The budget plan Gov. Pawlenty released this week doesn't just cut spending. It also proposes a series of tax cuts which Pawlenty says will help improve the state's job climate -- and continues the decades-long debate over whether cutting taxes really does lead to more jobs.
Pawlenty's plan would cut corporate taxes and small business taxes, and provide tax breaks for research and development, and for those who provide capital for business startups.
Pawlenty is pushing for the tax cuts as a way to improve the state's economy. When asked if he could guarantee that his plan would create jobs, he flatly said yes.
But neither Pawlenty nor the tax experts in his administration can say exactly how many jobs would be created if the governor's plan becomes law. Pawlenty said history shows that tax cuts enacted under Presidents Kennedy and Reagan helped stimulate the economy.
"At the state level the impact is more modest," Pawlenty acknowledged. "But there is no credible or fair-minded review of the data that would lead you to the conclusion that Minnesota's competitiveness wouldn't benefit from some improvements in our tax structure."
Pawlenty and his revenue commissioner both said that businesses aren't relocating or expanding in Minnesota because of the state's tax climate. They declined, however, to name any of those companies.
Pawlenty would only point to comments made by 3M CEO George Buckley on Minnesota Public Radio's Midday program last March. 3M is one of Minnesota's largest companies, so policy leaders listen when Buckley expressed concern about the state's business climate and the corporate income tax.
"I think it's a pretty tough climate, candidly speaking, for business," Buckley said at the time. "The taxation levels in this state are very high, and we do see a flavor of the absence of support for business in this state -- which is sad."
Pawlenty and Minnesota's business leaders have long criticized Minnesota's corporate income tax as being too high. Minnesota has the fourth highest corporate tax in the country, behind Iowa, Pennsylvania and the District of Columbia. Pawlenty wants to cut the state's corporate tax by 20 percent.
The governor's plan would cost the state $20 million during the current budget cycle. But the cost would balloon to more than $300 million in the next biennium. State Sen. Tom Bakk, DFL-Cook, who chairs the Senate tax committee and is running for governor, criticized Pawlenty for that.
"It's pretty easy to offer up tax proposals or incentives like that when you don't have to pay for them," said Bakk. "A year from now he'll be going on doing something else, and if we pass these provisions into law, he doesn't have to figure out how to pay for them. The next governor is going to have to figure out how to pay for $344 million in business incentives."
Bakk said he also isn't sure that cutting the corporate income tax will have an impact on jobs. He said many out-of-state companies doing business in Minnesota may take the savings either as profit, or invest them in other states.
That's what worries Dane Smith with the progressive group Growth and Justice. Smith, who has called for higher income taxes for Minnesota's top earners, said there hasn't been proof that tax cuts create jobs.
"The tax-cut craze over the last decade at the federal and the state level -- it was tax cuts galore," said Smith. "Income tax cuts on state and federal levels. Capital gains cuts, specific business taxes cuts and credits, did not produce the promised economic utopia."
Smith said many low-tax states currently have higher unemployment rates than Minnesota. He said if business taxes are cut, lawmakers should include an ironclad guarantee that a specific number of jobs will be created.
That's an idea the Pawlenty administration rejects. The governor says if the state doesn't act, businesses will.
"Competitive forces will decide this. So it's not ultimately going to be up to the Legislature, it's going to be up the market and competitive forces," said Pawlenty. "Regardless of what Minnesota does in the next year or two, in the intermediate and long term, this will be decided as to where these types of decisions are made."
But in the long term Pawlenty won't be governor, and lawmakers will weigh that, too, as they debate whether to accept or reject his budget proposal.