The Star-Tribune editorial board brutalized a key component of the
Messinger Dayton and DFL tax plan over the weekend.
The editorial starts out with a half-squib…:
We urge Dayton to reconsider and the Legislature to reject a sales tax on business-to-business services, a tax idea the Star Tribune has long opposed. While expanding the consumption sales tax to a larger share of the economy and reducing its overall rate, as Dayton proposes, is sound tax policy, taxing businesses’ service inputs is anything but.
The lowering and broadening the sales tax is a fine idea, but broadening it to the point where it takes $2.2 billion more out of the state economy during a recession is just plain stupid.
But taxing business services?
Messinger Dayton may have done the impossible: forced the Strib and me into a common cause.
We’ll get to the common cause. First, the Strib accurately describes the inevitable consequences of this tax plan in a way they never did with the Governor’s personal or political record, which shows, I guess, their priorities, but better late than never I guess:
A tax on business-to-business services would distort the choices businesses make about purchasing or keeping in-house accounting, legal and computer services. It would favor large companies with big back-office operations over small firms. It would put Minnesota engineering, architectural, scientific and consulting firms at a disadvantage. And it would turn the sales tax into a price inflator of every Minnesota-made product through a process economists call “tax pyramiding.”
For example, a law firm would pay tax on its cleaning service, and add that cost to the legal bill it sends to a trucking company, which would pay tax on that bill and pass the cost on in its charges to a farmer, who would pay tax yet again on the whole accumulating amount. At that point, the state’s long-standing policy of not applying sales tax to food will have faltered.
To answer the inevitable question: of course the Strib editorial board is acting in its own enlightened self-interest:
Consider the impact on one particular industry sector — one this Editorial Board serves and understands well — advertising, information and communications. Providers of those services together employ nearly 68,000 Minnesotans. Many of them serve clients outside Minnesota and compete with rivals around the country and the globe.
The American Association of Advertising Agencies ranks the Twin Cities ad industry ninth-largest nationally and second-largest in the Midwest. It reports that none of the top eight markets have a tax commensurate with the one Dayton proposes. A cautionary tale can be found in Florida, where in 1987 a sales tax was placed on advertising and a range of similar services. An advertising boycott quickly ensued. So did a repeal of the tax, only six months after its passage.
It could certainly happen here. Of course, the spending that’s being matched with that revenue under the
Messinger Dayton / DFL budget won’t get repealed any time soon…
But here’s the issue where, for the first time ever, I find myself on the same side of the barricade as the Strib:
More than large enterprises would be affected. Sole proprietor David Aquilina, a “strategic storyteller” whose PR business is based in Minneapolis, said he would be contractually obliged to absorb all of Dayton’s proposed 5.5 percent tax.
“I will have to pass along the full cost of the tax to my employee: me,” Aquilina said. The proposed tax “would effectively impose a 5.5 percent cut in the top-line revenue of my business and in my income.”
The tax would apply to lawyers, accountants, cleaning services, networking jobbers, PR flaks like Aquilina – and freelance IT architects like yours truly, who frequently work “corporation to corporation”, and have nobody to pass the cost of the tax on to. And it will favor the big IT solutions shops, who can absorb the extra top-line costs and pass them on – although they won’t be much happer about it that…
…I almost choke to say it…
…the Strib and me.