Bill Blazar said he generally concurs with
what Toby Madden from the Federal Reserve Bank (who spoke to the Civic
Caucus on Dec. 7, 2012) observed about the nature of the current
"There are factors affecting the recovery in
Minnesota and the entire Upper Midwest that I'm not sure we've
wrestled with before in the context of tax reform," Blazar said.
1. The rapidly aging population today.
2. The world economy. He said
Minnesota companies that have found a way to gain customers outside
the U.S. generally have done much better than those dependent on the
domestic economy. For example, to tap the overseas market, Hormel
bought Skippy to get access to Skippy's international distribution
and customer list. Similarly, United Health Group bought a Brazilian
hospital and health plan this fall.
Those two factors, Blazar maintained, make a
very different environment for thinking of tax and spending reform. He
questioned whether the governor and the Department of Revenue
understand how the state is changing and how it's developing and
whether or not they've factored that into their plan.
Minnesota has made some strategic changes in the tax structure in past
years. Blazar said Minnesota eliminated its personal property tax
long before other states. "That was a big deal in terms of building
the computer industry in the state, because computers were considered
Minnesota's corporate income tax is
structured by three factors. Multistate companies must apportion their
income to the state based on percent of sales, percent of property and
percent of payroll. The state put a higher weight on sales and lower
weights on property and payroll. "The whole idea was to encourage
businesses to have the property and the payroll here and to sell to
the whole country," Blazar said. "It's a great example of seeing where
the economy was heading and thinking strategically about the change."
The Taconite Amendment was another example,
he said. The policymakers thought of a strategic change in the tax
code to let that industry get going.
"We really do need to be thinking about how
the economy is changing," Blazar said. "Any strategic changes we
consider ought to be at no lower than an industry level. And thinking
about the overall economy and then applying that knowledge to the tax
code makes a lot of sense."
We haven't made enough progress on the spending reform agenda. For
10 years, the Chamber has had a series of recommendations on how to
restructure and redesign the way we spend. Part of that motivation is
the aging population and growing diversity of Minnesota.
Minnesota businesses use and expect public
services just like everybody else, he said. Companies want education
and good roads. Everybody wants that but without raising the price.
"We all want more stuff and the price to go down even more," he
We haven't made enough progress on the
spending reform agenda, Blazar continued. "That's really hurting us.
One of our fears is that we leap into this discussion of tax reform,
since we haven't dealt with the issues of spending, and now we find
ourselves trying to restructure a tax system in an environment where
we not only need more money, but the more is forever."
It's easier to fix the tax system when
you're not raising taxes or, better yet, when you can give people some
relief, he said. Now we're positioned to have a discussion about tax
reform in an environment where some would argue we need more money.
"That's why the spending reform agenda is so much more important than
tax reform. We need to make some significant progress on the spending
In 2008, the business community supported a $6 billion tax increase
over 10 years for transportation by raising the fuel tax and
instituting a metro sales tax for transit. Lots of people in
business saw a problem in the transportation system - highways and
transit - and they were willing to pay to fix it, Blazar said. It was
going to be a good value. Now their constituents wonder, was the deal
we made in 2008 worth it? Did the public sector deliver a high value
for that fuel tax increase and metro sales tax that we supported?
Blazar said the Chamber is not ready to say
right now that the state needs more general fund money, because we
haven't really done the work to deliver value. "We'd like the
Legislature to focus on spending reform and work through those
issues." There are plenty of actionable ideas from outside groups.
We should talk about tax reform assuming it
will be a revenue-neutral solution. Our fear is that when we talk
about tax reform, the discussion will become about where to raise more
money, Blazar commented. We've suggested that the governor propose a
revenue-neutral set of reforms. We should get a new tax structure and
then decide how much money we need to raise. "If we mix the discussion
of the structure and the amount of money, issues of how much we raise
will drive the discussion of reform. We won't have a discussion about
the structure of a tax system for a 21st century economy."
The ultimate goal of tax and spending reform should be to ensure a
system that encourages economic change and growth, job creation and
retention, and a high quality of life for all Minnesotans. Beth
Strinden Kadoun said both Gov. Mark Dayton and Commissioner of Revenue
Myron Frans are saying their number one principle is to create jobs
and improve competitiveness, the same thing the Chamber wants to see.
"We believe when state officials are looking
at tax reform they have to keep in mind key tax-policy principles:
competiveness, stability, transparency, simplicity and making sure
Minnesota's economy is growing," she said. "It's a competitiveness
Minnesota is a high-tax state. Minnesota ranks high on education,
workforce, patents and volunteers, but we are a high-tax state, Kadoun
continued. Minnesota ranks:
- Forty-fifth worst on the state business tax climate index.
- Fiftieth worst out of 51 on the business tax index for
entrepreneurship and small business.
- Forty-third worst for the small business survival index.
- Third highest for corporate tax rate, at 9.8 percent. Other
states and countries have lowered the corporate tax rate. "That's
your billboard rate," Kadoun said. "Often people will not look
further after they see that."
- Eighth highest, at 7.85 percent, on individual income tax rates.
Ours is one of the most progressive income tax systems in the
country. Minnesota is in the top three in structural progressivity,
according to data from the Minnesota Taxpayers Association. Lower
income taxpayers in Minnesota pay some of the lowest taxes in the
nation and higher income taxpayers already pay some of the highest
in the nation. This is due to our current income tax rates and our
generous working-family income tax credit and other tax provisions
benefiting lower-income households.
Some changes that would improve the tax system. Kadoun pointed to
three changes the Chamber believes would be valuable:
1. Treat main street retailers the same as
e-commerce. Currently, online retailers without a physical
presence in the state don't have to collect sales tax. "This is one
idea we should be able to make progress on," she suggested.
2. Get rid of the upfront capital
equipment sales tax, under which businesses get taxed on capital
equipment and pay those taxes upfront, getting a refund later.
"That's a problem, especially for small businesses," she said.
"Changing that would be very helpful for our tax system."
3. Don't allow the individual income tax
rate to get too high compared to our border states. There is a
North Dakota proposal to reduce their tax rate for individuals from
its current rate of four percent. Ours, at 7.85 percent, is the
eighth highest in the country. The concern is that most businesses
are pass-through entities, so they pay their business taxes through
the individual income tax. The corporate income tax will raise $1.9
billion for the FY 2014-2015 biennium. But there are 10 times more
companies where the corporate income tax is not a factor. "Their big
deal is the individual income tax," Blazar said. Kadoun added that
companies are very sensitive to a marginal tax increase. We must be
concerned about the impact of an individual income tax rate increase
on investment decisions and net business immigration.
The sales tax system does not reflect the
change to people buying more services than goods. An interviewer
pointed out that 60 years ago, two-thirds of what people bought were
things; now two-thirds of what people buy are services.
"The tax system hasn't kept pace with the
change from goods to services, leading to more instability in the
sales tax," Kadoun responded. The Chamber favors expanding the base of
the sales tax on consumer purchases and lowering the rate.
Kadoun and Blazar also said the sales tax
should be imposed at the point of the final, or retail, sale. "Focus
on consumer goods rather than taxing business inputs," Kadoun
commented. Virtually all tax-policy experts and economists agree that
sales tax expansion should be on consumer goods and not on business
inputs and services, he noted.
Taxing business inputs can affect factors
such as fairness among businesses, tax pyramiding, competitiveness and
economic distortion in the marketplace. For example, larger businesses
gain a competitive advantage over smaller businesses if smaller
businesses have to hire accountants and pay sales taxes on the
service, while larger businesses can afford to have in-house
accounting departments, whose services would not be taxed. If
Minnesota taxes business inputs, but other states don't, there is an
uncompetitive burden on Minnesota businesses that compete with
businesses elsewhere without these additional cost burdens.
Blazar noted that 40 percent (or $4 billion)
of Minnesota's total sales tax revenue ($10 billion) comes from
business-to-business transactions, such as one business buying
furniture from another. The Chamber wants to eliminate the sales tax
on business-to-business purchases and wants sales taxes paid at
retail, the point of final consumption.
Taxing clothing purchases is a contentious issue. Kadoun reminded
the group that Gov. Jessie Ventura got "beat up" trying to broaden the
sales tax base. "Politically, it's very difficult."
An interviewer pointed out that Minnesota is
one of only four states with no tax on clothing. Blazar responded that
the Chamber likes a broader sales tax base and lower rates. He noted,
though, that there is "lots of sensitivity among our members on taxing
clothing." The Mall of America advertises that the state has no sales
tax on clothing. Retailers on the South Dakota border also benefit
from the same advantage.
Should we consider taxing food, not clothing? Blazar said that his
personal opinion is that we should tax food and not clothing. There's
some economic advantage to taxing food and people won't drive as far
to buy food as to buy clothing. Food would provide a much broader
base, which brings more predictability and stability in the tax. He
commented that the state could adjust everybody's withholding table so
that lower-income families get more in every paycheck to work against
the impact of the sales tax. But, Blazar said, the Minnesota Chamber
of Commerce Fiscal Policy Committee does not support the idea of
Some tax system solutions might better come from the federal
government. In response to a comment from an interviewer, Kadoun
said there really needs to be a federal solution to the "e-fairness"
issue. The affiliate nexus bill, which would require companies to
collect sales taxes on online purchases if they have affiliates
located in the state, is only a small piece to help even the playing
field with remote online retailers. "If we extend the sales tax to
clothing, that will exacerbate the current 'e-fairness' situation,"
According to Kadoun, the state Department of
Revenue will be issuing a report on the estate tax in February.
Minnesota currently exempts the first $1 million of an estate from
taxes, while the federal government now exempts the first $5 million.
"Most other states currently don't have an estate tax," she said.
"There might be more of a push now to get to some conformity with the
Broadening the sales tax base can help offset the effects of an aging
population. A questioner asked what changes we should make in the
state's tax system to adjust for the aging of the population. Kadoun
responded that as people age, they buy fewer goods and more services,
which argues for a broader sales tax base. In addition, an aging
population impacts individual income tax revenue, as seniors generally
pay less in individual income taxes. Broadening the sales tax base on
consumer purchases can help offset the coming reduction in the income
The Chamber is uncertain whether a change in the tax system like the
Taconite Amendment would be helpful to any industry in the state
today. In response to a question, Blazar said he didn't know
whether there is an industry segment where something like the Taconite
Amendment would be appropriate. He said we didn't have pass-through
businesses 30 to 40 years ago. "The changes in how businesses are
structured might alone be a basis for making fundamental changes in
the tax system."
He talked about the declining demand for
paper and lumber from forest products industries and said Minnesota
has lost five major producers in that area. "Many businesses haven't
figured out what to do next, given the decline in demand for paper.
I'm not sure if a Taconite Amendment-like change would have any
effect. But that's the level of the conversation we ought to have."
Companies sense a recent decline in the quality of Minnesota's
workforce. Responding to a question about the high quality of the
workforce, Blazar said the Chamber, in talking to companies over the
past year, has seen that the companies do place a value on that high
quality. "Many businesses put up with higher taxes and a more complex,
cumbersome regulatory environment in Minnesota because of the quality
of the workforce," he noted. "But companies in the last few years have
sensed a lowering in the quality of the workforce or have been unable
to fill openings in Minnesota. As that happens more and more, they
become a lot more sensitive on those other cost factors."
Changes in the property tax system in 2001 reduced the disparity among
different property classes, but businesses still pay almost one-third
of the state's property taxes. In response to a question about
property taxes, Blazar commented that the structure of the local
property tax system adopted in 2001 is the best we've had in years and
that the disparity among property class rates is substantially less
than it was before. But the changes that year didn't deal with
property tax relief to homeowners. "We're no further toward a real
system of residential property tax relief today than in 2001," he
Kadoun added that even though the changes in
2001 lowered the property tax class disparity between businesses and
other property, they added a new statewide property tax on businesses,
which now collects $800 million annually and makes up approximately 28
percent of the business property tax burden. So business properties
pay their local property taxes, the statewide property taxes and
voter- approved school levies for capital expenses. While businesses
have 13 percent of the state's market value, they pay 30 percent of
the property tax. "There still is a great disparity," she said. "For
businesses, Minnesota property taxes are sixth highest in the nation
for some business types, while for homeowners, they are 28th highest."
Getting more value in the public sector may require a whole new
business model. An interviewer commented that if we're talking
about value in the public sector, we must change the business model.
He compared it to retailing: "We didn't get value in retailing by
having department stores lowering prices; we went to a whole new
"Working the current business model will
only get you so much," Blazar responded. "The citizens have concluded
it isn't enough. They want a lot of stuff at the same or a lower
The Chamber is different from the Itasca Project and Greater MSP.
A questioner asked about the differences between the Chamber and other
organizations, such as the Itasca Project and Greater MSP. Blazar said
the Itasca Project is really a civic organization, whereas the Chamber
is a business organization and sees itself as a voice of the business
Greater MSP, he said, is a regional economic
development organization, created to present the Twin Cities region to
the world; to convince companies to locate here; and to encourage more
outside customers for the region's businesses. "That's hard work,"
Blazar pointed out. "Everyone should encourage Greater MSP to stick
with its focus on business-attraction and recognize that it will take
three to five years to come up with results."
The Chamber has an economic development
program called Grow Minnesota!, Blazar continued. Last year the
Chamber, in partnership with about 60 local chambers statewide,
visited 800 businesses and helped 125 of them. "The program's focus is
on working with businesses already in Minnesota to help them be more
successful. Many of the companies we see are not Chamber members.
We're focused on retention and growth of the businesses we have."