Taxes Archives

Star Tribune interview “Business owners urge quick landing from cliff”

My thanks to Neal St. Anthony of the Star Tribune for featuring Intertech in the article Inside Track: Business owners urge quick landing from cliff.

As shared with Mr. St. Anthony, whether a person likes it or not, I haven’t talked to any fellow business owners who believe taxes are staying the same or going down next year. While revenue increases seem, to me, a forgone conclusion, I believe any solution requires addressing national debt, entitlement reform, and spending cuts.

As it relates to spending cuts and tax increases, I talked about something that surprised me when teaching at the University of St. Thomas Graduate School of Business Management Center. To illustrate the point of savings versus revenue increases, I asked the class a question:

“An organization with a 2% profit has the opportunity to save $.01 (one cent) or increase revenues by 30%. Which would you choose?”

Most students chose the wrong answer… a revenue increase. With a 2% profit, it takes a 50% increase in revenues to match a 1% cut in spending. Our government, with huge annual losses, would see a great impact through cost savings.

Finally, if there is an overhaul in tax policy, it would be ideal to address the handling of taxation for S corporations (where profits of a firm pass thru to personal 1040’s). In 2008, after Obama’s election win, the Star Tribune was good enough to print an op-ed I wrote on this issue Don’t tax small business out of picture.

The Misguided Governor Dayton’s Position on Taxes

I’m still shaking my head over a recent opinion piece in the Star Tribune by Roger L. Hale, “The Governor’s budget won’t send businesses scurrying.” Hale has served as either CEO or a director for five highly regarded local companies: St. Paul Companies, Valspar Corporation, Donaldson Company, U.S. Bancorp, and Dayton Hudson (now Target Corporation). While his experience is impressive, I’m guessing it is exactly the reason he does not understand how a tax increase proposed by Gov. Dayton will hurt many small- and medium-sized businesses in our state.

We may not “scurry” if our taxes go higher, but we will likely have to pull back on expanding our businesses, hiring more employees and even building new facilities. It doesn’t take a Fortune 500 CEO to know that this will have a negative ripple effect on many others in our state.

This is not a personal attack on a venerable leader of Minnesota’s business community. But to my knowledge, Hale never personally founded a company or had to sign his name on legal documents stating he was risking all of his personal and family assets for the sake of his business. This is the reality of risk for a small business owner like me. I personally back every business loan or significant obligation for Intertech. If the business goes down, I’m agreeing that I’m personally on the hook. Banks and other institutions won’t loan, borrow, lease, etc., without that personal guarantee.

So what does all of this have to do with a possible tax increase?

The whole personal versus business tax debate has been simmering for a long time and still is largely misunderstood by most. Every year, I personally pay taxes on the profit of my firm, regardless of the cash I take out for personal use. As an example, if my firm makes $500K and I issue a dividend to take $10K for personal use, I’m taxed on $ 500 K not on $10K.

This is important because with my business and personal finances completely intertwined, when I must pay even higher “personal” income (i.e., business) taxes it reduces the amount of money left to reinvest in Intertech.

Most entrepreneurs feel the same way. We’re not selfish money hoarders or greedy fat cats sucking every dime out of our businesses to bankroll a luxurious lifestyle. Rather, we invest in our firms, we care about our people, and we care about and give to the community. When we are able to invest everyone wins due to the multiplying effect (http://www.cnmi-guide.com/info/essays/economics/33.html).

Taxes are one of the biggest expenses we have as a firm and we pay them without (too much!) complaint because we know that taxes help keep our community strong and that benefits us too. But Governor Dayton, Roger Hale and others leading this tax increase debate should be cautious. Minnesota’s entrepreneurs and small business owners cannot help jump- start our tepid economy if all or most of our revenue must go for taxes!

This is not an academic policy debate for me. Intertech is growing and we’re adding to the tax base by hiring new people and buying new equipment. We’re also close to buying a building and engaging a distressed industry—construction—to finish it. If our taxes go higher I’m not sure how much of this will be possible.