Minnesota's Corporate Tax Drain
The conventional conservative wisdom professes that Minnesota drives businesses away with its high taxes, a belief that the Pawlenty administration has cited to keep tax increases off the table as a means of dealing with the state's budget deficit. But the reality, according to a report by Citizens for Tax Justice and the Institute on Taxation and Economic Policy, is that some of the biggest corporations in Minnesota get away with paying little or no state income tax. In 2002, the report claims, 3M recorded a profit of more than $1.6 billion but paid no state income tax. General Mills' profits in 2001 passed $750 million, yet the corporation paid no state corporate income tax for the year. The report cites a total of 11 Minnesota-based Fortune 500 companies that paid little to no state corporate income tax.
"The average mom-and-pop shop has less access to the tax reduction practices large corporations use," says Wayne Cox, executive director of Minnesota Citizens for Tax Justice. "There are fewer avenues available. When large corporations aggressively use tax reduction practices, the tax burden is shifted to smaller businesses and individuals."
Tracking state corporate income taxes is complicated by how the numbers are reported. Corporations do not publish the amount they pay in income tax state by state; instead, those that fully disclose what they pay in state income tax release national numbers.
From 2001 to 2003, the 11 corporations (see inset above) paid about $1.1 billion, or 2.6 percent of reported profits, nationally in state corporate franchise taxes, analogous to a corporate income tax. Had they paid state income taxes at Minnesota's rate of 9.8 percent, the total would have been $4.3 billion in tax revenue. At the national average rate of 6.8 percent, they would have paid $2.9 billion.
A larger portion of business tax revenue comes from sales and property taxes, but the missing billions from income taxes might have had a big impact on the state's spending for transportation, education, and social services.
"What we have is a problem of a state being squeezed financially," Cox says. "A portion of that is from the decrease in the state corporate income tax. I think the average citizen should be irate about this. We're talking about a shared sacrifice. This discourages the individual from providing his own tax revenue. People should have faith that the tax system will be fair. Clearly it is not. Large corporations and the wealthy are favored. It is asking a lot of modest incomes. We're in a situation where they're getting less back for their dollar. They're getting a greater tax load and short-changed in the services they're buying."
Corporate income taxes have contributed a shrinking share of Minnesota's Gross State Product over the past 15 years. Minnesota's corporate income tax rate is one of the highest in the nation, at 9.8 percent, but from fiscal year 1989 to fiscal year 2003, Minnesota experienced a 44 percent decrease in the corporate income taxes as a share of the state's GSP. This is about 4 percent greater than the average decrease nationally.
Jack Mansun, assistant commissioner of tax policy and external relations of the Minnesota State Department of Revenue, says the decrease might be due to collections being down after the September 11 attacks. A slumping economy, changes in business structures, and a shift of corporate incomes internationally contribute to the decrease in collections, Mansun says.
The corporate franchise tax applies only to C-corporations, like 3M, General Mills, and UnitedHealth. Small corporations, or S-corporations, and partnerships are taxed through their individual partners. Smaller businesses and individuals have felt the effects of large corporations' aggressive use of tax reduction practices.
Jacqueline Berry, a spokeswoman for 3M, calls the report inaccurate. 3M's 2003 annual report states that the company paid $12 million in state income tax nationwide in 2002.
Robert McIntyre, author of the report and director of Citizens for Tax Justice, says the amount 3M paid to its employees in stock options, when broken down between state and local tax rates, negated the amount paid in local tax. When a company pays its employees in stock options, McIntyre says, it reduces taxable income. General Mills in 2001 benefited in the same way, he says.
Minnesota is merely one case in the nationwide trend illustrated in the report. The budget deficit in Texas is a prime example of what can happen if a state does not have solid laws to maintain tax revenue from corporations based in that state. Dell and SBC Communications have been able to transfer profits artificially to a subsidiary in Delaware, putting those profits out of the reach of taxation, according to the Texas comptroller's office.
Minnesota has better laws than most states. It uses combined reporting that eliminates most of the tax benefits of shifting profits to other states, but lately more and more corporations have declared subsidiaries in foreign nations. In that regard, Minnesota has the same problems as the federal government, Mansun says. The State Department of Revenue is investigating the laws that govern operating a foreign corporation and how foreign royalty fees are deducted.
Lynn Reed, executive director of the Minnesota Taxpayers Association, says this is a legal means of exploitation. "Creative corporate tax people will always be ahead of revenue people," Reed says. "The rules in Minnesota need to be tightened."
The corporate franchise tax rate in Minnesota is figured by taking into account a corporation's property holdings and the percentage of its payroll and sales in Minnesota. Minnesota's formula ranks sales the highest at 75 percent, and Reed says this encourages businesses to locate their corporate headquarters in Minnesota.
Cox has watched state government for 30 years and says the current governor is the "worst governor for fiscal management" that he has seen. Minnesota has a tradition of economic success because of its productive workforce, Cox says. Now, schools are in perennial trouble. It's unlikely that Minnesota will be able to continue to provide that level of productivity. Cox maintains that this will ultimately be bad for business. "The relentless drive by the business lobby has put the future workforce at risk," Cox says. "It will come back and bite them in the end."
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