Thursday, January 15, 2009

State investment tax credits 

I didn't get to hear Governor Pawlenty's state of the state speech (I might watch it tonight after I get home from a late meeting), and as expected it was long on rhetoric, particularly about taxes:
Imagine a typical Minnesota kitchen table. A mom and dad have just tucked the kids into bed with a kiss and a prayer, and they come back to the table to confront economic reality.

On the table are bills, notices and a notepad with a budget that�s tighter than it�s ever been. Hope and fear are also at the table.

How do we pay these bills? How do we fix the car? How do we pay this mortgage?

How are we going to afford college or even retire someday?

The same emotions, concerns and urgency at that Minnesota kitchen table must be at all the tables we sit at here at the Capitol � the budget hearing table, the agency tables, and the negotiating tables.

And this day, on behalf of Minnesotans sitting at their kitchen tables, I ask each member of the legislature:

Please don�t add to their burden by increasing their bill from government.

Please don�t take more of their hard earned money.

Please don�t raise their taxes.
As I posted this morning, if you're going to make statements like this, you have to state what choices you really are making. (Turns out I said that last year too.) And one statement he made shows one place where he's being rather bold: Despite balancing the budget, he wants to reduce business taxation.
The way to renew our prosperity is to unleash creativity, innovation, entrepreneurship and job growth.

Successful economies are built by people. Our economic landscape is shaped by men and women who see unmet needs and opportunities in the world around them, and devise goods and services to meet them. For all the turmoil in our nation's financial markets, the malfeasance, corruption, and neglected oversight, this truth remains: While government can commission public works, write checks and foster conditions for job growth, it can�t match or replace the power of people who create goods, services, and jobs. ...

In 2009, it costs too much for employers to create and keep jobs in this state. If we want to build up employment, we need to bring those costs down. I�m proposing a Minnesota Jobs Recovery Act.

For starters, Minnesota�s business tax rate is way too high. A recent study by the Tax Foundation concluded that if Minnesota were a country, we�d have the third highest business tax rates in the world. It�s way out of line and it needs to get fixed.

Today, I�m proposing that we cut Minnesota�s business tax rate in half. This means reducing the current 9.8 percent business tax rate to 4.8 percent over the next 6 years. This will take us from having one of the worst business tax rates in the country, to having one of the best. It will help us keep and attract more jobs.

These days, lack of financing is a major barrier to small business success. To jump start small business job creation, I�ve proposed a 50 million dollar package of tax credits that will create over 100 million dollars in new investments.

In addition, I�m proposing a 25 percent refundable tax credit for small business owners that re-invest in their business quickly in order to stimulate our economy.

I�m also proposing a capital gains exemption for qualifying investments in small Minnesota businesses. This will encourage investment in Main Street and help grow jobs.
Wisconsin has a 7.9% corporate income tax rate; perhaps the Minnesconsin idea could be applied as a start? Even at the lowest in Pawlenty's proposal, we'd still be higher than South Dakota and North Dakota if income is under $8000.

The two changes work at cross-purposes, leading me to wonder how the Pawlenty Administration intends to implement the credits. Tax credits are more valuable when the marginal tax rate is higher; as the tax rate cuts work through the system, the amount one gets back on an investment through the credit becomes lower, especially for small businesses (unless the credit is refundable, which seems unlikely.) The proposal sounds similar to Ohio's plan, which was subject to a constitutional case a few years back. The research tends to support the idea that state investment tax credits, by reducing the user cost of capital, increase the amount of capital formation in a state (see Chirinko and Wilson (CW) [2006a and 2006b] and Ernst and Young [2003]). Tax competition between states tends to be substantial, and CW 2006b show that states tend to create these together to avoid losing businesses to neighboring states. Given we already have a kind of investment tax credit in JOBZ for outstate investment, metro area firms are most likely to benefit from Pawlenty's new plan.

I suspect that the offer to cut corporate marginal tax rates is going to fall on deaf DFL ears. (I heard from one reporter that the DFL is already labeling the speech a billion-dollar addition to the deficit.) I am looking forward to the opening Pogemiller Yell. (You know that "Please don't tax me" line got a little color in Pogie's cheeks.) But by and large it was a relatively mild speech based on the reading. No dramatic veto pens, even when many expect he's going to get a budget he has to veto. Is he signalling softness? Or is he just keeping his cards close to his vest until the budget gets released in a couple of weeks? I think the latter, but I don't know that.

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