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Minnesota Legislature Should Reconsider Warehouse Tax

Wednesday, August 14, 2013  
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Article by: EDITORIAL BOARD , Star Tribune - August 13, 2013


We hold that there’s never a bad time to correct flawed state tax policy. If Gov. Mark Dayton and legislators do, too, they will expand the agenda of the special session Dayton has said he’d like to call on or about Sept. 9. Though its ostensible purpose will be paying for storm recovery, the session should also reverse at least two ill-considered new business taxes enacted in May.


Dayton and DFL majority legislative leaders signaled last week that they do agree, to a point. At Farmfest, the annual agribusiness fair, Dayton allowed that he favors taking up repeal of a new sales tax on farm equipment repairs. Legislative leaders quickly concurred. The repeal would cost the state general fund an estimated $28.6 million during the two-year budget period — an affordable amount, given that the 2013 Legislature left a forecast $46 million balance on the 2014-15 biennial books.


But Dayton resists going farther. He says he’d prefer to wait for the 2014 Legislature’s regular session, which convenes on Feb. 25, to consider eliminating a new sales tax on warehouse services, now scheduled to go into effect next April 1, and repairing the budgetary breach that would cause. The governor has shown little interest in altering two other new applications of the sales tax, to business equipment repairs and telecommunications equipment purchases.


Each of these is undesirable tax policy. They build hidden taxes into the prices consumers pay for goods and take a hidden toll on employee compensation in the affected industries.


That’s true of any tax on business inputs. But the tax set to hit warehouse services in April is worse. Minnesota companies in the business of providing storage and inventory services for other companies ("third-party logistics”) compete with similar providers in other states. Adding the 6.875 percent sales tax to their prices puts them at a significant disadvantage in that competition. Within days of the new tax’s enactment, the CEO of Minnesota’s largest such company, Richard Murphy Jr. of Murphy Warehouses, said his 109-year-old Minnesota business is considering a move to Wisconsin.


The Legislature seemed to signal some hesitation about inflicting that blow, opting to delay the warehouse tax’s effective date to April 1. Tellingly, no legislators have defended the move, except to say that the state needs the $95.4 million it’s intended to bring state coffers in 2014-15.


The same fiscal justification is cited for the other new business services taxes. Together, they are projected to raise $314 million in this biennium. That money finances a number of long-sought tax relief measures, including ones that would slightly reduce business property taxes and allow business purchasers of capital equipment to be spared sales tax on those purchases without applying for a refund, as they must do now. The latter change is scheduled for phase-in beginning next July 1.


But inflicting serious damage on a few businesses in order to give others a modicum of relief is neither fair nor justified. And keeping warehouse firms worrying for six more months about a steep impending tax is not a business-friendly gesture.


Dayton and legislative leaders should put the warehouse tax alongside the farm equipment repair tax as repeal items on a September special session agenda, and find a way to plug the hole that would create in the state budget. An obvious choice would be a year’s delay in the business capital equipment sales tax change. Another would be a slowdown in the final repayment of the lingering IOU the state owes school districts who were dealt state aid payment delays during the Great Recession.


A third would be to revisit the still-extensive list of consumer purchases that are exempt from the sales tax. All of the business-to-business sales tax exemptions could be repealed, with money to spare, if Minnesota were to join all but four other states in applying their sales tax to clothing.


None of these are politically attractive possibilities, we acknowledge. But picking on one small industry to the point of driving it from the state also exacts a price, both politically and morally. This repeal’s timing wouldn’t be ideal for state budget managers. But as we said, there’s no wrong time to set tax policy to rights.