Star Tribune reporters and editors are covering Gov. Dayton’s sales tax plan knowing it threatens pay raises and possibly newsroom jobs.
Calling Dayton’s plan “jaw-dropping,” Strib publisher Mike Klingensmith estimates the paper’s earnings would fall 25-40 percent. Negotiations on a new newsroom contract, which expired Jan. 31, have been suspended.
The Minnesota Department of Revenue projects the ad tax would raise $310 million of a $2.1 billion sales tax increase in 2014-15. The Strib currently charges no sales tax on ads Minnesotans buy, but would remit the proposed 5.5 percent state rate, plus 1.15 percent in local-option add-ons.
Klingensmith considers the ad tax a “revenue” tax, not a conventional sales tax on expenses. He uses this illustration of how such a single-digit tax threatens an enterprise: A business grosses $1 million and nets $100,000; the new 6.65 percent sales tax on the gross would cost $66,500, becoming a 66.5 percent earnings tax. The normally even-tempered publisher calls that “devastating.”
But this scenario assumes two things: the business can’t cut costs and can’t raise prices.
The Strib is no stranger to cost-cutting. The 2009 bankruptcy cost dozens of jobs and surviving newsroom workers absorbed pay cuts of up to 14 percent. Those haircuts and Klingensmith’s management stabilized newsroom staffing, and the union looked forward to its first pay raise in five-plus years.
Klingensmith says Dayton’s plan creates a climate in which it “certainly doesn’t look good to give salary increases. We spend our money on newsroom people, and ink on newsprint. We don’t have a lot of discretionary expenses” to cut.
Talks with union suspended
Newspaper Guild co-chair David Chanen says the union agreed to the suspension after Klingensmith presented his case to members. The expired contract’s terms remain in force for now.
What about price hikes? Anyone who’s paid a few extra pennies for a drink knows consumers often eat a sales tax hike. Would the loyal single-copy buyer revolt at paying $1.07 instead of $1? Would the die-hard full-price subscriber cancel at $23.10 a month instead of $21.66?
Klingensmith calls such consumer-facing sales taxes “the least of our concerns, though it is a concern.” He reserves his ire for the ad tax.
Ads make up a declining slice of the Strib revenue pie, but still the biggest share. In a hyper-competitive, digital-era climate, Klingensmith believes the Strib will have to swallow the tax. “We have no pricing power. We’re pricing to marginal efficiency.”
University of Minnesota journalism professor Dan Sullivan, the Strib’s director of strategic development for 14 years, say that’s exactly what he’d say if he kept his old job. “I would be trying to build the case that we are unable to shift this tax,” he says.
But in his current role, Sullivan says: “The ability to shift depends on the availability of substitutes” and many — TV, radio, community papers, even online-only sites like the one you’re reading — would be subject to the same new levy.
No one is suggesting the Strib — or indeed, the state’s ad industry — won’t be hit. Advertisers could, as Klingensmith predicts, keep spending flat and reduce media profitability. They could skip ad buying entirely with more in-house social networking (though they’d encounter payroll expenses if they staff up). They could buy ads from non-Minnesota media, though those sellers would have to pay sales tax if they have offices, facilities or employees here. (If not, the ad buyer must pay a “use tax,” which you’re supposed to pay on Internet purchases but don’t.)
Pressed, Klingensmith allows that the strongest local media might be able to pass on a couple of points of the sales-tax increase. Still, he notes, if that $1 million business has to eat half the sales tax, its net still goes down by a third.
Non-Minnesota firms
One revenue source would remain untaxed: ads bought by non-Minnesota firms. Klingensmith says “that’s not a material change for us, since we only have about 8 percent national ads.”
The Strib might not lose as much as Klingensmith fears, but the state might not gain as much, either. Revenue Commissioner Myron Frans acknowledges the $310 million estimate “does not make adjustments for what negatively affects industries. … We don’t do dynamic scoring.”
Could the state phase in new sales taxes to ease transition shock? Frans says no: Minnesota is part of a 30-state compact that requires the base rate to be applied equally to all taxable products. Localities must follow the same principle.
Of course, we might never find out what the tax will bring in. “No state in the United States of America taxes advertising,” notes Klingensmith, who says the Strib will fight the tax as part of a publisher-broadcaster-advertiser coalition.
In 1958, Maryland repealed its ad tax 14 month after adoption. Iowa repeated the dance in 1967. Arizona bailed in 1986. Florida’s ad tax collapsed in 1987, withering under a barrage of — wait for it — critical ads (plus canceled national conventions).
Of course, a year ago at this time, same-sex marriage proponents had never won at the ballot box — until four did last fall. This year, Dayton is not alone in proposing an ad tax.
Other states
In Ohio, Republican Gov. John Kasich has proposed an ad tax, also as a rate reducer but not a revenue raiser. James Davidson, executive director of the D.C.-based Advertising Coalition, said he’s heard “rumblings” from a former repeal state, Arizona.
Despite his skeptical eye, Sullivan agrees with Klingensmith and MinnPost economist Louis Johnston that a sales tax on a business input (like a Target ad to sell a product), on top of the product’s end-user sales tax, represents inefficient tax policy. He says such cascading or pyramiding taxation is unfair, opaque and more complicated to collect than a simple end-user sales tax. For his part, Johnston has played with scenarios eliminating some services from the tax and paying for it with a smaller rate cut.
Frans says his department decided to “start big” in defining taxable services because excluding whole segments “carte blanche … would take a lot of revenue off the table.” It wouldn’t be the first time a politician asked for something big in hopes of getting something at all, and even if Capitol swells predict the business-to-business tax will be the first to go, some aspects — say, a previously unheard-of tax on newspaper purchases — may survive.
For now, Frans says that the department is listening to feedback about which business-to-business aspects merit exclusion: “Some [industries] have a more compelling argument than others.”
No kidding that they are fighting it
The paper’s “editorial board” has been running the editorial online at the top of the list, “A better state budget omits services tax.” since February 16. That’s five days now, which must be some kind of a record for a editorial to run. Plus they offer solutions that include taxing more clothing, reducing the tax cut for others or scaling down property tax relief. Classic tax them but not me strategies. I feel sorry for the Strib, which will take a hit while their business is declining. But I’d rather see the sales tax extended in a flat manner to all and set at the amount of revenue necessary to run the state. It’s a matter of fairness, we need to quit picking winners and losers.
6 days now
Kind of making me wonder about the impartiality of the rest of the paper’s content.
The Stribs also forgetting to mention it’s mark-up
Dayton’s tax would apply to sales prior to mark-up, the calculation the Strib is doing is simply bogus. The Strib does not pay what it’s charging your for it paper, if it did it couldn’t make a profit.
I used to work in a photo lab. At the time it cost us about 5 cents in materials (chemistry and paper) to make a print. We charged 35 cents for that print. If we were paying 5.5% sales tax on that 5 cents it wouldn’t be anywhere near a 20%-40% hit on our profits. If we made 20 for a dollar, we’d pay 5.5 cents for that material. We could sell those prints for $7.00. That 5.5 cents is .78% of the sale, that would a .78% “loss”.
This is NOT a tax on gross sales, it’s a tax on material purchases BEFORE resale. Klingsmiths calculations are incoherent. Gross sales are irrelevant. Show us your EXPENSES that are subject to sales and service tax and calculate the cost of the taxes on those expenses. I would guess Klingsmith is paying around 5-10 cents to the paper he’s using to produce the paper you read. Net profit isn’t just the difference between material cost and sales. The $7.00 we were charging for those prints also paid our wages and rent, none of which is taxable under Dayton’s plan.
Revenue tax, not expense tax
Klingensmith’s point is that is IS a revenue tax, on the value of the ad placed with the paper (in other words, its revenue or income. Your photo example is something different – a true sales-taxable expense – and by the way, many of those Strib purchases will remain tax-exempt, Frans says.
I’ve added a sentence to the relevant paragraph above to try to make Klingensmith’s point clearer. Thanks for the comment.
Thanks for the attempt at clarificaton but it doesn’t work
Klingsmith is entitled to his opinion but not his own facts. This is NOT revenue tax, it’s a sales tax. It’s a 5.5% sales tax on some purchases made by businesses. You can’t multiply that into a 20% revenue tax, it’s mathematically impossible. There is no 6.5% tax on revenue, period. Anyone who thinks there is doesn’t understand the tax. I’m not talking about something else in my photo lab example, I’m talking about Dayton’s sales tax proposal. I don’t know what Klingsmith is talking about. This example of a million dollar business is simply made up, there’s no basis in reality for it.
Ya know, the more these guys distort the facts the more support I tend to lend to the Dayton proposal.
Taxes are taxes
Fees, taxes, surcharges…yada, yada, yada. They’re all taxes no matter how you look at them. When you have to manipulate how taxes are charged, you know you have a failing government that screams for more and more money. The addiction that Dayton is feeding is sad. We’re facing a deficit and Dayton wants to raise the spending level even higher.
Taxes are not oppression and we need more government spending
Taxes are how we pay for government services, like health care and pensions for veterans. We have growing populations, aging populations, crumbling and inadequate infrastructures, an education system that’s falling behind. Republicans have been waiting for all of these issues to magically disappear under the weight of ideological purity for 30 years now and all we’ve gotten is a great recession and collapsing bridges. There’s no such thing as magic. This is a manufactured crises produced by faith based budgets that ignored reality and promised to deliver better government for less money. Not only has this failed but it was a lie, the intentions was simply to dismantle the government under the guise of improving it. What did we get for that? The shameful ongoing spectacle of Katrina, a crime wave in the financial and energy sectors, and the most dysfunctional health care system on the planet… amongst other things.
Yeah, we need more revenue and we need more government spending. It’s not manipulation it’s math, and it’s responsible fiscal policy.
It *IS* a revenue tax
Paul, you should read the full details from the proposal. This *IS* a revenue tax.
Star Tribune, or any other MN-based company that sells advertising services to another MN-based company, will pay 5.5% of that amount in sales tax. In other words, selling $100 worth of advertising will result in $5.50 owed to the state of MN.
Many businesses affected by this sales tax extension will simply pass this cost to the customer, whether it’s a consumer or another business. They will be impacted, but not decimated. However, ‘advertising’ as a product is fundamentally driven by ROI. In other words, you cannot simply pass on the 5.5% expense to the customer because you are fundamentally changing the purchasing decision for them. Which means a business who sells advertising services will pay the tax out of their profits instead.
If we assume the 10% profit margin quoted in the article is accurate, then more than half of the company’s profits will be paid in tax, amounting to an overall increase in tax burden to MN of 500-600%.
Whether you sympathize with the plight of Star Tribune (or other businesses) is up to you, but please recognize that this isn’t an inconsequential bump in income tax rates. This is a fundamental game-changer for many companies affected and will have negative impacts.
VAT?
Economists and businesses are arguing against the extension of the sales tax to business-to-business services because it results in tax pyramiding. For his part, Dayton believes expanding to this area is a necessity in order to stabilize the tax base and promote tax fairness and is not shying away from “bold” solutions. Doesn’t a value-added tax expand taxes to business inputs without resulting in tax pyramiding? I don’t know, a VAT might not be such a bad thing …
VAT
Andrew — actually, James Davidson at the Ad Coalition spoke favorably of Europe’s VAT, partly for the reason you describe.
What’s Wrong?
What’s wrong with tax pyramiding? Why do we make all of these assumptions about what is “right” and what is “wrong?” Why do taxes get treated specially?
Cascading/pyramiding
David, I think the argument is that you should pay sales taxes on the product, but not sales taxes on the sales taxes (i.e., the business input sold to help make the product).
Of course, plenty of business inputs (products) are sales-taxed right now so you could say why not extend the same pyramiding allowance to services?
It’s also worth noting we have double-taxation in many other realms – it’s a frequent argument by corporate tax opponents (who argue all taxes should be paid by end-users — in this case, owners or shareholders who receive the profits).
The Strib’s Lack of Intellectual Honesty
Of course the Strib doesn’t like it. It affects them severely. It’s funny to hear them try define the differences between taxes after they blasted TPaw’s ‘fees.’ The Strib has always touted more government revenue but now because it hits them pretty hard, they cry foul. Dayton’s plans are idiotic, but the Strib also deserves some pain because the hat is now passed their way. They have no qualms about hurting others, but never themselves.
Pyramids and bogus numbers
I’d just like to say a couple more things.
Elsewhere on Minnpost there’s an article about the “experts” who declare Daytons sales tax proposal to be a bad idea http://www.minnpost.com/politics-policy/2013/02/tax-experts-economists-say-dayton-s-business-sales-tax-bad-idea
There’s bee a robust discussion there wherein a VAT has emerged has alternative as well. The main problem however is that the “experts” who make these declarations fail to explain why businesses paying sales tax is really a bad idea. They declare it to be so on principle but the principles are dodgy. This is a 5.5% tax on some expenses, not gross revenue. When you actually consider the numbers it’s very difficult to see how being tax can produce the effects being predicted by critics here other than more revenue for the state. Klingsmith is literally inventing a bogus scenario wherein a million dollar business is paying 6.5% of it’s gross revenue that ends up being 60% of the profit, this tax simply doesn’t so that, not even close. The headline here should be that the Strib is using bogus numbers to attack Dayton’s tax plan.
As for this tax pyramid, I find an interesting rhetorical ploy, why a pyramid? If you look at my photo lab example you see that whatever sales tax any business pays, it will be much less (in dollars) than the sales charged on the final product or service. The size of mark-ups varies but businesses will always pay less than the consumer because their spending less, that’s how we make profits. The image of a pyramid turns that economic reality upside down, it’s creates the illusion that costs are greater at the base and decrease as they reach the consumer at the top. The effect of this imagery is to exaggerate the cost of doing business and exaggerate the effect of Dayton’s sales tax. In reality, any pyramid would be upside down, with the costs starting out low and increasing by the time they reach the customer at the top. I suppose I could be looking at the pyramid the wrong way, maybe the businesses are at the top and the consumers are at the bottom, but that seems counter intuitive to me.
No one would deny that these taxes would be double taxes on some products and services but I still don’t see why that’s a bad thing and pyramids don’t explain it. In reality the cost to the consumers and businesses will be negligible, look at my example here and on the other thread. And remember the over-all sales tax is being decreased so in many cases the final price for consumers will not change and may even go down. Maybe a VAT would be better, but beyond ideology and principle when you do the math Dayton’s plan isn’t a “bad” idea and can’t possibly deliver the fiscal Armageddon Klingsmith is describing. Klingsmith’s predictions are based on fictitious models that convert a sales tax into a revenue tax.
Not correct
This statement is NOT correct:
“This is a 5.5% tax on some expenses, not gross revenue”
This *IS* a gross revenue tax of 5.5% for companies who sell services. If Star Tribune sells $100 of advertising, they owe the State of MN $5.50. If they can’t pass the cost on to the advertiser (which, in the case of advertising services is not feasible), then the $5.50 comes out of their profits. If their profit margin is 10%, they’re losing more than half of their profit to this tax.
Perhaps not all companies will be affected this way, but you should recognize that it *IS* a gross revenue tax for some companies.
This is VAT without a VAT.. and a complaint
Actually when you think this through the practical effect of sales for business is a VAT because sales taxes are deductible for businesses. Advertising is also deductible Mr. Klingsmith. We don’t get100% deductions on these things but the point is businesses actually end up paying below cost for the stuff we’d pay these sales taxes on. You don’t deduct the sales taxes separately but any sales taxes you do pay are part of the total cost deduction. I don’t know what it actually works out to but let’s say that you get a 20% sales tax deduction for the stuff you buy. That would reduce our 5.5% sales tax to a 4.4%. In a way that’s kind of like a reverse VAT, but it functions the same way. I don’t think places that have VAT can’t deduct they’re sales taxes expenses. As far as know I know no one is talking about eliminating this deduction.
I think it’s time lodge a complaint with Minnpost. I’m not complaining about bias but the critics of Dayton’s proposal are certainly getting a lot more attention, and for most part uncritical attention around here. Look, Dayton didn’t come up with this idea on his own, he got it from somewhere, it can’t be impossible to figure out where and talk to some THOSE people. I know the tax “experts” Minnpost is talking claim they can’t find any supporters but that could be a product of self selection. I think the majority of economists still view taxes as revenue black holes instead of investments that more than pay for themselves so a built in bias against taxes remains in the field; that’s ideology not data driven conclusion. As we approach the sequester some of these heretofore taxes are a drag on the economy folks are coming pretty close to acknowledging that government spending is boosting the economy, and spending without revenue creates debt sooooooooooo maybe taxes that pay for government spending aren’t such a bad thing after all.
At any rate when you turn a critical eye towards these criticisms it looks like they don’t hold up well. Can’t someone other than me look into that?
Paul
the question that you have not addressed, which I asked in the other thread, is this:
———
I think the biggest issue is that this tax ……. the budget is actually increasing expenditures rather substantially. The General Fund Budget is proposed at 37.9 Billion Dollars. Our population estimate is 5.4 M people. That’s $7000 of spending for every man, women and child in the state. (Not including all the local government spending that comes from local taxes)
Why can’t we provide the necessary services in MN for that amount of money? Or, is it that we are spending a lot of money on non essential services that are diverting money from those in need of additional funding? That is the question I want answered before I sign up for more taxes.
——–
As it is clear you feel that Government needs more revenue, I would like to hear your answer to my question. Because, I, quite frankly, feel we are spending a ton of money on non essential services that should be redirected into a few items that you speak so passionately about (transportation infrastructure for example). If we don’t draw a line, I foresee our state always in need of more revenue but never prioritizing how our revenue should be used.
Not How It Works
Tim, that’s not how it works. Dayton has priced what he wants to see Minnesota do together. It costs X amount of dollars. If you think it should cost Y < X amount of dollars, the ball's in your court to say what should be cut and how much. I consider $7000 an absolute bargain for all the things we get: MN Care, roads, bus and rail transit, schools, universities and other institutions of higher learning, social services, airports, parks, trails, the list goes on. And yes, we are woefully budgeting below the need in many areas. My expertise is in transit so I'll concentrate there. To really fund our system in a reasonable fashion, we should increase the metro sales tax another 3/4 cent. That's what it takes to build a transit system that works well for many people. It is what our peer regions have already done. We are in the transit backwater and losing educated workers because of it.
Sales Tax Fairness
I run a tree service located in Minneapolis with 10 -12 employees. Since the late 80’s tree maintenance services are taxable. Where was the media outrage when that started? “Oh my god, the tree services are going to be run out of business!” That’s the editorial I would love to read, in my dreams. The rest of the dream is, when the current round of jousting over sales tax is over, the burden placed on our business to collect tax for the state and local governments will be lifted. Along with the state audit, when they come to your office, dig through your records to ensure sales tax is charged correctly, if not, the business pays. By the way, the tax on tax issue is handled with a state issued ST3 Form which you file showing the business you are invoicing is charging the sales tax so your burden is removed.
Did you pass the cost on?
Did you pass the cost of the tax on to your customers, or did you pay for it out of your profits?
Brain glitch
Sorry about my “their” vs. “they’re” typos today. I hope it’s not too distracting.
Did you pass the cost on?
Yes, all our bids are “plus sales tax”. My competitors are the same way. If you operate in the entire metro area there are five different sales tax rates. It can be confusing at times.
No, it is NOT a revenue tax.
Darren,
I appreciate your attempts to clarify but you are simply mistaken. The sales tax on advertising IS a sales tax on advertising. That means when I buy advertising from a local publication I would pay a sales tax whereas currently I do not. That does does not translate into a revenue tax for the seller. I currently collect sales taxes on my sales, that is NOT a tax on my revenue.
The only way you can possibly translate that into a revenue tax is to assume that advertisers (those who sell advertising) will eat it rather than pass it along. If you know anything about advertisers you know that’s a bizarre assumption. I have no doubt that my advertisers will simply charge me the sales tax. So I’ll pay another $55.00 on my $1,000 ad. I don’t care.
By the way, Klingsmith claims to NOT be talking about advertisers, he claims his example is a typical business. The majority of businesses in MN do not sell advertising. I don’t why advertising would be any different than any other business. Look, Klingsmith’s proposition is absurd, NO business is going to convert a 5.5% sales into a 60% loss on revenue, that would be negligence. If Klingsmith were to chop 60% of the Strib’s profits using sales tax as an excuse investors would file suit faster than you can say “Strib”. THAT’s the reality of business. Do you think he could turn to his investors and say: “Sorry, I had no choice, the government made me do it”? No, that’s not going to happen. And since every OTHER advertiser in the state is in the same boat there’s no reason to assume any one advertiser would be put at a disadvantage. I’m gonna pay $1,055 for my ad instead of $1,000. That’s not going to be a financial Armageddon for anyone.
Do I pass the sales tax along to my customers? Actually no. Every business is different, I’m a photographer. The only things I pay sales taxes on are things like blank DVDs, jumps drives, and some processing. Since I went digital I’m not buying film anymore and I don’t actually do a lot of processing. So when I buy a pack of 50 blank DVDs at Micro-Center for $20.00 do I raise the price of my photography? No, I don’t. I don’t even bother to haul out my tax number, I just pay the sales tax at Micro-Center even though technically I don’t have to. I’m not even going to bother to do the math on that sales tax. When I raise my prices it has absolutely nothing to do with any sales taxes I’m paying. I even pay sales taxes for my processing because I’ve switched from a photo-lab to Costco. Costco doesn’t even take tax numbers so I have to pay sales tax there. Guess what, it’s still cheaper for my customers because the photo lab charges 40 cents for a print while Costco charges 12 cents. Do I go to the photo lab just so I can dodge the sales tax? No. I use Costco and pass the savings along to my customers. Sure, I’m “pyramiding” the sales tax, who cares? My customers and I are getting a better deal.
Other businesses will tell you a different story but the point is Klingsmiths “revenue” tax and attending financial collapse is hysterical fantasy.
Again, wrong
I appreciate your response, but (respectfully) it is you that is mistaken.
You said: “The only way you can possibly translate that into a revenue tax is to assume that advertisers (those who sell advertising) will eat it rather than pass it along.”
This is precisely the scenario I am describing. You assume the cost will be passed to the customer, but I am saying that will not work in the advertising industry. You see, customers who purchase advertising (especially digital advertising) do so with specific ROI goals in mind. Raising the price 5.5% significantly changes their purchasing decision and they simply won’t accept it. The seller of advertising will either lose customers or pay the tax out of their profits.
Also add
In response to:
“If you know anything about advertisers you know that’s a bizarre assumption”
Perhaps I should also add that I am the CEO and owner CotterWeb Enterprises, a $20 million advertising company located in MN. In addition to selling $20 million+ of advertising annually, we are also a considerable buyer of advertising. I believe I am qualified to speak to the purchase decisions of advertisers, and I assure you this is not a bizarre assumption.
Clarification
I meant say that no business person is going to convert a 5.5% sales tax into a 60% percent loss in profits, not a 60% loss off revenue. Sorry about that.
Besides…
Publications like the Stib don’t get all of their revenue from advertising, they also have sales and investment revenue. You’d have to be really stupid and work really hard to convert a 5.5% sales tax into a 60% or even a 30% loss in profits.
Strib <> all businesses
Star Tribune may not get 100% of their revenue from selling advertising, but other advertising companies (like mine) do.
If the company can’t pass the cost on to the customer, they will pay it from their profits.
If the company’s profit margin is 10% (pretty normal) before the tax, then they will lose 55% of their profits. If the company’s profit margin is 20% (pretty high), they will lose 27.5% of their profits.
I don’t understand your comment: “You’d have to be really stupid and work really hard to convert a 5.5% sales tax into a 60% or even a 30% loss in profits.” I assure you, neither is true in my case and I’m sure for the CEO of Star Tribune as well. The above scenario, with simple math, should illustrate for you exactly how this tax will affect companies who sell advertising.
Why are Advertisers so different?
Sorry Daren, I didn’t see all this posts of yours until now. Thanks for the example. It seems however that you’re whole argument hinges on the assumption that advertising customers are completely different from all other customers, can you explain this assumption?
Those are lot of if’s that just make sense. How do all the business currently collecting sales taxes stay in business in the face of such financial catastrophe?
Here’s what’s going happen, you’re going to add a sales tax line to your invoice and your customers will pay it. Don’t tell me your going to put yourself out of business because of 5% sales tax.
Advertising is an essential component of business, we have to use advertising that works, and we have no choice but to pay for it. What makes you think advertisers would abandon successful advertising campaigns based a 5% sales tax? Where are we going to go, and where are we going to get the same advertising cheaper? Do you think we’re all going to stop advertising? I’m not going to stop advertising, and I’m not going to abandon advertising that’s working for sake of 5%. Are you?
Pyramid, revenue, profit, VAT, compliance.
The “pyramid” (buzzword) is bad because it creates a general consumer price increase. I think it’s often poorly used as “tax on tax”when there are several other effects in play. Mainly, compliance costs: software, consulting, staffing, accountancy, legal. (interesting, much of those subsequently include a ‘pyramid’ under the proposal).
As for the Star Tribune, while Paul is right that it is not a gross revenue tax as the newspaper has several revenue sources, others are more right regarding the cut in profits as I would expect the ‘Strib’ derives a large portion of profit from print and digital ads. In the 5-county metro under the governor’s proposal, the minimum tax would be 6%, and that is a healthy cut of 10% profits. Your photo lab example is naive and not all businesses have markups you repeatedly use in example. The best easy to describe the proposals are revenue AND expense taxes with uncertain compliance and administrative costs. Nothing in the arena of 21st century reform.
No one will write a bill on VAT, so that’s a tangent to the discussion and a philosophical debate worth having, but not realistic within a federal government with no direct consumption tax which allows individual states to administer their own. While their are robust ideas on the link Paul directs folks to, they are generally not regarding European-style VAT, but Minnesota here and now in the 21st century.
21st century tax reform is focused on “ease of compliance” and “efficiency of administration”, two things we do not have in my opinion as a private, independent Minnesotan. I have made proposals for stable, efficient revenue from consumption taxes; they appear to have not be considered by Minnpost readers/commenters.
~ Bob
Naive?
Thanks for taking some time to respond to my posts Bob.
The pyramid is an illusion, the inflation being predicted here is not inevitable. Dayton actually makes that argument on page 14 of his tax proposal and I’ve explored it in my comment.
http://blogs.twincities.com/politics/files/2013/02/2-15-13-Final-Sales-Tax-Booklet.pdf
My examples are not “naive”, they are REAL examples of REAL business unlike the fantasy company that Klingsmith offers. I’m not making up photo lab numbers to illustrate a theory, I’m telling you how it actually works, as has Mr. Walsh with his tree service. I acknowledge that other businesses are different but we’ve got 25 comments on this thread now and none of you guys have provided a REAL example of a REAL company that’s actually going to have to convert a 5.5% sales tax into a 60% loss in profit. I see your math, what I don’t see is a REAL business example.
Look; it’s actually quite simple, and I apologize for not finding this simplicity sooner; businesses don’t voluntarily decrease their profits, the whole point of business is to maximize profit. Show me the business person who’s actually telling investors or families that they’re going to be “forced” into converting a 5.5% sales tax into a 60% reduction in profits? Think about this for two seconds, what do you think Klingsmith is telling the investors? Do you really think he’s telling them: “Look, we can add a ‘sales tax’ line to our invoices and charge it, or we can convert that sales tax into a 60% reduction in our profits. I’m leaning towards the 60% profit hit.” I think if Klingsmith told that to the investors he’d be out a job by the end off the day. What do YOU think, seriously. THAT’S a naive assumption. Any business person who converts a 5.5% sales tax into a 60%, 50%, or even 30% profit reduction is by definition a really bad business person. No one’s going to be “forced” to that, and it’s simply not a choice any sane business person would make. If your profit margins are sooooo small that you can’t somehow cope with this sales tax your going out of business anyways.
Mr. Helland, regarding your tax proposals all I can say is my impression is that it’s too complex. If any one element is lost whole thing starts to fall apart. Dayton knows his plan will not go into effect as written and I assume he knows that it doesn’t have in order to produce some results. Complex plans can look good on paper but in reality complexity can kill a good idea. When you run for governor I would recommend simplifying the plan or finding a simpler way of explaining it. I’d also bring some other ideas to the table, no one wins an election on a tax plan alone. Good Luck.
One example: mine
I have given you an example — my company, CotterWeb Enterprises, Inc. — http://www.inboxdollars.com/corporate/.
We sell performance-based digital advertising. Performance = ROI. In other words, not TV, Radio, Print (or Brand) advertising. Our advertisers will not tolerate a 5.5% increase in their advertising spend without getting anything different. It significantly changes their ROI and thus purchasing decision. This is fact. I won’t speak on behalf of *all* companies who sell advertising, but those who sell performance-based advertising face the same challenges.
The impact of this on profits is simple math. I’ve illustrated a couple of examples in my comment above.
Thanks for the example Daren. I see you are the owner and operator of Cotterweb Enterprises.
First of all, I’m not sure how the tax will apply to you because it looks like your business is an internet based business. What percentage of you customers are based in MN? Not only that but you’ve expanded overseas so none of that will subject to MN sales tax. Second, how do you know you advertisers will not tolerate a sales tax? If you’re delivering what you claim to be delivering why is a 5.5% hike so outrageous? Third, are you really telling us publicly, that your have no choice but to convert a 5.5% sales tax into a 50% reduction in your profits? You’re companies going to loose 50% of it’s profit?
It looks like you have annual revenue of around $20 million dollars, break this down for us, show us how you going take a 50% hit in profits? It looks like you have a lot more than 10% profit margin, you’ve been growing at a rate of 9% for the last three years, and since your founding in 2000 you’ve paid out $20 million, while your revenue for the just the last three years look it’s about $56 million. Off hand it looks like you pay out between $2 and $3 million a year on a revenue of $19 million. I’m sure you have other expenses but just eyeballing it looks like you may have a profit margin much higher than 10%. Congratulation by the way on being one of the 5,000 fastest growing companies in America.
I believe I have proposed simplicity…
… but any proposals within this complex system face that barrier. I do believe you are discourteous to my broader plans as a future candidate for governor by tagging me as a single-minded tax planner while commenting on tax-related articles. It is my strength and I feel obligated by this strength in this regard, but you miss my broader social aims incorporated into those same tax plans. Social liberty: Freedom to marry, freedom to love, freedom to imbibe, freedom to smoke, freedom to learn, and commercial freedoms.
These will win young people, and older, regardless of partisanship, a game I do not play.
I do not presume where you lie within partisan politics; regardless I believe I can win your vote. Governor Dayton has sold out public employees with a state shutdown, sold out the state with an enormous price tag for a stadium on behalf of Minnesota based on over-optimistic, projections of gambling yet people believe he can be trusted on outrageous projections of our state’s economic activity via sales tax? Absurd. He is out of touch and has no new ideas, just political tactics. Through that understanding, I am hopeful I can also gain the support of conservatives; I do not write them off as he may.
I have read S.F 552. I would encourage you to do the same. If you find it less complex than my plan, vote your heart. Else, open your mind to an alternative voice and consider what I have out in the public domain as a private citizen.
I talk about a 21st century economy and 21st century tax system. I believe this requires a 21st century leader, which Gov. Dayton is not. He is an old school fundraising, political tactician who buys votes. He is out if touch with private enterprise, household economics and public administration. He follows what is politically expedient. You will see broader manifestations of my ideals and plans as election season approaches.
This is the fight to wage now. Not gun control, democrats are choosing a path of expediency because they cannot win on tax reform. I don’t need either partys’ support to to make a successful appeal to reason.
Thanks,
~Bob
ROI and advertising
First, let apologize for the scattered nature of my responses to Daren, I read missed them entirely and then read them AND replied to them out of order.
In the latest exchange it appears to come down to this notion that advertising is such a completely different animal it cannot cope with sales tax without descending into financial ruin. I’ll anticipate the explanation for this.
It appears that the advertising sector claims that it’s all about return on investment, ROI. Because advertising is soooooooo tied to ROI making even minor adjustments are financially ruinous. First, it’s kind of funny for a bunch of advertising guys to claim the the ROI on advertising is sooooo low that even a 5% increase will wipe it out. That’s not what they tell me when they try to sell me advertising.
Look the truth is this ROI business is very dodgy. I don’t think any business can tie every particular dollar of revenue a particular advertising dollar because not all business is the result of advertising. We have existing and repeat customers, we have word of mouth, we have trade shows, etc. Advertisers use ROI as a sales tactic but none of them guarantee any particular return on the advertising dollar… because they can’t. So how is an industry that can’t even estimate ROI can be ALL ABOUT ROI? Look, you don’t even get the same results across advertising platforms, some will give you zero return, and some will work better. A Yellow Pages listing for instance in many cases today will not give you same return as Google.
Let’s stop pretending that there’s some predictable and inviolable ROI associated with advertising. I’ve never yet gotten a refund because I didn’t get guaranteed results. Advertisers no more guarantee an ROI than Nikon does on a camera I buy from them.
The truth is we’re all rolling the dice with our advertising dollars and a 5% sales tax isn’t going to change the game. Real businesses don’t make advertising decisions based on any actual ROI calculation, it’s idea of ROI not the actual rate of return that sells advertising. We need to advertise but we’re not looking for a particular rate of return, we’re looking for something that works. If we find something that works, we pay for it, and 5% isn’t going to be a deal breaker. Most businesses don’t actually know precisely what their rate of return on advertising dollars is, so they’re not going walk away from ad campaigns that work based on that calculation.
Taxes and death
Are two inevitable things in life. If a business can’t plan for either one, they will fail. That is, if a business doesn’t find a way to adjust to a new tax, the business plan is flawed.
If you’ve gotten away without a tax thus far, consider yourself lucky, and I sure hope that you took advantage of that little break and planned for the future. The fact of the matter is, advertising isn’t some special business that should be handled with kid gloves simply because it exists. There is no viable reason that services shouldn’t be taxed.
And the numbers that have been thrown around–a 5.5% tax somehow building into a 20% loss in profit–are preposterous. It simply doesn’t add up for a law firm or an advertising business. Besides, a profit is a profit. If you retain 80% of your profit, I really don’t feel bad for you. If still making most of your profit will sink you, you probably have bigger problems.
Costco’s CEO, in a move unlike most retailers, says he would want to see the federal minimum wage increased to $10.10 an hour. That is even higher than the $9 an hour President Obama requested in his State of the Union address.