At the federal level, one of the key controversies in the stimulus debate has been over how much of the stimulus should come in the form of tax cuts. Fortunately, a consensus seems to have formed that tax cuts should play a less important role than spending increases (though there are still a variety of tax cuts in the federal proposal that we could certainly do without). In Minnesota, however, the Governor recently made a number of proposals in direct contradiction to this sentiment. He proposes to cut business taxes with the alleged goal of reducing unemployment in the state.
Among the Governor's proposals:
- Slashing the tax rate on business income in half
- Allowing companies to deduct the entire cost of their equipment purchases up-front, rather than doing so gradually over time as the equipment depreciates
- A variety of tax credits for business investors within the state
- A capital gains exemption for those who invest in small business within Minnesota
The Minnesota Budget Project quickly issued some sharp criticisms of the Governor's stimulus plan. Those criticisms rely heavily on the well-publicized figures produced by Mark Zandi demonstrating the relative effectiveness of various kinds of stimulus measures. Unsurprisingly, business tax cuts ranked among the least effective stimulus options available.
Unfortunately, however, the Governor is not alone in attempting to chart a course down this ill-conceived path. House Republicans have recently begun touting what is perhaps an even more radical measure: a five year suspension of the corporate income tax for any company that relocates to Minnesota, or expands its business within the state.
As the Budget Project points out, though, Minnesota can expect to have even less success with business tax cuts than the federal government could, since the requirement that the state balance its budget (coupled with the already dire budgetary situation in Minnesota) means that every dollar in business tax revenue lost through these cuts will result in economically harmful spending cuts.
Ultimately, stimulus is a matter best left up to the federal government, which can borrow to pay for temporary injections into the economy. The states, including Minnesota, would be much better off focusing their energies on maintaining the valuable state services that Minnesotans are depending on to weather the current economic storm.