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By Danielle Killey, Forum News Service, Published January 26 2013

Businesses worry about Dayton’s tax plan’s effects

ST. PAUL – Someone has to pay.

Gov. Mark Dayton’s budget proposal would add more than $3.1 billion in new tax revenue over the next two years. Higher income taxes on the richest Minnesotans would bring in about $1.1 billion, but the rest has to come from somewhere. Businesses are worried they, and their customers, would take the hit.

Legislators, who must approve any tax change, admit they do not have all the information needed to decide if Minnesotans would benefit or be hurt by the Dayton plan. Republicans are especially vocal, questioning Dayton’s claim that the average Minnesotan will pay about the same in taxes under the proposal as now.

“How can that be?” Rep. Rod Hamilton, R-Mountain Lake, asked, since total tax increases would be more than $3 billion and property tax refunds would return a third of that, leaving $2 billion that someone must pay.

Mike Hickey of the National Federation of Independent Business-Minnesota said new taxes on businesses will be passed on to customers.

“This is truly a net sales tax increase of $2.1 billion, and most of that is going to fall on the businesses,” said Beth Kadoun, tax and fiscal policy director for the Minnesota Chamber of Commerce. “It’s a huge concern for the business community.”

Much of that concern stems from a proposed new tax on services, including those that businesses provide to other businesses.

The governor’s plan also includes a lower 5.5 percent sales tax rate, down from 6.875 percent, but would expand what is taxed.

“We like the idea of lowering the overall sales tax rate,” Bruce Nustad, president of the Minnesota Retailers Association, said. “The tradeoffs, though, are a little difficult for us.”

Revenue Commissioner Myron Frans said the taxing of more services, such as haircuts, auto repairs and accounting, is meant to reflect a change in the state’s economy. In the 1960s, people spent about a third of their money on services and the rest on goods. Now, that has flipped, Frans said.

He said the typical consumer would not pay more in sales tax overall because “the rate reduction is so significant.”

“I think this would be relatively neutral for the Minnesota economy,” said Jay Kiedrowski, a senior fellow at the University of Minnesota’s Humphrey School of Public Affairs.

The tax on business-to-business services offers the most risk for a negative impact, he said.

It is hard to predict what businesses would do to offset the tax changes, Frans said, but it could include lower wages, higher prices or less of a profit.

That means even though sales taxes are expected to even out for typical consumers under the plan, Minnesotans could end up paying more overall because of price increases or other charges.

Nustad said he is not sure the lower tax rate would be enough to appease businesses.

“Retailers would really have to be convinced that lowering (the rate) overall would spark spending on the part of consumers,” he said.

Kiedrowski said while businesses might charge more to cover the taxes, they cannot raise prices too high.

“It’s a competitive marketplace,” he said.

Some businesses are worried the plan would affect their competitive edge. Another piece of the governor’s proposal includes a tax on articles of clothing that cost more than $100, which has caused a stir.

Tax-free clothing has made Minnesota unique and drawn shoppers here, Nustad said.

“It’s tough to envision a tax bill where we’d embrace the clothing tax,” he said.

There are pieces businesses like in the governor’s proposal.

A plan to tax Internet purchases has been applauded by business leaders. The rule, often called the Amazon tax, would require online businesses with state ties to collect Minnesota sales tax on purchases.

That change would bring in an estimated $5 million a year for the state. Kadoun said the change also would make the system fair, putting Minnesota’s brick-and-mortar businesses back in competition with Internet-based businesses.

“We think that Minnesota passing that language really would level the playing field,” Nustad said.

A federal solution would be ideal, Nustad and Frans said, but Minnesota taking action would be a start.

Dayton also has included in his plan a drop in the corporate tax rate from 9.8 percent to 8.4 percent. He would freeze businesses’ state property taxes for two years as well and change how the rate increases in the future.

Those are good changes, Kadoun said, but they do not balance the concerns.

“Those positives are miniscule as compared to the overall tax expansion,” she said.

Questions still remain about the details of the proposal, but that has not stopped businesses from worrying.

“Part of it is trying to still sort through what all he’s taxing,” Kadoun said. “But the feedback we’re hearing is this is just terrible for Minnesota’s business climate.”

Frans said the governor is serious about hearing new or different ideas for a plan, though the budget must remain balanced.

Kadoun acknowledged this is only the first version of the budget plan and it likely will change before it is finalized.

“Sometimes it’s easy to say you don’t like the whole thing because you don’t like parts of it,” Nustad said. “We’re going to try to be a constructive part of the conversation.”