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Are GOP and businesses crying wolf over impact of new warehouse tax?

They say the tax is a “mistake” that should be fixed immediately to protect state jobs. The DFL, though, says there’s plenty of time before it goes into effect.

red wing factory
Red Wing Shoes says it was going to build a $20 million warehouse in Red Wing but halted the project when the tax was passed by the DFL-controlled Legislature.

In politics, it’s always difficult to separate genuine concerns, stunts and cries of “Wolf!”

No case exemplifies that lack of clarity more than the noise surrounding a sales tax that was applied to Minnesota warehouses in the final days of the legislative session.

Thursday morning, Republican legislators, surrounded by people affected by the tax, held a news briefing, asking the governor to call a special session to stop the tax, which isn’t scheduled to go into effect until next April.

kelly portrait
Rep. Tim Kelly

“We’ve made a mistake,’’ said Rep. Tim Kelly, R-Red Wing. “As I tell my kids, it isn’t whether you make the mistake — it’s how you correct them.”

Kelly insists this “mistake” is costing the state jobs and business expansion opportunities right now. Therefore, the problem should be fixed immediately with a special session, he said.

Interestingly, though, Kelly and Rep. Pat Garofalo, R-Farmington, went to the media with their calls for a special session before going to the governor.

True concern or political stunt?

Does that mean this is more another un-ending campaign stunt about Minnesota’s tax climate than a real concern?

The governor’s office seems to think so.

Bob Hume, the governor’s deputy chief of staff, made it clear that a special session is not in the offing.

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“This is a stunt, not a solution,” Hume said in a statement. “The Legislature is coming back more than a month before this tax would take effect, which is more than enough time, if revenues permit, to review and possibly revise this tax.”

Before proceeding, here’s a quick look at the tax, which is expected to bring in about $100 million over the next biennium and $185 million in outlying years.

The new law would put a 6.5 percent tax on the amount warehouses charge for storing a product. If a warehouse in Red Wing charges a flour mill $1,000 a month for storing flour, for example, there would be a tax of $65 that did not exist before.

According to executives present at Thursday’s event, no other state in the nation has that tax.

‘Added value’ tax, too

Additionally, there would be an “added value” charged on products stored in a Minnesota warehouse.

Stephen Lawrence, who heads the trucking and warehouse company Lawrence Transportation, said there are times that the company’s warehouses put together parts that arrive from different places and then ship those parts to their final destinations. The “added value” on those products now would be subject to a sales tax.

Again, he said, that would make Minnesota unique in the country.

Those taxes are giving his company — which already has locations in Iowa, Wisconsin and South Dakota — pause about expanding in Minnesota, Lawrence said.  He points out that this tax might be one more reason to expand across the river in Wisconsin, rather than in Minnesota.

Of course, for years Republican politicians and business groups have been claiming that the state’s relatively high taxes will chase businesses away. To date, though, the Minnesota economy is humming at a far healthier rate than the economies in such business-friendly states such as Wisconsin and South Dakota.

So is this just another case of businesses crying wolf?

The GOP likes to point to Red Wing Shoes as an example of a company being stymied by this new sales tax.

The simple GOP/business story: Red Wing Shoes was going to build a $20 million warehouse in Red Wing but halted that project when the tax was passed by the DFL-controlled Legislature.

Endangered projects?

But, after listening to John Sachen, a Red Wing Shoe executive, it’s not so clear there’s a direct link between delaying the warehouse project and the tax.

“It’s on hold,” said Sachen of the project.

Would the project have gone ahead if there’d been no tax?

Sachen couldn’t say that it necessarily would have.

Would the project definitely go ahead if the tax were eliminated?

Sachen couldn’t say that was necessarily the case, either.

He did say that the company, which has a facility in Potosi, Mo., is “in talks with Potosi.”  But again, he wouldn’t say that there’s a direct link between the tax and the warehouse project.

Additionally, it should be noted that the Red Wing Shoes warehouse wouldn’t create jobs — other than construction ones in building the warehouse. Rather, it would allow Red Wing to consolidate its current the five warehouses into one facility. Those warehouses, by the way, employ about 80 people, a number that would not increase with a new warehouse.

But all of this is not to say that this is a “crying wolf” stunt.

Despite its passage because of heavy pushing from DFLers in the Senate, this is a tax that may well be headed for elimination before it ever is applied. This is a narrow tax to a narrow group of businesses, a remnant of the broad array of business-to-business taxes the Dayton administration initially proposed but then, under fire, withdrew.

(Another business-to-business tax that survived this session was a sales tax on repair and maintenance of commercial equipment, a tax expected to put $150 million into the budget next biennium.)  

Special session sought

Garofalo thinks the example of Dayton pulling back so quickly from most of the business-to-business sales taxes  makes it possible he might call a special session now.

“Dayton has a long track record,” Garofalo said. “When he makes a mistake, he wants to get over it quickly. And this is a mistake.”

Garofalo says this threat — that warehouses will move across state lines — is real. In fact, moving will be easier than ever, what with new bridges up and down the Wisconsin-Minnesota border. 

“I don’t think this is what we intended when we built the new bridge across the St. Croix,” he said. 

But DFL leaders say a special session is not needed. Given that the tax won’t go into effect until April, there’s plenty of time to fix it.

“I think Minnesotans have had enough of special sessions,” said House Speaker Paul Thissen. “We finished on time, with investments people wanted and with a balanced budget. Coming back for a special session on this one, narrow issue doesn’t make sense.”

Republicans argue, though, that as long as the threat hangs over the heads of businesses, they’ll hold up on making decisions about investing in Minnesota. 

Trucking company executive Lawrence seconded that view. He believes the tax will be revisited — and very likely removed — in the next session. But he’s not certain.

“We think this will go away,’’ he said. “We think it should go away. This is a bad tax. But we’ll hold off on decisions because we’re concerned it could be one of those things that gets lost in the shuffle.”

It is not just warehouse owners and Republicans who oppose this tax.

DFL tax chair also opposes tax

Lenczewski portrait
Ann Lenczewski

Rep. Ann Lenczewski, DFL-Bloomington, who heads the House Tax Committee, opposed it and other business-to-business taxes throughout the session. Senate DFLers and the governor initially pushed the tax, but the governor eventually dropped it.

The fight continued through conference committee, Lenczewski said.

“I don’t support any of the business-to-business taxes,” she said in an e-mail. “Indeed, the House consistently opposed them.”

She urged the Senate to cut spending in order to avoid those taxes. But the Senate held strong.  In the end, the compromise included a handful of business-to-business taxes, such as the warehouse tax.

“That is how compromise works,” Lenczewski said. “We all had to agree to some things we didn’t like.”

She said she will oppose any tax increases next session, so that means spending cuts will have to be made to eliminate the warehouse tax,

“Everyone will need to offer ideas for cutting spending,” she said, “including those who held the news conference.”