PoliGraph: Horner’s small businesses claim cuts both ways

In a recent gubernatorial debate in Winona, Tom Horner and Mark Dayton traded barbs over taxes.

Horner, the Independence Party’s candidate, said Dayton’s plan to raise taxes on the wealthiest Minnesotans would hurt small businesses.

“What Senator Dayton is proposing is not just a tax on success, it is a tax on job creators,” he said on Aug. 19. “When we have most small businesses in Minnesota paying taxes at the individual income tax rate, we’re now robbing their ability to make investments to retain some of their earnings and make investments in new jobs, new equipment, new technologies.”

It’s a claim that’s often made about Dayton’s tax proposal, and it falls into a gray area.

The Evidence

Defining small businesses is a sticky wicket, but for this investigation, there are two definitions that matter.

The federal Small Business Administration identifies them as operations with less than 500 employees, and counts roughly 500,000 such businesses in Minnesota. These businesses can include farms, sole proprietorships or partnerships, and about 90 percent of them report income through the individual tax return.

So, by this standard, it is correct to say most small businesses in Minnesota pay taxes at the individual income tax rate.

But this definition can be misleading because some very large corporations pay their taxes though individual tax returns and some very small organizations don’t. So, to dissect Horner’s larger point that Dayton’s tax plan would put small businesses in a bind, it’s best to look at how many people report what’s known in the tax world as “flow-through income,” or money that comes from business, on their individual tax returns.

By this definition, the Minnesota Department of Revenue estimates that only 8.7 percent of small businesses would be subject to the new tax rate.

If all this sounds familiar, that’s because it is. During the 2010 legislative session, lawmakers debated a tax increase on couples making more than $200,000. Opponents argued that many of Minnesota’s wealthiest derive some income from small business operations. They also pointed out that firms affected by the new taxes account for much of the small business income in Minnesota.

The same holds under Dayton’s proposal. According to the revenue department, while only a sliver of all Minnesotans reporting flow-through income would be affected by the new tax brackets, those filers account for 64 percent of all such income.

The Verdict

Horner is correct to say that most small businesses report taxes under the individual tax return. But it’s misleading to imply that Dayton’s plan would hit a lot of small businesses in Minnesota. In fact, only 8.7 percent would be subject to the proposed increase. Nevertheless, that narrow slice of filers does account for a lot of the state’s small business income.

This claim is inconclusive.

SOURCES

The UpTake, Coalition of Greater Minnesota Cities debate, Aug. 19, 2010

Minnesota Public Radio News, Tax increase would affect 7 percent of small business owners, by Mark Zdechlick, May 13, 2010

The Small Business Administration, Small Business Profile: Minnesota, accessed Aug. 24, 2010

MinnesotaBudgetBites.org, Legislature’s tax plan would impact few small business owners, accessed Aug. 24, 2010

Mark Dayton for Governor, Mark’s Deficit Solution, accessed Aug. 24, 2010

The Minnesota Department of Revenue, Taxes Paid by Small Business in Minnesota, accessed Aug. 24, 2010

Interview, Tom Hesse, vice president for government affairs, Minnesota Chamber of Commerce, Aug. 24, 2010

More

The Humphrey Institute

  • Jamie

    First – it’s FEWER than 500 employees, not LESS than…

    Second, even if some small businesses would have to pay higher taxes, it doesn’t necessarily mean that it’s going to prevent them from hiring more employees. I believe that the reason many small business owners making enough money to pay the higher tax would not hire more employees is GREED. For others, the additional one or two thousand dollars they might pay in taxes isn’t enough to hire an employee all by itself anyway. But it IS enough, combined with all the other individual tax increases, to do a lot of good for the whole state — for all of us. And it would help to keep many people employed who provide valuable services to the state’s citizens — people who might lose their jobs if we don’t fix the deficit.

  • Todd Williams

    What really counts, as far as Emmer and Horner are concerned, is how many jobs will be affected by Dayton’s tax proposal. Of the 8.7% of small businesses subject to Dayton’s proposed tax, how many employees do they have? I would be surprised if there is much correlation between the income level and the number of employees. Put another way, small business owners with high income might have very few employees. Thus, additional taxes on them might not affect many jobs.

  • shawn

    Interesting article – however, what was not clear to me in the article and the radio broadcast is:

    By this definition, the Minnesota Department of Revenue estimates that only 8.7 percent of small businesses would be subject to the new tax rate.

    So, only 8.7% of all small business owners make over $200k a year…. based on this in the article.

    If all this sounds familiar, that’s because it is. During the 2010 legislative session, lawmakers debated a tax increase on couples making more than $200,000. Opponents argued that many of Minnesota’s wealthiest derive some income from small business operations.

    My comment – the article never clearly defines if only 8.7% report pass through income is greater than 200k.

    It would be nice to know if this is true – would Dayton’s tax only go after 8.7% of the small business owners (assuming the income is more than 200k)

  • peter hill

    The correct answer is that no jobs will be lost if the top 9% of “small” business reporters pay incrementally more income tax. Employees are not hired or fired based on trivial increases in tax (Dayton’s proposal is apparently a graduated scale topping out at less than 3.15%) on some fraction of the taxable portion of their employer’s personal income. Employees are hired and fired based on whether enough business exists to merit the larger head count. Period.

  • Arthur Dickson

    The big lie that is missing in the analysis of this issue is that Emmer and Horner are implying that the fair share taxation of the wealthy elite does not allow for deductions for business expenses. The fact is that earned income that is reinvested in the small business is not subject to income tax.

  • Annie G.

    I am a small business owner and I agree that an increase in the individual income tax rate has no bearing on whether we decide to hire any new employees. We hire when we have more business than we can handle with our existing employees. Period. At the end of the year we issue bonuses to the owners and employees so that the business shows little or no profit, and we all pay individual income taxes on those bonuses. The income tax rate has NO bearing on how we run our business. Anyone who claims otherwise is either being disingenuous or doesn’t understand how small businsses operate.

  • Ralph Crammedin

    So, Catherine, can we talk? You give Tom Horner (and the other Tom) the benefit of the doubt by assessing his claim as “inconclusive,” don’t you? You demonstrate that, for 91% of all small business owners, the claim is simply false, right? Further, as Annie G demonstrates, for us small business owners (I’m one, too, and I’ve discussed this with others) the hiring trigger is not the personal income tax. So, even for the 9% for whom the Horner/Emmer claims could be true, they’re unlikely to be true. How about you revise your scoring of Mr Horner’s claim to reflect reality? I’d say it’s 9% inconclusive, 91% pure bs.