Business Taxation
Full title of the publication:
Taxing Business in Minnesota: Taxes Received Versus Cost of Services Provided.
Click here for a PDF version of the report.
This MTA whitepaper explores the adequacy of business tax revenues in light of the costs of government services provided to Minnesota businesses. Sound tax policy argues for taxing businesses primarily on the basis of recovering costs of government services provided directly to businesses, a practice known as the “benefit principle.” The report replicates a methodological approach developed by researchers at the Federal Reserve Bank of Chicago and the University of Tulane. It finds that in 2002, total state and local revenues received from business were 2.3 times greater than the cost of services directly benefiting business.
From the Executive Summary of the Publication:
Background and Policy Problem
• Sound tax policy argues for taxing businesses primarily on the basis of recovering costs of government services provided directly to businesses, a practice known as the “benefit principle.”
• To make primary use of the benefits principle as a philosophy of business taxation helps guard against overly subsidizing voters in a way that encourages them to “over use” government services, so that the level of government services, something to be arrived at through consensus by regular elections, will be determined in a manner as economically neutral as possible.
• Taxes on businesses are regressive, when their incidence is determined (their “final resting place”).
• There remains little theoretical argument against taxing businesses on a cost-recovery fee basis, rather than through general taxation.
• A “fee only” approach is not always possible, because unlike vendor sales to businesses, a particular business’s use of a specific government service is not necessarily immediately apparent.
• William H. Oakland, former professor of economics at Tulane University , and William A. Testa, Vice President of the Federal Reserve Bank of Chicago , have experimented with a method for estimating governments’ costs for services provided to businesses, as well as how much businesses are paying to governments for those services.
• The purpose of this study is to apply their methodology to more recent Census data only for Minnesota , supplementing it with information not available to them from the Tax Incidence study of the Department of Revenue cited previously.
• This report provides the basis for discussing the implications of our findings and drawing conclusions regarding the taxation of business in Minnesota .