs

When industry trade groups and companies talk about public policy, they often engage in special pleading, asking for special tax breaks or regulatory preferences. But sometimes their claims do in fact serve the public interest–especially when they call attention to unusual taxes or onerous regulations. Such is the case with the medical hardware industry and its beef against a tax levied on it as part of ObamaCare.

First, some background. In an attempt to make Affordable Care Act (ObamaCare) “fiscally responsible,” Congress enacted a number of measures to increase federal revenue. One was an excise tax on medical hardware, such as pacemakers.

Medical hardware just happens to be a Minnesota specialty, so the Affordable Care Act has a extra impact on the state. It so happens that in this case, industry concerns line up with the concerns of a free-market advocate.

Taxes are needed to fund necessary and proper government functions. But the hardware tax is bad for at least three reasons. First, it was meant to support an unwise law. Second, it’s a special rather than a general tax, which makes it suspect. Finally–and to make a parochial point–some of its harm lands squarely here in Minnesota and nowhere else.

How much harm? A new report claims that (to quote an article from the Star-Tribune), “the device tax could cost more than 43,000 job losses nationally, including 2,767 in Minnesota, home to one of the country’s most robust medical-technology sectors.” The report estimates that in 2009, all forms of medical device manufacturing employed 24,825 people in Minnesota. That’s more than tech-rich Massachusetts (23,960), though a distant second to much-larger California (76,834).

Shaye Mandle, a vice president with the Minnesota-based trade group LifeScience Alley, said, “Hopefully, this will create more energy around the repeal of the tax before it takes effect.”

Mandle added, “We are more dependent on medical technology than any other state.” All the more reason for Minnesotans to be concerned about the over-reaching health care law.

The report itself has a rather dull name: “Employment Effects of the New Excise Tax on the Medical Device Industry.” Don’t let that scare you away; it’s readable, and you can find it at the website of the Advanced Medical Technology Association (another trade group), in PDF. The authors are two economists well known in policy circles, Diana Furchtgott-Roth and Harold Furchtgott-Roth.

Here are two other points from the report:

  • The new tax will “raise the average effective corporate income tax rate [of the affected companies] to one the highest effective tax rates faced by any industry in the world.” This will be especially hard for start-up firms, which often have little income.
  • “The Joint Tax Committee estimates that the tax will raise $20 billion in revenues over the period 2013-2019, a cost to device companies and the American consumer. The economic impact of the tax on wages and output will be significantly higher.”

The report also notes that medical hardware is one of the few bright spots of manufacturing in America. I’m not in favor of special favors for manufacturing, but singling out one of the country’s–and Minnesota’s–stronger segment in manufacturing makes me … sick.

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