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Governor's Tax Cuts=Unemployment

March 04, 2009 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

The Governor's proposed budget contains a number of tax breaks for businesses, including large reductions in corporate income taxes. Fully phased in, these tax breaks would cost the state $440 million every two years. It is far from clear whether these tax breaks will generate the new jobs that the Governor predicts. However, one thing is certain: the additional reduction in public spending resulting from these tax cuts would lead to immediate and significant job losses in Minnesota.

The Governor's plan to cut business taxes would lead to further reductions in public investment, which would in turn cause an immediate and certain loss of public sector jobs without a guarantee of corresponding private-sector job growth in the future.  This immediate job loss would occur at a time when the state is already experiencing the highest unemployment rate in over a quarter century.

Using reasonable assumptions regarding average pay and the portion of each dollar of state spending that goes toward employee wages, Minnesota 2020 and Minnesota Citizens for Tax Justice have estimated the public payroll job losses that would occur if public spending were reduced by the amount of the proposed tax cuts.  We estimate that the business tax breaks that the Governor is proposing* will lead to a loss of 800 full-time equivalent (FTE) public payroll jobs in fiscal year (FY) 2010, which begins on July 1, 2009.  Job losses will increase in future years as the level of tax cuts ramp up.  By FY 2013, job losses resulting from the tax breaks are estimated to reach 1,550.

These estimates include only public payroll job losses.  A portion of state expenditures go to non-public employers, such as road constructions firms, non-profit health providers, and others.  The loss of non-profit and private sector jobs is not included in this analysis.

The Governor's position is that these tax breaks will stimulate job growth by encouraging businesses to expand in or relocate to Minnesota.  Essentially, the Governor is gambling that the purported job growth resulting from his business tax reductions will be sufficient to offset the impact of the immediate public sector job losses and negative effects of even deeper cuts to public investment in education, infrastructure, and quality of life.

So far, the Governor's policy gambles have not turned out very well for Minnesota.  Over the last six years, real per capita state general fund expenditures have fallen by nine percent as state policy makers avoided significant broad-based tax increases in favor of deep cuts in state investments.  Under this policy, Minnesota unemployment and poverty rates have increased relative to the national average, while median household income and job growth declined.  In short, the Governor's tax cutting strategy is not working as he predicted.

Tax breaks for businesses will do little to boost economic recovery if increasing numbers of Minnesotans are unemployed and thus unable to buy the goods and services that businesses are producing.  With the state in the throws of a severe recession, the emphasis of state policy makers should be on immediate job creation or, at a minimum, avoidance of additional job losses, in order to avoid the further collapse of consumer demand.  By creating further job losses, the Governor's tax cuts are taking Minnesota in the wrong direction.

In light of the $6.4 billion state budget deficit, some cuts in public spending are inevitable.  However, state policymakers should pursue a balanced approach that includes both broad based tax increases and expenditure reductions.  At a minimum, we should not compound the state's budget problems by further reducing state revenue, as the Governor is proposing.

* The specific tax breaks included in this analysis are the Governor's corporate income tax reduction, the reinvestment tax credit, angel and early stage tax credits, the capital equipment upfront exemption, section 179 business expensing, and the capital gains exemption.  Estimates of the net state revenue loss from these changes were obtained from the Governor's "Tax Policy, Aids, and Credits" budget document.

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