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PoliGraph: Zellers exaggerates tax increase impact on businesses

False image.GIF 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.

-- By Catharine Richert

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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