A plague on both their houses. Imposing taxes on two business-to-business services, warehousing and repair and maintenance of business equipment, passed by a DFL majority in the last legislative session, is bad public policy. But some critics of the taxes on the other side of the aisle are making such wildly exaggerated assertions about the likely effects of these taxes that they may cross the line into dishonesty. This doesn’t serve the public purpose any more than a poorly-conceived tax does.
The taxes arose at the end of the session like a fiscal Lazarus from the tomb of a broader application of an intra-business services sales tax, first proposed by Gov. Mark Dayton and then dropped by him when it became apparent that they would not pass the Legislature.
They are bad policy for several reasons. First, as ad hoc forays into taxing sales of business services, an area previously exempt, they further complicate our state’s crazy quilt sales-tax system in which some goods and services are taxed and others are not. We went into the session with some hopes that the sales tax might be simplified, at least a bit, and we came out of it with more complication.
Secondly, the tax is arbitrary and hence unfair. Why tax warehousing, but not parking lot patching or payroll administration? Hence some single-business public warehousing companies will get hit hard and other businesses not at all.
Third, and most importantly, ad hoc taxes of this kind have what economists call a high “excess burden”: the total cost to society of the tax, including the cost of complying with it, and the lost output from the economic inefficiencies that inevitably are induced when taxpayers adjust their business practices to minimize the tax due.
In this case, these wasted resources might include the fuel used to haul goods back and forth to warehouses across the river in Wisconsin that are exempt from the tax rather than more rationally located ones near to the business using the warehouse service. They might include businesses building their own warehouses to avoid paying the tax to an independent warehouse, even though that prior practice would involve lower overall use of resources by society.
Finally, there is the issue of “tax competition” between states. Minnesota is cursed in that its major metropolitan area, in contrast to, say, Idaho, Colorado or Arizona, is right on a state border. This means that there is much more potential for taxed businesses to move 20 miles or so east and escape payment. And it is even more difficult to tax Minnesota businesses for use of Wisconsin warehouses than to tax people who buy cars in a nearby state with lower sales tax rates.
All this means that existing public warehouse businesses have very legitimate concerns about how the new tax will affect their competitive position and profitability. And the new tax is a step further away from much-needed tax simplification rather than toward it.
All that said, many of the claims made by critics of the tax are highly overblown, to put it mildly.
For a number of reasons, this isn’t going to wipe out warehousing in Minnesota. First of all, it does not apply to businesses that operate their own facilities. Some 14,000 people work in warehouses in the state, but most of these are in company-owned ones exempt from the tax.
Also, while some such businesses located close to state borders might relocate, there are others which, for a variety of reasons, need to stay close to their customers. And not all public warehouses are in competition with forms already located outside the state.
Yes, the existence of the tax may be a factor deterring construction of new warehouses in the state. But with the streamlining of logistics pioneered by retailers like Target and Wal-Mart and by the big box stores like Best Buy or Home Depot, public warehousing is a declining component of the overall economy.
Then there is the issue of how increased storage costs due to the tax will affect the price of goods to consumers. This is the area in which the most erroneous and irresponsible assertions are being made. One recent opinion piece predicted an “overnight increase in product costs of 7.85 percent” to consumers.
Now it is obvious that this could only occur if warehousing costs made up 100 percent of the retail cost of merchandise. In reality, many goods never pass through a public warehouse at all. And the fee for warehousing for those that do is only a percent or two of consumer prices. With a correct rate of 6.875 percent for the new tax, the effective cost increase to consumers would be a few hundredths of 1 percent.
Even assuming that warehousing made up 5 percent of a retail price, highly unusual, the tax would raise what consumers pay by 32/100ths of 1 percent. When queried about his more than twentyfold exaggeration of the impact on consumers, the author of the opinion piece responded that this was a matter of “parsing syllables.”
The tax may well be repealed. But that leaves the question of from where the projected revenue will then come. Part of the rationale for the tax was that it replaced a tax on purchases of new business equipment, some of which could be rebated through a cumbersome process.
Zealots will say that taxes are out of control and that spending must be cut. The reality is that combined state and local revenues as a percentage of personal income, the “price of government” that the Legislature requires the revenue commissioner to tabulate, is well below what it was two decades ago. If it were the same proportion as in the 1990s, taxing and spending per year, not per biennium, would have to increase by $3.5 billion.
It is legitimate to question government spending, including the new outlays passed. But it is also important to acknowledge that much of the revenue increases go to eliminate the unsustainable smoke-and-mirrors gimmickry that has prevailed over much of the past decade. The new tax is not a good one, but don’t junk it without getting the money from somewhere else.