Why is a tax policy a critical issue for business?
What challenges does Minnesota face in its tax policy? 
What guidelines or changes does TwinWest advocate related to tax policy? 
           Upfront exemption for capital purchases
           Sales only apportionment  
           Property tax
           Sales tax
           Local option sales tax

Why is a tax policy a critical issue for business?

Businesses are highly impacted by taxes in Minnesota. In 2006, Minnesota
business paid about 45 percent of the state’s sales tax – almost $2 billion.
The same year, business properties accounted for approximately 12 percent
of the state’s market value, but paid 30 percent of property taxes. Minnesota’s
individual and corporate income tax revenues were projected to total $16.2
billion during the 2007-08 biennium, providing just over half of all general
fund revenues. In light of this high level of taxation, businesspeople must be
actively involved in examining and improving Minnesota’s tax structure.

Minnesota will never be a bargain basement state when it comes to taxes – nor should it be. Minnesotans also generally believe that they have gotten a good value and return on the tax dollars they entrusted to state and local governments. While spending on critical services is important in maintaining a high quality of life, the necessary money should come from our state’s future economic growth – not from tax increases.


What challenges does Minnesota face in its tax policy?

The biggest challenge to Minnesota’s economic growth in recent years has been a competitive disadvantage due to high tax rates. While much has been accomplished in making Minnesota more competitive in terms of tax policy, lawmakers must continue to resist the urge to push Minnesota back into the top tier of high tax states. According to the 2007 Business Barometer Survey conducted by the Minnesota Chamber of Commerce, 33 percent of Minnesota businesses said higher taxes are the biggest barrier to adding jobs; 38 percent said the overall burden is higher today than five years ago.

Regionally, business property taxes in Minnesota are still significantly higher than those in neighboring states. For example, a 70,000 sq. ft. building housing a light manufacturing company, employing 99 workers in Minnesota would pay $110,504 in 2006 property taxes versus $59,240 in Wisconsin (NAIOP). The state must keep commercial/industrial property taxes in Minnesota under control in order to improve our ability to compete with other states. Despite reform and plunging market values, taxes on business property as a percent of market value are three times greater than taxes on residential property—the eighth largest such disparity in the nation (MTA).

The sales tax rate has steadily increased over the years to its current 6.5 percent, with many local cities and counties authorizing local option sales taxes on top of the state rate. In 2004, Minnesota collected $832.78 per capita in state and local sales taxes (25nd highest) and $23.13 per $1,000 of personal income (37th highest). Minnesota’s high sales, property and income tax rates make further broadening of the sales tax base inappropriate.

What guidelines or changes does TwinWest advocate related to tax policy?

General taxation principles:

• The state should review the entire tax code and establish desired outcomes in 
  order to create a comprehensive and streamlined system that encourages 
  economic and business expansion.

• TwinWest is opposed to the creation of new taxes. History has proven that once a 
  new tax is implemented, it is very difficult to take away. The “temporary” sales tax 
  increase from 1991 is still in place, over 15 years later.

• We believe that taxes from all levels of government should be transparent. The 
  residents and businesses who are paying the tax should know what the tax pays 
  for, which unit of government receives the tax revenue, and should be able to 
  vote for or against those implementing the tax.

• In times of surplus in the state budget, any tax cuts or rebates should come back 
  proportionately the way they were paid in.

• We oppose the creation of a business activity tax (BAT) which would tax
  companies based on gross receipts. Michigan is the only state to depend
  on a BAT for significant revenue, and they began phasing it out in 1999.

• In order to raise awareness of unfunded mandates on local units of government,
  fiscal notes should be attached to legislation that creates financial obligations for
  local units of government.

• Fees should directly relate to the cost of services received. TwinWest opposes the
  imposition of fees simply as an additional revenue raising measure, and they
  should not fall disproportionately on the business community.

Upfront exemption for capital purchases

Corporate taxes should be placed on net outputs, not inputs. Therefore, we support converting the capital equipment refund program to an upfront exemption. This would simplify administration of the tax and reduce compliance costs. It also helps small employers because they will no longer have to finance the tax themselves and it provides sales tax relief to those businesses that do not know about the refund program. There is no need for the Department of Revenue to continue the refund process because taxpayers no longer have to distinguish between new and replacement capital equipment to qualify.

Sales only apportionment

Corporate tax policies should not penalize Minnesota companies for increasing payroll and property. We support the immediate adoption of an apportionment formula that is based on the percent of the corporation’s total sales that are in Minnesota, i.e., sales only apportionment. Current law would not implement sales only apportionment until 2014. The current apportionment system is a disincentive to economic growth and increased investment in Minnesota.

The impact of moving to a sales-only apportionment formula varies among businesses. Those that have significant amounts of property and payroll in Minnesota relative to the rest of the country and sell products nationally or worldwide benefit from such a change. These firms are companies that have their headquarters or a major facility in Minnesota. Those with headquarters in other states might see an increased tax liability if a sales-only formula is adopted. For these firms, their percent of sales in Minnesota is greater than the average of their property and payroll factors. The apportionment formula does not impact firms that do business totally within the state of Minnesota.

Property tax

The TwinWest Chamber of Commerce supports the 2001 property tax reform and believes the Legislature should not modify the following aspects of it:

The Classification System: TwinWest opposes any change to the classification system that increases commercial/ industrial (C/I) property’s share of the tax burden. The 2001 reform reduced C/I’s share of the tax burden from about 30 percent to 24.5 percent. If the Legislature considers reducing the class rates for agricultural, cabin or homestead property (or changes in the breakpoint between the tiers of homestead property), the class rates for C/I property must be reduced proportionately.

The statewide property tax: TwinWest opposes increasing the base level of the statewide property tax (currently set at $592 million and indexed to the rate of inflation) or changing the structure of the tax from a fixed dollar amount to a fixed tax rate. Such changes would erode part of that relief and jeopardize the improvement made in the state’s competitiveness.

Limited market value: TwinWest supports the six-year phase-out of limited market values and believes it should be implemented as scheduled. We support the phase-out because limited market value is contrary to the policy reforms adopted in 2001. It serves only to shift the property tax burden to unprotected property such as C/I and apartments. For example, in communities where one property value is growing more rapidly than another property value, the tax burden is shifted onto the property with the slower growing property value.

Sales tax

Minnesota’s sales tax on goods and services should be a retail sales tax levied on the final consumption. Taxing goods and services on a basis other than final consumption violates the principles of equity, efficiency, ease of administration and accountability. Therefore, we support:

• Preventing business services and business-to-business transactions from being
  subject to the sales tax. Imposition of sales taxes on services is a disincentive to
  Minnesota businesses, particularly impacting small and mid-size firms,
  encouraging them to keep services in-house or out-of-state to avoid the tax.

• Eliminating over time the sales tax on all intermediate goods and services. This
  could include exempting equipment that is used to comply with state or federal
  law (e.g. pollution control equipment, equipment required to meet safety
  regulations, etc.) or exempting equipment purchases made by non-manufacturers
  such as computer equipment.

• Continuing efforts with the Streamlined Sales Tax Project to find a national
  solution to resolve the issues regarding the taxation of Internet and catalogue
  sales. The state should not attempt to tax these sales absent a national
  solution. The state should also not enact further “boutique” taxes or gross
  receipts taxes which further complicate administration of the tax system.

Local option sales tax

TwinWest is opposed to the implementation of local option sales taxes and will oppose any efforts to authorize such taxes. TwinWest also opposes local sales taxes that are used to finance projects that will directly compete with existing area businesses.

TwinWest opposes local option sales taxes for the following reasons:

• Reduces Accountability: A local sales tax reduces accountability of the local
  revenue system. The sales tax gives a local government the ability to tax
  people who don’t vote in their community.

• Exacerbates Tax Base Disparities: Retail sales are not evenly distributed among
  Minnesota cities. Some have much larger sales tax bases than others. Expanding
  the use of local sales taxes could ultimately lead to a new state aid program to
  equalize their yield. A new state aid program for local governments should not be
  a priority for any surplus revenue that is available.

• Delays Sales Tax Reform: Expanding the use of local sales taxes could delay
  sales tax reform. If more local governments rely on the sales tax to finance
  government projects, it will be more difficult for the Legislature to reform the sales
  tax base as has been recommended by the Sales Tax Advisory Council. There
  would also be an incentive for local officials to support broadening of the sales
  tax base because it would provide communities with a greater revenue stream.

• Puts Upward Pressure on the Property Tax: The proceeds from local sales taxes
  approved by the Legislature have been dedicated primarily to construction
  projects such as convention and civic centers. In most cases, local sales tax
  revenue cannot be used for operating purposes. Therefore, local governments
  will likely look to the property tax as the source of operating funds, thus potentially
  increasing the growth rate in property taxes.

• Leads to Inefficiencies in the Tax System: The implementation of different tax rates
  in different taxing jurisdictions is overly cumbersome for a business to administer.

Gas Tax
The TwinWest Chamber supports up to a 7.5 cent increase in the state’s gas tax.