Group: ‘Fourth tier’ wouldn’t carry substantial impact on small businesses

MARSHALL – One of the reasons, if not the No. 1 reason, Minnesota Republicans don’t support Gov. Mark Dayton’s “fourth tier” tax proposal is the fear of what it would do to small businesses in the state.

But a report released Wednesday by the non-partisan Minnesota Budget Project says a new state income tax bracket would not affect most small businesses since only a small share of households that report “small business” income would fall in the new bracket. It says only 6 percent of households with what is broadly called “small business” income have income in the new bracket, and many of these aren’t traditional small businesses.

“The fourth tier is not largely a small-business story,” said Nan Madden, director of MBP. “There are some people who would be affected by the fourth tier who have small business income, but the data we have seen from the Department of Revenue show that the majority of small business folks would not have taxable income high enough to be affected by the fourth tier.”

Dayton has proposed a new individual income tax bracket a “fourth tier” that would apply a 9.85 percent tax rate on taxable income above $250,000 for married couples, $200,000 for head-of-household filers and $150,000 for single filers.

MBP says it’s a business’s tax structure, not its size that determines whether it pays taxes on its profits through the corporate franchise tax or the individual income tax. Businesses that pay taxes on profits through the individual income tax include partnerships, sole proprietorships and subchapter-S corporations (S-Corps). Profits from these businesses “pass through” or “flow through” to its owners and/or shareholders, who report the profits on their federal and state income tax returns, MBP said.

Households with flow-through income go beyond those who run a small family business, such as a restaurant, hardware store or barbershop. Only 28 percent of households with incomes high enough to be in the proposed fourth tier receive more than 20 percent of their total income from flow-through sources. Less than half (46 percent) of households with incomes in the proposed fourth tier have any flow-through income, MBP said.

The MBP also says that an analysis of states that have raised income taxes on high-income residents show an increase in taxes doesn’t necessarily push high-income households out of state.

“It actually is a pretty expensive undertaking to move from one state to another,” Madden said. “It’s not something to be taken lightly. When you look at different states with targeted income tax increases, data show there wasn’t a significant increase of wealthy individuals leaving the state after those increases are passed.

“Both of these are issues where people may have the anecdotes of a decision that a particular person made, but when you look at the data there are other factors that are more at play that determine how many millionaires you have in the state,” Madden added. “What’s going on with the national economy is a big factor.”