With just two weeks to go in the legislative session, several of Democrats' ideas for business are falling apart.
Ramstad: The rapid rise and fall of Minnesota's effort to tax overseas corporate profits
As the legislative session enters its final weeks, lawmakers are learning some ideas aren't practical.
May 8, 2023 at 3:21PM
Last week, Mayo Clinic, the state's largest employer, told lawmakers to back off a time- and money-wasting idea for combating nursing shortages by forming committees in hospitals. It took a threat to shift future capital investments out of state, from Minnesota's preeminent health system, to get legislators to listen.
Then, on Saturday, the idea to tax the overseas affiliates of Minnesota-based multinational companies — which I wrote about last Wednesday — collapsed as quickly as it rose.
It's been a decade since Democrats controlled the full Legislature and the governor's office. And they've used their power this spring to make the biggest increase in the state budget since the 1970s — while also adding policies and taxes that will raise the cost of doing business in Minnesota.
As lawmakers sprint to the scheduled May 22 end of the session, some of the excesses in their thinking are being recognized. And some welcome signs of moderation are appearing.
The failure of the overseas tax proposal is one. Innovative and complicated, the proposal aimed to capture tax from companies that sell things in Minnesota but assign the revenue to business units in other countries.
Democrats hoped the concept, called mandatory worldwide combined reporting, would bring in about $400 million during state government's two-year budget cycle beginning in July.
It's a fine idea to chase businesses that shield Minnesota sales in overseas affiliates, but that revenue estimate was shaky and enforcement looked difficult.
In public hearings, Department of Revenue officials expressed skepticism. In private conversations, they were more direct: There was little to guide them on how to implement the policy.
The idea collapsed Saturday when Sen. Ann Rest, the New Hope Democrat who chairs the Senate tax committee, told the House-Senate conference committee hammering out new tax law that the Senate would no longer support it.
"Worldwide reporting raised too many questions, even about being able to ascertain what that income may be," she said after the committee met.
While the idea isn't new, no state has tried it since California in the 1980s. Other countries complained and the U.S. created a tax treaty that has acted as a lid on such taxes. However, states still have the option to create such a levy and several considered it.
The idea has been batted around in previous Minnesota legislative sessions. But support was mainly among progressive Democrats, and it prompted little public discussion between sessions — nor serious vetting at the Department of Revenue.
"Mechanically, logistically, it's a difficult thing to implement," Sen. Bill Weber, R-Luverne, the assistant minority leader and an opponent of the idea, said after Saturday's hearing. "Are we going to send auditors to London? It's just totally impractical."
The idea surfaced in the House tax bill earlier this session but wasn't projected to have a chance for passage until April 27, when Rest added it to a list of tax increases in the Senate bill. It passed out of the Senate tax panel that day and the full Senate last Tuesday.
Sen. Scott Dibble, DFL-Minneapolis, spent the most time researching the concept and convinced other Democrats that it was the best way to spread some of the new tax burden to corporations.
"That was what was attractive about that. We were looking for revenue sources that were far away from middle-income Minnesotans," Rest said. "But this particular source, with additional information, seemed to me to be less and less reliable."
All through last week, the proposal started getting more attention with antitax groups in Washington. The Wall Street Journal's editorial page on Friday inveighed against it. Large businesses worried the formula for collecting the tax was too blunt and would hit income that wasn't connected to Minnesota.
The most even-handed criticism came from the Tax Foundation, which is supported by businesses. Detractors find proponents' concerns about corporate "profit shifting" to be valid but overstated, an analyst at the group wrote. "The double taxation and additional complexity associated with combined reporting outweigh the benefits," he added.
Rest said the Senate will support other ideas to raise revenue, such as a recommendation from Gov. Tim Walz for a surcharge on capital gains. The state could also conform to a portion of the 2017 federal tax law that imposed a minimum tax on foreign earnings.
Dibble, the Senate's authority on worldwide combined reporting, declined after Saturday's meeting to talk about its failure. His disappointment seemed evident.
He did say Democrats' chief aim is for Minnesota to maintain one of the most progressive tax systems in the country and for large companies to pay their fair share.
In this instance, though, practicality beat principle.
Pioneering surgeon has run afoul of Fairview Health Services, though, which suspended his hospital privileges amid an investigation of his patient care.
