Another strike against Dayton's tax plan and Minnesota's economic competitiveness

Minnesota’s neighbors smell blood. Political leaders from nearby states are seeking to capitalize on Governor Mark Dayton’s budget proposal, with its myriad tax hikes, massive spending increases (many of which are permanent), and dearth of reform. State lawmakers are trying to lure Minnesota residents and especially businesses seeking economically competitive states with lower taxes.

Wisconsin Governor Scott Walker responded to Dayton’s budget plan, with its billions in sales taxes on business services, by reminding Minnesota companies that "Wisconsin is open for business." This week, a Wisconsin legislator issued an open letter to Minnesota businesses, touting Wisconsin’s fiscal restraint, low cost of doing business, and forthcoming tax cuts.

It’s not just Minnesota’s immediate neighbors that are pouncing. Florida Congressman Trey Radel sent a letter to Governor Dayton that began: “I’m writing today to thank you. As a Floridian, I am overjoyed to hear about your plan to raise taxes on Minnesotans … Your proposal gives us a chance to shine here in the Sunshine State.”

But in North Dakota, policymakers are offering more than rhetoric. Legislators of both parties are pursuing policies that seem designed to exploit elements of Dayton’s sales tax plan. First it was the North Dakota bill to create a sales tax exemption for clothing, just days after Dayton announced his plan to tax all clothing over $100. (On Monday, the North Dakota house overwhelmingly rejected a proposal to raise the minimum wage and index it for inflation, just as DFL legislators in Minnesota prepare to pass legislation that would do just that.)

But it’s not just retailers and shoppers that North Dakota is after, they also want to lure investment and innovation across the border.

A bill moving through the North Dakota legislature would renew the state’s sales tax exemption on telecom equipment purchases, an exemption that Minnesota also currently allows. The exemption encourages investment in high-tech telecommunications infrastructure. Why is this significant? Because Governor Dayton’s budget proposal imposes a new tax on telecom equipment (one of many business-to-business taxes Dayton is seeking).

The proposed tax on telecommunications equipment is expected to generate $32.9 million for FY 2014-15 and $52.4 million in FY 2016-17.

This is not merely a tax on business, but a tax on innovation and technological advancement. And it comes at the worst possible time, as Minnesota works toward ambitious goals for expanding broadband access and adoption.

Studies have shown that exempting (or lowering taxes on) telecom equipment increases high-tech investment, increases GDP, and creates jobs. In fact, when North Dakota eliminated the sales tax on equipment, telecommunications and cable TV investment jumped 207 percent. Governor Dayton is apparently willing to forfeit high-tech investment and economic benefits to more business-friendly states.

Governor Dayton is sending a very clear message to business: Invest and innovate elsewhere. And unfortunately, businesses seem to be getting the message.

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