PoliGraph: Zellers exaggerates tax increase impact on businesses

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Minnesota Republicans’ biggest complaint about Gov. Mark Dayton’s budget proposal can be summed up in one word: taxes.

They claim Dayton’s proposed $4 billion in new revenue will hurt small businesses, as House Speaker Kurt Zellers pointed out in a Feb. 18, 2011 email to constituents.

“These tax increases will fall disproportionately on job creators,” Zellers wrote. “Approximately 92 percent of small businesses pay their taxes through the individual income tax.”

Zellers is exaggerating the impact of Dayton’s proposal.

The Evidence

Zellers’ concern centers on Dayton’s proposal to impose a 10.95 percent income tax rate on single filers making more than $85,000 in after tax income and couples making more than $150,000 in after tax income. Those making more than $500,000 in taxable income annually would see an additional 3 percent surtax, making Minnesota’s top income tax rate 13.95 percent. GOP legislators, including Zellers, say these income tax hikes will hurt small businesses most.

There are several ways to measure the size of a small business. In some cases, the Small Business Administration (SBA) looks at a firm’s annual receipts; in others, it focuses on the number of employees. Regardless, Zellers is correct that about 92 percent pay taxes through the individual return.

But the SBA definitions don’t mean much when it comes to taxes because some large companies pay their taxes through the individual return, and some very small companies pay corporate taxes.

Instead, The Minnesota Department of Revenue examines how much money individuals report from a business enterprise on their personal income tax returns. These dollars come from sole proprietorships, S-corporations and partnerships, which tend to have fewer employees.

Each year, about 360,000 individuals – or about 16 percent of all tax returns – report some sort of flow-through income, according to revenue department. Of those, only about 40,000, or 11 percent, would be affected by Dayton’s new tax plan – that is, people making more than $85,000 in after-tax income and couples making more than $150,000 in after-tax income.

Zellers is wrong that the impact of Dayton’s proposal would hurt the vast majority of Minnesota’s small businesses, as his claim implies.

The Verdict

The verdict on Zellers’ claim is false. He correctly points out that 92 percent of “small” Minnesota firms pay taxes through the individual return. But from there, the facts to support his claim get murky. It is false that most small businesses would be hit by the new tax, as Zellers’ claim implies; only 11 percent would feel the effect.

This claim fails the PoliGraph test.

SOURCES

The Small Business Administration, Minnesota: Small Business Profile, accessed Feb. 23, 2011

The Minnesota Chamber of Commerce, Fiscal FAQ, accessed Feb. 24, 2011

The Minnesota Department of Revenue, Governor’s Proposed Income Tax Changes and Flow-Through Businesses, accessed Feb. 24, 2011

The Minnesota Legislature, Taxation and Small Business in Minnesota, by Nina Manzi and Joel Michael, January 2011

Minnesota Public Radio, U of M economist on how state tax rates affect jobs, by Tom Crann, Feb. 16, 2011

The Small Business Administration, Table of Small Business Size Standards

Matched to North American Industry Classification System Codes, accessed Feb. 23, 2011

Minnesota Department of Employment and Economic Development, Employment Distribution by Size of Firm and Major Industry Division, accessed Feb. 24, 2011

Growth and Justice, An Analysis of a Proposal to Add a Fourth Tier to Minnesota’s Individual Income Tax, By Marsha Blumenthal, Ph.D. and Charles Quimby, May 11, 2009

Interview, Jodi Boyne, spokeswoman, House Speaker Kurt Zellers, Feb. 24, 2011

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The Humphrey School

  • Patrick

    Zellar uses a typical highschool debating tactic….facts tossed around that in the end fail to support a thesis.

    If only he and others would just admit they promote an exclusionary society. In the end they come off as zealous hypocrits.

    If the wealthy refuse to cooperate in society then let them leave for autocratic repressive China, a place they may feel at home.

  • Susan

    The argument that Republicans make that people will move because of higher income taxes does not make logical sense. Moving out of state can be a huge lifestyle change. They are already settled in their jobs, life and friends. They are more likely to move because of higher property taxes. That way they can keep their high paying job and just move to a different community with lower property taxes.

  • Jeff

    So if it’s true that “Approximately 92 percent of small businesses pay their taxes through the individual income tax”, why don’t these businesses separate their tax filing into two separate claims? Individual and corporate earnings?

    If they are so worried about getting hit with these extra taxes, you’d think they’d do this. Or are they just lazy, and don’t want to file the extra paperwork?

  • Ralph Crammedin

    Zellers is a liar. It’s that simple. Republicans have declared war on the middle class, both here and nationally. Their economic, financial or budgetary theories serve one purpose, to pull cash from the middle class wallet and transfer it to the rich. To cover up this fact, they spin out lie after lie after lie. PoliGraph could maintain accuracy while saving time and effort by simply declaring false all Republican statements on finance, budget and economics.

  • Jamie

    Not only is what Zellers says wrong – about the percentage of small business owners potentially affected – but he and other Republicans are wrong about so-called “job creators.” Even if that small percentage of small biz owners are creating any jobs (and it sounds like it’s a BIG ‘if’), they just deduct the expense of the employee/s from their income taxes. In addition, the tax increase they would pay isn’t enough to hire a half-time employee, let alone a full-time one anyway.

    The objection some wealthy people and most Republicans have about paying more taxes is simply about GREED.

  • John O.

    If the Republicans were correct about income taxes, Minnesota would have been a wasteland after the early 1980′s. The state did not empty out and move to South Dakota like the business leaders said would happen at the time.

    It should also be noted that there is a distinct difference between the new phrase “job creator” that is belched every 10 seconds by the Republicans and the REAL phrase which would be described better as “wealth aggregators.” The policies and positions eschewed by the current crop of Republicans won’t affect the bulk of small businesses since most of them plow every dime they make back into their business.

    Small businesses are being used by their large corporate relatives in an attempt to promote the narrow interests of insanely wealthy CEOs and institutional shareholders.

  • Joe O.

    Pathetic reporting by writer Catharine Richert. Am the only person that noticed Catharine incorrectly, and no doubt intentionally, based this on ‘percentage’ of tax returns rather the ‘taxable dollars’ contained on the tax returns? No discussion of the percentage of ‘tax dollars’ falling on small business? A single tax-return can be paying a radically higher dollar amount in taxes than another single tax return. What bogus reporting.

    And to some of you other commenters, since when is $85k per year “rich”. The talent to know how to ‘create jobs’ is a talent just as much as the talent to know how to build a widget that a company can sell. If you just keep making it harder for the ‘job creators’ to do their job, let’s see how long you have a job at that company of yours. You will no doubt blame the ‘job creators’ when you lose your job all the while you vote policies against the job creators. Everyone needs to reflect on whether you really believe ever-increasing taxes, debt-spending, and un-funded liability (e.g. gov union pensions) spending will lead to more jobs now and down the road.

    You do realize that “greed” is the ‘excessive desire to acquire or possess more’. Greed can also take the form of voting for state and local spending increases that you have no intention of personally paying for but instead expect “the rich” to pay your share. The only problem is Gov. Dayton has been forced to redefine “rich” down to $85K/yr. At this rate, just 3-5 years from now, ‘rich’ will probably have to be redefined down to what you make in salary. We will also see how you feel about it once those baby-boomer un-funded government union pensioners start hitting your tax return and property tax rates, especially when you start to realize what their retirement package consists of versus your private sector 401K.

    The ‘smart money’ has already moved their money out of Minnesota, like Gov. Dayton’s trust funds in South Dakota that he admitted to the other night on TPT Almanac.