As the Minnesota gubernatorial candidates debate proposals to revive the state economy, their arguments center on taxes and the role of the government in affecting business and market behavior. The main candidates — Tom Emmer, Mark Dayton, and Tom Horner — offer solutions, but are their views on taxes premised upon hard facts versus wishful thinking?
Emmer offers the clearest statement on taxes. His billboards proclaim: “Not another job lost to South Dakota.” He declares that high state taxes are a deterrent to business expansion and location decisions, and that excess government regulation is stifling investment. Cut both and business investment and expansion will revive.
While rhetorically simple, there is little evidence that taxes are a major factor affecting business location or investment decisions. Overwhelming research and surveys of businesses find they come in behind labor, access to suppliers or markets, and transportation costs as factors affecting location and investment decisions. The same is true for health and safety regulations. The reason for this is that taxes and regulation account for a small fraction of business expenses compared to labor and other costs. This is not to say that taxes and regulation have no impact on businesses, but they are marginal.
The tax/benefit equation
Business taxes have to be paired with their benefits. Even Adam Smith, the guru of modern economics, recognized an important role for government infrastructure investment. Businesses pay taxes; in return they get educated workers, roads, water, and fire and police protection. Overall, the evidence indicates that taxes, done right, pay for important services that produce net benefits to businesses, investment and job creation.
If Emmer’s assertions lack evidence, they might be defensible on ideological grounds. His arguments may be a pretext for simply saying we should have less government. If he were to have his way and enough government were cut to offset the $5-7 billion deficit plus pay for tax cuts, these cuts in state spending will have a major impact on depressing the state economy by unemploying workers and cutting demand.
If Emmer thinks taxes discourage business investment, there are options. One is to eliminate the corporate income tax and instead shift it to individuals. There is good evidence that the corporate income tax is regressive in that it is passed on more to medium and low-income households. The problem here? — how to make up for the lost revenue if cuts cannot be made that do not hurt the economy.
Dayton’s position: almost the converse of Emmer’s
Dayton offers almost the converse of Emmer: There should be no more cuts to government and that we need to raise taxes on the highest income earners. He proposes significant increases to early childhood, K-12 and college funding as a way to reinvest in the economy.
Research consistently demonstrates that education spending is the best medium- and long-term investment the state can make to help the economy. Yet its short-term effects are debatable. His tax proposal will raise revenue, but not enough to offset the deficit and pay for education tax increases. There is also concern that higher tax rates might encourage some wealthy to flee the state. Dayton needs to offer something for quicker revival of the state economy, but he does see taxes as playing a role here.
Horner’s mixed approach
Finally, Horner proposes tax increases and spending cuts to revive the economy. He also wants to exempt businesses from paying taxes on capital equipment. Evidence suggests that the tax on capital equipment has a marginal impact on investment, but this burden is slight compared to other business costs. But Horner calls for a new sales tax on goods and services — reviving an old Ventura administration idea — that we could extend taxes to more items but overall lower the rate.
Horner lists clothing and haircuts as possible new tax sources. The idea is good in the sense that taxing services and not just goods reflects the reality of a new economy. The affluent consume more services than goods, and a tax on the former will transform a regressive sales tax into a progressive one. However, taxing clothing, especially that for children, is a nonstarter, especially as parents ready their kids for school again. This tax will burden parents and the poor, making it even more regressive to some.
Sales taxes should be extended to services. However, exempt clothes for children. Better yet, extend to clothing but institute an automatic $1,000 to $2,000 sales tax credit for those at the economic bottom, with that credit decreasing as family income increases. This would truly make the tax progressive.
As it stands, none of the candidates has fully worked out theories on taxes and the role of the government in stimulating the economy. Many of the arguments may make good political sound bites, but they do not constitute well-thought-out economic policy.
David Schultz is a professor at Hamline University and he has taught state constitutional law for nearly 20 years. He blogs about Minnesota politics and law at Schultz’s Take.