Here's how a Star Tribune editorial framed House Tax Committee Chair Rep. Ann Lenczewski's business tax reform bill:
Lenczewski's bill does what experts consistently urge. It eliminates a raft of special tax breaks in favor of a reduction in the corporate-tax rate paid by all — taking the rate down a full percentage point, from 9.8 to 8.8 percent.
Each of the tax breaks Lenczewski's bill would eliminate has powerful defenders, and is in the tax code for defensible reasons.
Everything in the tax code got there because of "defensible reasons," which are not always the same as sound tax principles.
We agree that lowering corporate taxes is a good idea, but we also agree with Rep. Lenczewski. At the very least, cutting business taxes must involve some kind of deal to replace the lost revenue — and supply side economics won't cut it. And as she understands, a revenue-neutral bill would simply keep us stuck where we are. Her bill would generate $100 million more in fiscal 2009 than the Governor's plan.
Business owners and investors would rather keep this unpopular tax than accept a cut and pay their share some other way. Here's why.
A tax levied on business is typically shifted to consumers (in higher prices) or to labor (in lower wages). Only after the first two shifts occur is any remainder borne by the business owners (in lower rates of return). Why trade subsidies and tax breaks — or worse, higher personal income taxes — for a cut in a tax you only have to pay a portion of?
The business tax eventually falls disproportionately on people with lower incomes. The Minnesota Revenue Department calculates this impact in its Tax Incidence Report [Download pdf]. The table shows the Minnesota Effective Tax Rates for 2009 by Population Decile, where you can see the lower half of earners pay a substantially higher percentage of their income in passed-through business taxes.
This makes business taxes virtually invisible to those paying them — that is, to the consumers and employees effectively paying them. In fact, many consumers support higher taxes on business because they don't understand the pass-through effect.
Like scattershot fees, indirect or invisible taxes may be politically expedient ways of raising revenues, but they make it more difficult for taxpayers to fully appreciate how they pay for government services.
Unfortunately, most measures being considered to fix the budget deficit will increase the burden on middle- and lower-income households. Regressive sales taxes, fees and cuts to programs that serve the working poor drop a triple whammy on people already struggling to get by.
Now — while we're trying to deal with a state budget deficit — may not be the best time to work out such a fundamental issue of tax fairness. But if not now, when will we?
— Charlie Quimby