Late Debate Senior Economist John Spry, Ph.D., was interviewed by MinnPost for his opinion on Governor Mark Dayton’s business-to-business sales tax plan. Dr Spry says he’s searching for agreement:
“It is very rare when all economists agree,” says John Spry, a professor of business economics at the University of St. Thomas and an expert on state tax policy. “But I am still trying to find an economist who studies this area who thinks taxing business-to-business services is a good idea.”
So economists dislike Dayton’s idea. Well, so do business leaders:
“The business-to-business tax doesn’t make sense for economic reasons, for fairness reasons or for practical reasons,” says Bill Blazar, senior vice president of the Minnesota Chamber of Commerce. “There’s nothing progressive about it.”
Part of the problem with the business-to-business sales tax is “tax pyramiding”.
“If there’s a product or service that has multiple stages of production, when taxes are applied in stages, then you are applying a tax on top of a tax,” explains Laura Kalambokidis, a University of Minnesota economics professor and tax expert.
Kalambokidis says the classic example is “the baker who buys the flour, pays a tax on it, and then sells the bread to the consumer. Then you apply the tax on the sale to the consumer, so it ‘pyramids.’ It’s building so that you have 5.5 percent or whatever on the inputs. That then gets baked into the price of the good. The more stages of production, the more time it happens if every input is taxed.”
So you end up paying all the taxes for every company that had a hand in creating the product you’re buying; the more businesses involved the higher the final cost.
And because the only tax you see on a receipt is the 5.5% sales tax on the product’s final cost, every level of sales tax paid by the series of businesses that brought you the product are hidden. And hidden is bad.
“It’s a bad tax — it’s a hidden tax,” says Arthur Rolnick, an economist and former senior vice president of research for the Federal Reserve Bank of Minneapolis. “It’s going to end up distorting business decisions.”
All these people think Dayton’s new sales tax is a bad idea. But that’s nothing compared to the DFL state legislators who think it’s a bad idea. Without legislative support, the Governor’s budget plan is severely compromised.