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Economist's View: With veto from Dayton, Minnesotans to pay $850 million more in taxes

On Wednesday, true to his word, Gov. Mark Dayton vetoed the Minnesota Legislature's tax bill. Among other things, the bill would have brought the state's tax code into alignment with the federal one.

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On Wednesday, true to his word, Gov. Mark Dayton vetoed the Minnesota Legislature's tax bill. Among other things, the bill would have brought the state's tax code into alignment with the federal one.

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John Phelan

With that now looking very doubtful, how might ordinary Minnesotans be affected?

Next year they will have to fill out a 2018 federal income tax form, a Minnesota-only tax form based on the old federal tax code, and a Minnesota tax form. According to economist John Spry, the situation is so complex that, "The Minnesota Department of Revenue has not yet counted how many lines would be added to our tax forms." An estimated 800,000 Minnesotans are expected to end up paying up to $850 million in extra taxes.

Gov. Dayton defended his veto, saying the bill "put powerful special interests, multinational corporations, and the rich ahead of Minnesota school kids and families."

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Looking at the bill, though, the governor's claim was absurd.

On the corporate side, the bill called for reducing the corporate income tax rate from 9.8 percent to 9.65 percent immediately and then to 9.1 percent in 2020. Minnesota would have gone from having the third-highest rate of corporate income tax in the United States to having the sixth-highest.

The bill also would have repealed the corporate alternative minimum tax. Minnesota is one of only eight states to have this. It does little except add unnecessary complexity to the tax code. When the Department of Revenue last published a corporate income tax bulletin about a decade ago, it estimated that the corporate alternative minimum tax brought in just 1 percent of state corporate income tax revenue. Indeed, this sensible measure was originally proposed by a DFL senator, Ann Rest.

The bill also would have conformed Minnesota's tax code to the increased Section 179 federal expensing amounts. This was to allow businesses to deduct the full prices of qualifying equipment and/or software purchased or financed during the tax year from their gross income, reducing their tax liability. It would have served as an incentive for businesses to buy equipment and invest. This raises capital per worker, worker productivity, and wages.

And just because it is called the "corporate" income tax doesn't mean corporations pay it. After all, corporations don't really exist; they are just contractual relationships between individuals. It is these individuals who bear the burden of the so-called "corporate" tax. The workers bear it in the shape of lower wages, and the owners - including millions of middle-class Americans with 401ks - see it in the lower returns on their investments.

On the individual side, the bill would have reduced the two lowest state income tax rates, 5.35 percent and 7.05 percent, to 5.3 percent and 6.95 percent immediately and to 5.25 percent and 6.85 percent in 2020. After these cuts, Minnesota's lowest rate of income tax - which is currently higher than the top rate in 23 states - was to be higher than the top rate in 22 states. The bill left completely untouched the top rate of income tax, the fourth-highest in America.

In truth, these were steps in the right direction, but only small ones. They were certainly not the handouts to corporate fat cats and "the rich" that Gov. Dayton claimed them to be. His was empty, economically illiterate, class-warfare rhetoric, and the state would be better off without such antics.

Tax conformity is an important issue for Minnesota taxpayers. If they don't get it, they will be hit with higher taxes and increased difficulties in filing next year. It is scandalous that the governor is happy to treat ordinary Minnesotans this way.

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John Phelan is an economist at the Center of the American Experiment (americanexperiment.org), based in Golden Valley, Minn.

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