‘Small business’ tax cuts miss the mark, would prevent investments in durable prosperity

Nan Madden
May 05, 2016

This session, I’ve been hearing from some small business owners about their perspectives on what course state policymakers should take to strengthen their communities and the state’s economy. They have talked about the importance of affordable child care and other supports for their workers, and the need to improve our state’s infrastructure.

Others argue that tax cuts would provide a needed boost to Minnesota’s small businesses. But a closer look at some of the tax cut proposals on the table this session shows their high cost would prevent investments in our schools, infrastructure and workforce to build a broader and more durable prosperity. In addition, these proposed cuts are not particularly well targeted to small business.

For example, the estate tax impacts few Minnesotans: fewer than 2 percent of estates pay Minnesota’s estate tax. That was about 800 estates in 2015. Yet the House 2015 tax bill, up for consideration again this year, would give tax cuts that reach $66 million a year in FY 2019 to this small number of the largest estates.

While proponents often describe small businesses as being important beneficiaries of further cuts to the estate tax, Minnesota already makes special estate tax treatment available to small businesses. Family-owned businesses and farms can exempt up to $5 million of qualifying small business and farm property from the estate tax if they keep the business or farm in the family.

The 2015 House tax bill also would eliminate the statewide property tax, providing a massive tax cut that would cost around $1 billion per year when fully in effect – that’s about what the state of Minnesota spends each year on public safety.

Another way to think about the size of this proposal: had it passed last year, it would have taken up 50 percent of the currently projected surplus for this budget cycle and 85 percent of the projected surplus for the next budget cycle, leaving few resources left to invest in strengthening our communities.

Nor is repealing the state property tax particularly focused on small businesses. (While the debate is often framed in terms of large or small businesses, property taxes are based on the value of a property, not the size of the business itself.)

When fully in effect, the House proposal would provide the largest tax cuts to the highest-valued business properties. An analysis by the North Star Policy Institute estimates that about 75 percent of commercial-industrial properties in Minnesota have values just below $500,000, but these properties would only receive 14 percent of the tax cuts from eliminating the state property tax on commercial-industrial properties.

There are critical decisions to be made in the final weeks of the legislative session, and policymakers will need to decide whether to pass large, poorly targeted tax cuts or instead to invest in what makes our communities thrive.

-Nan Madden