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Minnesota’s business climate and the budget

It’s budget crunch time at the Capitol.

It’s budget crunch time at the Capitol. As the dual, but countervailing, impact of a larger deficit and federal stimulus money fuels discussion of service cuts and taxes, the governor vetoed a bill that would have filled a $1 billion budget hole with selective – and partially temporary – tax increases in order to help education, nursing homes, hospitals and those without health care survive the crisis. Gov. Tim Pawlenty has presented no working solutions to raise necessary revenue that are acceptable to legislators from either party.  

House Tax Chair Rep. Ann Lenczewski and veteran tax-policy expert Sen. Ann Rest have weighed in with deeply thoughtful and comprehensive plans to modernize our tax system, making it easier for citizens to understand and less regressive by spreading the tax responsibilities more evenly. The proposals provide tools for economic stimulus even though they are revenue neutral during a time of budget stress for families and the state. Their fresh ideas are quite different from each other, but both deserve serious consideration at a time we need to smartly realign our tax system for a changed world.

But before we can get there, a conventional wisdom of past debates needs to be thoroughly examined. Pawlenty has proposed significant cuts in corporate income taxes ($110 million in this budget and $410 million for the next two-year budget). The governor and his business supporters, in particular, emphasize that our “terrible business climate” is driving future business growth to other states. Even in the midst of major budget crisis, he argues, we should be giving more tax cuts to profitable corporations. Others suggest we should instead balance prudent, but difficult, spending cuts with smart tax adjustments and wise public investments. 

Contradictions in Pawlenty’s approach
There are some obvious contradictions in the governor’s approach. First, when our immediate problem is too little projected income to match projected expenses, we make the problem worse by reducing projected income by over $100 million and widening the deficit. That’s pretty simple math.

Second, while the governor proposes slashing taxes on corporate profits, he is also slashing $372 million of property-tax relief to business and individuals. So while he gives income-tax cuts to the corporations that are making a profit, he raises property taxes on families and all businesses, including the small businesses that are facing more job cuts, growing financial losses and numerous closings.

The moldy “business climate” claim is an old argument with not much relationship to what has actually happened in Minnesota, so it is important to give it serious examination. Fortunately, an article last summer on Forbes magazine’s webpage (“Homepage for the World’s Business Leaders”) provides some guidance.
In Forbes’ Special Report “The Best States for Business,” Minnesota is, of course, near the bottom. … Oops, no it’s not. In fact, it’s No. 11 among the best states — ahead of North Dakota (No. 13), Iowa (No. 22), South Dakota (No. 23) and way ahead of Wisconsin (No. 43).

Minnesota ranks ahead of such alleged good-for-business states as Indiana, Tennessee and Arkansas, which feature low business costs.

Why does Minnesota do so well?  It’s because Forbes assesses all attributes that are important for business success, not just cherry-picking one item like the cut-business-taxes approach.

Quality labor force, quality of life
Minnesota does well because of the very high rank given to our quality labor force and our quality of life, our long-time strengths. We also rank above average in our regulatory environment and our prospects for future growth. Even our business costs rank 31st, not “nearly last,” and are lower than those in Washington state, Florida, Colorado, Arizona and Alaska, to name a few.

The worst three states for business, according to Forbes, are West Virginia, Gov. Sarah Palin’s Alaska and Gov. Bobby Jindal’s Louisiana, reflecting the disconnect between truly building a strong state economy and fiscally conservative  ideology and rhetoric.

Ironically, Rest proposes a similar delayed reduction of corporate taxes. However, she does it in a comprehensive plan that includes balancing those cuts with higher taxes on high-income individuals who pay a smaller share of their income in taxes than the rest of Minnesotans. She also proposes a lowered but broader sales tax and incentives that help return the business tax cuts to Minnesotans with better jobs and better prices rather than executive bonuses and increased corporate profits.
Bottom line:  Minnesota can retain our economic leadership among the states as we come out of the current economic crisis by maintaining our historically strong investment in labor quality (education) and community quality, which positively impact our good business climate. But we had best listen to thoughtful experts like Lenczewski and Rest, and resist Gov. Pawlenty’s temptation to compete with Govs. Jindal and Palin for their rungs on the bottom of the ladder.

John Hottinger is the president of Hottinger Consulting and project manager of Promoting Healthy Democracy. A DFL state senator from 1991 to 2006, he served as Senate majority leader in 2003.