The Independent Community Bankers of Minnesota introduced legislation in 2014 at the state level which would allow pass-through businesses to re-invest business earnings tax free. If business earning were sent out as dividends, no tax break would occur. ICBM viewed this as an economic development plan allowing s-corp and their pass-through businesses to expand more quickly. For s-corp banks in particular, it would help s-corp banks three ways: to raise capital levels; to conform to new higher capital requirements, while increasing their lending capacity.
In 2013, Democrats controlled both houses of the Minnesota Legislature as well as the Governor’s office. The Governor, House and Senate passed legislation creating a new upper tax tier of 9.75%. This amounts to a two percent increase, raising the top state tax rate from 7.75%. Tax increase advocates, backing Governor Mark Dayton’s proposal, echoed his message that the tax increase was necessary so Minnesota’s richest individuals, the top 2%, “pay their fair share.”
ICBM’s proposal gathered support in the 2015 Session from many business groups and legislators. Among businesses supporters was the MN Chamber of Commerce. During the 2015 session ICBM’s proposal evolved as more groups and legislators became interested. The proposal going the farthest was HF 63 and SF 102. These bills proposed setting a maximum tax rate on active business income at 7.85% for all pass-through entities – s-corporations, partnerships, and sole proprietors.
The cost of the proposal was very high making it unrealistic to pass. In response, State Senator Terri Bonoff, DFL-Minnetonka, amended her version (SF 102) so it only applied to s-corporations, stating she hopes it could be expanded to other pass-through businesses in the future.
Minnesota’s 2015 Legislature had a $1,9 billion surplus. When the session ended they left nearly a billion dollars on the bottom line. Should the 2017-18 budget forecast show additional budget surpluses, competition for funding will be even greater than in the past session, but ICBM will continue to push for tax reform assisting s—corporations and other pass-through entities. Community banks need this and our pass-through business customers need it too.
Proponents of the tax increase argued Minnesota’s richest don’t pay their fair share. They are well organized and their message is simple and easy to understand.
Unfortunately, the consequence of this proposal is that it not only hit the richest two percent, but a number of Minnesota’s businesses.
2. Federal corporate tax cuts were a subject of interest in the spring of 2015 but did not go anywhere. If corporate rats are cut however, doing so without reducing tax rates on pass-through businesses could result in pass-throughs (Individuals) paying higher tax rates than the largest corporations (see below from the Kippling Report.
From the Kippling Report: May 2015:
“It’s still a long shot, but chances of corporate-only tax reform are growing amid talk about a special tax rate on the business income of individuals. If the change is made, the top tax rate on business income of S corporations,
partnerships, sole proprietorships, etc., will equal the new corporate rate…probably 28%. Now income from such companies is taxed at individual tax rates, so corporate reform without any change in taxing business income of individuals would leave many owners of unincorporated firms paying more than corporations.
Some significant roadblocks remain in place, however: To offset the cuts, businesses would lose some much-loved deductions, all of which have lobbies that will fight hard for Congress to preserve them. Plus…President Obama favors higher taxes on multinationals than the GOP does. And with elections ahead, lawmakers aren’t keen on alienating supporters.”
A special thanks to the Independent Community Bankers of Minnesota Government Relations Team for an update on this important piece of legislation.