Growth & Justice Blog

A different tone in this year's tax committee hearings, and a clear consensus for more and fairer revenue

I've heard infinite versions of "don't tax me''  or "taxing me or my customers more will destroy my business AND the economy'' in my decades under the dome.   And last week's opposition at a House hearing to ending sales tax exemptions on business services was typical in many respects.   Just because these fears often turn out unfounded _ our economy was performing better, in the 1990s,  when taxes were higher  _ doesn't mean these specific concerns shouldn't be heeded.   

But I don't recall ever hearing as many tax opponents acknowledge, as they made their sincere case against losing tax exemptions on their own business, that our communities do need more revenue for public investment and for dealing with demographic challenges.    Time after time I heard these business owners or their association leaders, who are also citizens,  say that they supported or understood the need for more revenue, just "please, not on me or my customers, this time.''  And when all the opponents got through testifying, alternating one-for-one with those who favored the governor's plan, there were still more testifiers left who favored the reasonable increases in Dayton's plan, and the badly needed investments on the budget side, from early childhood education to transportation to workforce training.   I didn't hear nearly as many angry diatribes against government and taxes in general as I've heard in previous years.

That consensus for more revenue comes through in the Star Tribune's Sunday poll, showing  once again that a majority favor restoring higher income tax rates on the highest income margins, while opinion is evely divided on expanding the sales tax base to more consumer services.   A clear majority opposes ending the exemptions for so-called "business-to-business'' services.

This consensus for "reasonably more'' actually is not new.   Polls show support for revenue sufficiency was strong all through the 12 years of rule by one governor whose slogan was  "give it all back'' and another whose central theme was "no new taxes,'' and  legislative majorities that took the same hard and uncompromising line in 2011-2012.   Especially after budget crises began recurring regularly in 2001 and beyond, polls consistently showed that most Minnesotans thought revenue increases ought to be at least part of the solution for budget shortfalls.  That happened also to be the position of almost all former governors in all three parties through that period.    And in almost every reputable poll I've seen, most Minnesotans think those who have been reaping almost all the benefits of increased productivity in recent years, and who have been paying a smaller percentage of their big increases  in state-local taxes, ought to contribute reasonably more.

 

Dane Smith   

 

 

Jason Lewis' gaping omission in attack on nonprofits

Jason Lewis’ latest attack in his Star Tribune column on Minnesota’s nonprofit community--opening with disdain for the very concept of “shared responsibility"--is wrong in tone and content, and far removed from Minnesota sense and sensibility.

The smart-alecky dismissal of nonpartisan groups ranging from public radio to anti-smoking campaigns was mostly just unfair and cynical and predictable. But the biggest shortcoming was a glaring omission. Lewis did not say a word about the billions of tax-deductible dollars contributed nationally to fundamentalist churches, right-wing causes and conservative think tanks, including, in Minnesota, the Center of the American Experiment. All of those groups must adhere to the rules that forbid political endorsements while allowing religious expression, nonpartisan citizen engagement and communication around public policy.

It would have been fair enough for Lewis to propose reducing tax breaks for contributions to nonprofits, which actually would have the effect of raising federal and state taxes on the affluent. Some progressive tax reformers propose just that. But Lewis didn’t travel very far down that road at all. His obvious aim was to stir up anger on the far right against only those nonprofit, nonpartisan causes and foundations that don't line up with his extremely individualistic world view.

Finally, we at Growth & Justice were pleased to be associated with the other constructive Minnesota organizations listed in Lewis’ “rogues’ gallery." It was instructive to see that Lewis’ idea of roguish causes actually includes “reproductive rights, saving the planet, and world peace." (Horrors!!) But he got it half-wrong in dismissing us as “a merry band of collectivists." Growth & Justice is no more “collectivist" than the moderate Republican former office-holders, business managers and former CEOs who have supported us from our founding. We seek ways to broaden prosperity and business growth, with evidence-tested and cost-effective policies and interventions. And we have been allies with business leadership in this state on a host of policy fronts, including early childhood education, increasing transportation investment and gas tax revenue, and reducing some business taxes. But we are also almost entirely positive in our tone and content and therefore, I suppose, “merry."

Dane Smith

 

Did angels really fear to tread here?

MPR's Bob Collins, reporting on the Angel investor tax credit being considered by the Minnesota Legislature, notes the bankruptcy of VitalMedix, a company that announced its intention last May to move to Wisconsin to take advantage of a supposedly more favorable investment climate. It moved in December.

Back in October, when a different firm announced plans to head across the St. Croix, we noted the dodginess of the tax subsidy game.

Meanwhile, another MPR story tells how the federal medical device excise tax will hit Minnesota disproportionately.

Is the grass really greener on the other side of the river? According to the report of the National Venture Capital Association [Download PDF], Minnesota invested $263 million in 23 companies in 2009, versus Wisconsin's $23 million in 9 companies. 

This isn't to say encouraging venture capital investment in the state is bad. But legislators in both parties need to remember that tax breaks aren't the only thing investors consider when they lay their bucks down.

— Charlie Quimby

No griping about business climate from Mr. Plywood Minnesota (a.k.a. former Sen. Rudy Boschwitz)

The demise of Home Valu (it will always be affectionately thought of as Plywood Minnsota to us old-timers) reminds me that its owner,  former U.S. Sen. Rudy Boschwitz, has been  a stand-up guy in many respects:  a good family man, a community-minded business leader, serious about his Jewish faith and traditions, and at times a voice for moderation and common sense as a Republican Party leader.   

The announcement that his chain of home improvement stores is going out of business reminds me that Rudy was NOT one of those types who was constantly denigrating Minnesota's taxes and business climate.

In doing some research in the 1990s on a book about Rudy's election loss to the late Sen. Paul Wellstone, I ran across a newspaper clipping from the 1970s (when taxes really WERE higher in Minnesota) in which Rudy said it would just be bad form to disparage the business climate in a state where he had become wealthy and successful at business. (Rudy's family immigrated into the U.S. from Nazi Germany in the 1930s and he moved to Minnesota in the 1960s after growing up in New Rochelle, New York.)

In the statements about the company's closing, there is no mention of state business climate issues, only national crises and over-arching private-sector failures brought on by the collapse of the housing bubble and tight credit. Competition from bigger-box national retailers no doubt were a factor. Businesses most often fail because other businesses drive them out of business. 

Boschwitz, of course, was an early supporter of George W. Bush, and as a senior party leader he did approve of the Pawlenty-Bush state-federal tax cuts a decade ago. The ensuing lower-tax decade was a Lost Decade economically for most Minnesotans, perhaps the worst since the 1930s, and one in which Minnesota dropped to about average in tax rankings (see page 15 of Minnesota Taxpayers Association PDF). It also began underperforming the national economy for the first time in many decades.  

Many progressive and moderate business owners recognize that business is actually helped in the long run by taxes if they are converted to smart public investment in human potential and infrastructure, such as education, transportation, and health-care, that support economic security and stability for middle-income folks.  

And that way, those folks more likely can afford to buy carpet and paneling for their basement remodeling projects.  

— Dane Smith

Business leaders focus on success in schools, community priorities

Times are tough in the world of commerce these days but the Minnesota Business Partnership put on an uplifting and clever show Tuesday night, highlighted by a very funny Twitterfest orchestrated by partnership director Charlie Weaver. The fictitious tweets that flashed up on the big screen were inspired, including the one ascribed to Gov. Tim Pawlenty, under the name "veer2right'', in a reference to his presidential prospecting.  

Our favorite part, though, was the recognition afforded to two outstanding public schools, King Elementary in Deer River, and Dayton's Bluff Achievement Plus Elementary in St. Paul, for their progress on student achievement. The videos celebrating and explaining their success should be up soon on the partnership website. (The Partnership is comprised of the CEOs of Minnesota's 100 largest companies and obviously is a major player in policy matters.)

Qwest CEO John Stanoch, a valued member of the Growth & Justice Board of Advisers, and a leader of the partnership's education policy team, pointed out in his presentations of $10,000 awards that both schools have high percentages of poor and minority students and that those conditions "do not have to be synonymous" with low test scores. The principals at each school talked about setting goals and focusing constructive and energetic attention on the students and parents who need help.   

The evening's speakers were focused on community building, with relatively little of the dissing of the public sector or tax rates that sometimes occurs in business gatherings. Even Gov. Tim Pawlenty's keynote address was notable for its rather harsh denunciation of private-sector irresponsibility and arrogance, epitomized by General Motors.  

Doug Baker, CEO of Ecolab, Inc., current chairman of the partnership, took aim at Minnesota's corporate income taxes as a problem, and we agree that those rates could come down as part of an overall revenue-positive tax system reform. But Baker's speech also accurately summarized Minnesota's great tradition of community-minded rather than self-interested business leadership, going back to the Dayton's department store decision a half-century ago to donate 5 percent of its profits to the community. Corporate foundations currently invest about a billion dollars a year in Minnesota, Baker said, "and there's a culture here of stewardship.''  

— Dane Smith

The subsidy game: Slouching toward Wisconsin

The Star Tribune's Thomas Lee reports that "Another Minnesota company leaves for Wisconsin."

Dr. Joseph Ward, vice president of Marketing, said: “RJA Dispersions chose John Wold’s River Bluffs Business Center not only for its attractive location and economics, but also for the availability of industrial level power. Bill Rubin, director of the St Croix Economic Development Corporation coordinated key resources including availability of financial support from Char Gurney and the West Central Wisconsin Regional Planning Commission which is making our expansion plans possible in this difficult financing climate.”

Emphasis mine.

Hey, I get why a manufacturer might covet "availability of industrial level power," even though it's a mystery to me why the company could find better power in Hudson, Wisconsin, than is available in 3M's backyard. Just a hunch, but I think the "availability of financial support" probably played a bigger role.

Hudson is also home of the long-vacant St. Croix Meadows dog track, which promised big crowds, fancy restaurants and an influx of high-rolling tourism when it opened in 1991. You'd think communities would learn, but maybe the weeds growing up in the cracks in the parking lot aren't enough of a reminder.

This move is hardly on the same scale, but it brought to mind that only last week, Dell Inc. announced that it will shut down its state-of-the-art desktop computer manufacturing plant in Winston-Salem, N.C. facility by January, with the loss of 905 jobs.

Dell was promised more than $300 million in state and local incentives to open the [$130 million] plant. But it was required to invest $100 million, create 1,700 jobs by September 2010 and maintain those jobs for 10 more years. If those terms weren't met, the company would forfeit the incentive package.

Dell owed the state another 800 jobs in less than a year. Folding the state-of-the-art tent seems almost honorable.

Dell says it "will absolutely continue to comply with and honor all agreements with various governmental entities," which means it will pay back at least some of the help it received to locate there. As required.

[Winston-Salem Mayor Allen] Joines said he was assured by Kip Thompson, vice president for facilities, that Dell will honor its commitment to repay the $15.56 million the city has provided since Dell agreed to build the plant.

But millions of dollars won't be returned. Public agencies paid to prepare the Dell site for construction, widen roads leading to the plant, and equip community colleges to train company workers before the plant opened.

Our friends at Good Jobs First remind us that Dell was more aggressor than suitor. Greg Leroy's chapter on corporate tax dodges [PDF] details how Thompson ran the negotiations:

“Here’s what it’ll take,” Dell vice president Kip Thompson told Commerce Secretary Jim Fain in May 2004, according to Fain’s notes. “1) free land; 2) free bldg.; 3) no taxes; 4) training at $5m; 5) participation in creation of future value in the community.” The
following month, Thompson said to Fain: “[I am] not wowed here—not sure the state’s stepping up here ...If a state like N.C. can’t get after this, I’m worried for our country — there’s a certain amount of patriotism here.”

Meanwhile, Dell has announced that it would move its Irish operations to Poland in exchange for a 54 million Euro ($80 million) subsidy. The Poles are grateful, but say they are undeluded about the way the subsidy game works.

[W]ith wage costs rising, people here know they may have just a decade to make the most of the “Dell Effect” before the company vanishes again.

Although there's no specific talk of tax concessions in the brief story about the Minnesota company leaving for Wisconsin, the "another" in the headline implies it is part of a trend, and it may be tempting for readers to assume that our supposed unfriendly business tax climate is to blame.

But Wisconsin's total taxes as percent of income is now about 12.2 percent, ranking 13th, compared to 11.8 percent and a 19th ranking for Minnesota.

Let's hope Wisconsin doesn't decide to become Minnesota's Poland. Then, who will be Wisconsin's China?

— Charlie Quimby

Wisconsin, where the venture grass looks greener — so far

The Star Tribune today reports a start-up medical company, which grew out of University of Minnesota research, is considering moving to Wisconsin because of taxes.

No, the decision will not be based on the usual complaint about taxes on the business or its owners. The concern is taxes on high-tech investors in an economic environment where money for research is very difficult to obtain. The company believes investment dollars are greener on the other side of the border because of a Wisconsin law that gives investors in start ups

tax incentives that encourage them to fund risky, early stage companies based in the Badger State. Angel investors there can claim a 25 percent tax credit over two years up to $500,000 per investment; venture capital funds can earn a 25 percent credit over one year up to $2 million per investment.

Research-based medical start ups have ongoing needs for capital as they develop products and get them through the regulatory process. They also may be more mobile than other types of businesses that have already established facilities, suppliers and customers. 

The Governor's Tax Reform Commission proposed similar measures [Download summary PDF] to encourage early-stage investment in Minnesota entrepreneurial and high-tech ventures. There's broad, bipartisan support for change, but this reform is just one of many that must grind through a contentious budget-balancing process.

If the reforms fall through and the company departs to find success next door, Minnesota taxpayers can take cold comfort that they helped fund it. 

— Charlie Quimby

Will tax breaks for green investment bring green jobs?

Gov. Tim Pawlenty introduced yesterday his proposed package to encourage green job creation in Minnesota. His "Green Jobs Investment Initiative," extending a variety of tax credits to businesses and investors, has been called "Green JOBZ." 

That nickname is unfortunate.

It's true, part of what he's offering is just JOBZ warmed over — not a concept that will excite JOBZ's many critics. But he's also suggested some other positive steps to encourage private capital investment, expand infrastructure for alternative energy, raise awareness of energy conservation and discourage greenhouse gas emissions.

It's good he's getting out front on the issues of jobs and clean technology development, but he also got out ahead of a legislature-sponsored Green Jobs Task Force that has been laying out how to tackle the green jobs issue. The bipartisan group, which includes legislators, executive branch agencies, business and environmental representatives, had scheduled to bring out a legislative action plan in December and a report in January.

This political maneuvering aside, our question is whether longer-term tax credits will actually have much impact on creating jobs today.

JOBZ's tax breaks were aimed at increasing employment in communities where economic growth was stagnating. It's debatable how many new jobs overall were created. As much as two-thirds were part of planned expansions or simply moved from one place to another.

Green JOBZ faces another hurdle. It's trying stimulate job creation in a relatively young sector that has already received a lot of venture capital scrutiny. Although investment in green industry has been growing, there have also been signs that venture funds have not found enough compelling opportunities to invest in green industry.

A 2007 study by New Energy Finance found that venture capitalists had spent only 73 percent of the funds that had been raised for green technology, and several green tech funds closed their doors that year. More recently, the research group calculated that global investment in clean-energy projects fell by almost 25 percent in the third quarter 2008, and it will likely fall further by year end.

Persuading those investors to put more money into clean technology is a laudable policy goal, but it's a very different challenge from getting a machine shop to locate its new facility in Long Prairie instead of Bloomington.

Gov. Pawlenty's plan offers tax incentives for regional investment funds to invest in Minnesota (only 50 percent of the credits will be targeted for green industry, however). Using tax breaks to boost expected investor returns seems like a good move, but it's also a move any state can duplicate.

Of the more than $13 billion in public and private investment in U.S. clean energy in 2007, nearly $9 billion was made in wind energy, a sector where Minnesota has some advantages. Venture capital funds favored solar energy development, though, with $1 billion of the $2.7 billion they invested in renewable energy technologies. By virtue of geography and technology base, Minnesota will be less competitive for these funds.

Green industry by any name will be good for Minnesota, and it seems churlish to question any well-intentioned effort to grow jobs and lessen our dependence on fossil fuels. But we also should look for the most effective role government can play in encouraging future industry — while addressing jobs today.

For the thousands of Minnesotans who are out of work or underemployed, "offer tax incentives and the jobs will come" won't offer much encouragement. Let's hope the Green Jobs Task Force has more about ideas about creating jobs than Green JOBZ.

A crusader against tax incentives gives up the fight

This week, Mark Baker resigned as CEO of Gander Mountain Co., the St. Paul-based retailer of outdoor gear and apparel. Last quarter Gander Mountain reported a larger-than-expected 11.7 percent drop in same-store sales with net losses of nearly $5 million.

Times are tough for retailers all over, so that's not what pricked my ears about the news.

Baker was also outspoken about unfair competition in his industry — specifically, "corporate welfare" given by state and local governments offering tax incentives to Cabela's and Bass Pro Shops. These retailers promote their outsized stores as "destination retail" that will draw millions of tourists, their dollars and additional tax revenues to the communities.

Two years ago, the Heartland Institute did an interview with Baker that laid out how the game works. Various forms government assistance can amount to about one-third of the cost of building new stores, Baker said, citing a tax increment financing package worth $40 million to build a giant 180,000-square-foot Cabela's in Kansas City, Kansas.

Such subsidies give the big stores a substantial advantage over other retailers. What's more, the hoped for paybacks don't always materialize, said Baker.

Resources that could be used for education or true economic development are being wasted on private retail developments. Communities have been paying big money to bring in low-paying retail jobs. Buda, Texas, for instance, gave Cabela's subsidies worth $61 million, or about $271,000 for every full-time job, according to our estimates. Reno, Nevada spent $54 million, or $208,000 for every job.

Good Jobs First has written extensively about the issue, and David Cay Johnston reports in his book Free Lunch that Cabela’s made more money in its first three years by reeling in subsidies than it did from selling sporting goods.

Local officials in Wisconsin and Rogers, Minnesota, are among those who've had a change of heart about such subsidies.

Now Baker is off to run Scott's Miracle-Gro, which just announced it will close two of its three Twin Cities-area Smith & Hawken garden supply stores at the end of this year. It remains to be seen how he'll perform in a new retail environment, but I'd say he made a positive impact in helping to expose problems with public incentives to attract private businesses.

— Charlie Quimby

A Minnesota business expands out of state. Are taxes to blame?

A valued, long-time Minnesota business announces it's expanding across the border. Is this more fodder for those who claim corporate taxes are driving business to lower-tax neighbors? Or does it illustrate how business expansion plans respond to a complex mix of factors?

South Dakota is usually cited as the destination for migrating Minnesota businesses — typically without naming any specific companies. But in this case, it's North Dakota that will benefit from an expanding Minnesota company.

Marvin Windows, headquartered in Warroad, has announced plans to nearly double the size of its facility in Grafton, ND, adding up to 50 new jobs over the next five years. Marvin's Warroad location employs about 2,500.

But lo and behold, North Dakota isn't quite a low tax haven of the sort we're told is going to strip Minnesota of its economic growth. In fact, it ranks just above Minnesota in total state and local taxes as a percentage of income and two places higher in corporate income tax rankings percentage of income. The complete state rankings compiled from Census Bureau data by Growth & Justice and the Minnesota Budget Project are here [pdf].

It's true North Dakota is a comparatively low personal income tax state, but the company isn't moving to there to lower income taxes for the owners. The Marvin family is staying put in Minnesota, and most of the 475 jobs created at the Grafton plant, which opened in 1997, have been filled by local residents. 

(1)Total revenue includes federal government revenue and own-source general revenue — which together make up general revenue — combined with utility, liquor store, and insurance trust fund revenue.

Let's look at some of the likely factors figuring in Marvin's decision.

Labor. The labor supply has to be a concern for Marvin, with its major manufacturing facility located in remote Warroad. Polaris Industries has a large plant in Roseau, the next nearest town. With two large employers drawing workers from the thinly populated region, at some point as they grew, they'd likely look elsewhere for labor.

Grafton, with a population of 4,600, is roughly the size of those two cities combined and is located in farm country, where skills, work ethic and the lagging farm economy offer a ready source of workers. Labor costs were lower in 2003, with the average job in the county paying $22.2k vs. $27.9k in Roseau county.

Location and Infrastructure. Though like Warroad, Grafton is relatively isolated, it's near the major north-south freeway artery Interstate 29, which meets east-west I-94 at Fargo. Grafton also connected east-west to Warroad. Marvin undoubtedly saw that infrastructure as an advantage when it originally located there. And having a plant already in that location meant the company was more likely to expand there than in a new place. Also, as an energy producing state, North Dakota has lower industrial power costs than Minnesota or South Dakota.

Incentives. Rolling out the green carpet might have a modest attention-getting effect — if the financial incentives are coupled with other positives in a community. Grafton was not one of the locations originally considered back in 1996 when Marvin was looking to expand, but it did put together an incentives package that included a new industrial park and a spec building to help interest site selectors.

This time, Marvin already announced its plans to expand before the city votes on a possible 10-year tax exemption for the addition and sponsoring an interest buydown on a loan. As we've noted before on subsidies, they make the less sense when a company is already in the region. It's unlikely, given the current housing construction market, that Marvin would be very interested in breaking ground in an entirely new location.

Business Taxes. Lest anyone think I'm gaming the numbers, here's the low-tax-advocating Tax Foundation's ranking of the states. Although North Dakota generally scores better than Minnesota on the "business friendly" indexes, it's nowhere close to South Dakota.

 

Let's pause here to make our general disclaimers about all tax rankings. Numeric rankings can distort small differences; they're based on averages or rates that don't necessarily apply to actual taxes in individual cases; they may not measure what they claim or even measure the right things in the first place. And just about any state or advocacy group can find a ranking that either rankles or reinforces, as shown in Grading Places: What Do Business Rankings Really Tell Us? [pdf].

Thirty-four of the 50 states can claim that they are in the top 10 in terms of business climate or competitiveness; they just have to pick which of the five indexes they want to point to. Business interests in just about any state can find at least one ranking to support an argument for cutting business taxes to make the state more competitive. In all but eight states, one can find at least one index that puts the state in the bottom half of all states.

Bottom line? While tax considerations may be part of a business expansion equation, it's never as simple as the low-tax advocates would like you to believe.

— Charlie Quimby