Tax increase would affect 7 percent of small business owners

When Democrats talk about raising income taxes on the wealthy, Republicans sound alarms that small businesses will be hurt, and that it will cost people jobs.

It's part of the argument Gov. Tim Pawlenty made this week when he vetoed the DFL budget bill which would have raised income taxes on couples with adjusted incomes of more than $200,000.

Pawlenty wrote in his veto letter that the tax would "hamper job creation" and "disproportionately harm small business owners."

The Minnesota Chamber of Commerce also opposed the DFL plan. Tom Hesse, the chamber's vice president for government affairs, cites Minnesota Department of Revenue statistics to back up his position.

"Fifty-seven percent of the filers that will have some income in the fourth bracket down have some small business income flowing through," he said. "That, just to us, says that the governor was correct in vetoing the bill and that it was not, the proposal was not a positive for small businesses."

MOST SMALL BUSINESSES WOULD BE UNAFFECTED

While it's true that a majority of high income Minnesotans derive some of their income from small business activity, it's also true that the vast majority of small business owners would never pay the increased tax because they don't make enough money -- the Minnesota Department of Revenue says 93 percent don't.

The Small Business Administration says there are about a half-million businesses in Minnesota from which income passes through to the owner's personal taxes.

Those businesses run the gamut from sole proprietorships to S corporations and limited partnerships.

These small businesses employ a lot of people, accounting for 78 percent of employment in Minnesota, according to the Census Bureau.

DFL Senate Majority Leader Larry Pogemiller says all of the rhetoric about the peril increasing income taxes would cause for businesses is misleading.

"The governor knows full well that we're talking about taxable income, and there are very few small business people that, after they've taken their business deductions and so forth, are hit by that," Pogemiller said.

NEW TAX COULD STILL COST JOBS

While less than 7 percent of small business owners reports income high enough that they would get hit with the tax increase, they account for more than two-thirds of all small business income.

And Tom Hesse from the Chamber says even if just those 7 percent of small business owners would be directly affected, the higher tax could still cost jobs.

"First those small businesses that might not have income in the forth bracket may have income in the forth bracket in years to come. They certainly strive to," Hesse said. "And just the rate itself may discourage, again, some of that investment and hiring by smaller companies. They may decide to go elsewhere."

But Democrats still insist that new revenue needs to be part of the balanced budget solution.

House Speaker and DFL-endorsed candidate for governor Margaret Anderson Kelliher says on option of last resort could be an attempt to override Pawlenty's veto. But on initial passage the bill didn't get enough votes for an override.