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PoliGraph: Horner's small businesses claim cuts both ways

Inconclusive image.GIF
By Catharine Richert

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 through 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, 2010-08-24

MinnesotaBudgetBites.org, Legislature's tax plan would impact few small businessowners, 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



Home : Policy Areas : Center for the Study of Politics and Governance PoliGraph
PoliGraph: Horner's small businesses claim cuts both ways

By Catharine Richert

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 through 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: http://www.livestream.com/theuptake/video?clipId=flv_9dec224b-c0a7-4e66-9715-07ed6eea2683&utm_source=lsplayer&utm_medium=ui-play&utm_campaign=click-bait&utm_content=theuptake

Minnesota Public Radio News, Tax increase would affect 7 percent of small business owners, by Mark Zdechlick, May 13, 2010: http://minnesota.publicradio.org/display/web/2010/05/12/tax-small-businesses/

The Small Business Administration, Small Business Profile: Minnesota, accessed Aug. 24, 2010-08-24

MinnesotaBudgetBites.org, Legislature's tax plan would impact few small businessowners, accessed Aug. 24, 2010http://minnesotabudgetbites.org/2010/05/13/legislatures-tax-plan-would-impact-few-small-business-owners/

Mark Dayton for Governor, Mark's Deficit Solution, accessed Aug. 24, 2010: http://markdayton.org/mainsite/wp-content/uploads/2010/07/DaytonDeficitSolution.pdf

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


PoliGraph is a regular series of reports that checks the veracity of politicians' claims. It is a collaboration between Minnesota Public Radio News and the Humphrey Institute at the University of Minnesota.

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