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.
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.
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.
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