Last Wednesday, President Ben Kyriagis and SBM member Clark Dircz testified in Senate and House committee meetings on behalf of the Governor’s Job Now Tax Credit. Their Statements below will give you more insight into the Jobs Credit than anything else out there.
Clark Dircz before the Senate committee :
1) MN needs to be competitive as to employment incentives. Most of us, especially in high tech, have choices, we can hire outside MN, if not globally. I have a letter on my desk from California this AM reminding our company to take the corresponding CA credit for last year (that we do not presently have in MN).
2) There is no way to judge whether a given candidate in any position (which is where this credit focuses) is the “best”. Most companies attract many qualified candidates for all openings. Without the credit, MN loses on ties. Our past 12 hires – 10 CA, 1 IL, 1 MN.
3) For the types of jobs we provide, this credit costs the State NOTHING, because at 50k in salary for a single college grad, the MN income tax is $ 2748. So, in 12 months, the 3k credit is almost paid for. MN is ahead after that. This also does not take into effect the fact that the 50k in income is spent here, generating sales taxes, property taxes etc. In short, for most hires, this costs the State zero. Our employees’ average incomes are in excess of 75k per year by the time they have been with us 3 years and if they don’t start working here, they will most likely never end up in MN, a loss that keeps on losing.
4) State taxes have almost nothing to do with where companies hire and locate. To wit, per the Wall Street Journal (WSJ), taxes are the 26th most important factor in where to locate a business. #1 is demand for products, #2 is education/skill sets of employees/resources. In my earlier career as a CPA, I completed over 3k tax returns and have advised over 500 companies. Taxes were NEVER a primary factor in what they did with their business. How many companies (on net) have relocated to (or are located in ) SD, ND, or Montana from MN or anywhere else because of their zero income taxes? Zero per any actual study I have seen. There is one significant company in ND that is HQ’d there –in mining , because they mine the primary ingredients for their fertilizer there. On net, companies have been leaving those states due to lack of educational skills or because the low skill jobs they have created can be exported anywhere easily. “Buying” companies into your state via tax gambits is a zero sum game, but at times must be played until everyone stops doing it. I applaud the state staff that testified to the fact that we have no choice at this point to participate in this game. $10MM is chump change at that table, see below.
5) Reasons for hiring in states depend on company type, we are in high tech software. Overwhelmingly, our industry hires because of education and somewhat due to proximity to customers. MN used to be (pre-2000) a “low cost” state to hire from because of the high quality educated workforce here that obtained degrees at low cost (which includes my stint at UofMN). During the last 10 years education costs have exploded, forcing many graduates to leave the state to maximize income and we are not turning out as many graduates as needed. The state (pre Dayton) has also been hell-bent on ruining the public education system here due to underfunding.
6) Once you get past agriculture, recreation and some mining, the only real resource MN has is a highly educated workforce. This was heavily invested in during the 60, 70s, leading to Control Data, Honeywell, Cray, Medtronic etc. Since, 2000, nothing of the scope of those companies has been created in MN, with the possible exception of Compellent, which was sold to Dell last year. Since 2000, high-tech in MN other than medical has basically been gutted compared to the truly competitive states. Medical will be gutted too as non-MN ownership/management succeeds the generation of MN founders if we are not competing HARD with multiple programs to keep them here.
7) Where are the “true competitors” and how are they succeeding? WSJ tracks 15k venture-funded companies every year, and culls that list to the top 50 “new” ones per year. Where are they located per last year’s awards? 40 CA, 3 NY, 4 MA, 3 in other states ( 2 in TX). Note that other than TX, these are all “high-tax” states (much higher than our actual status at 33rd highest overall, although our nominal rates look high- there were discussions about this in the meeting as well). Why are the competitors located there? Qualified people & aggressive funding culture. By the way the ones in TX were nothing to brag about- they were R&D energy-related and would generate low-paying jobs.
8) Since 2000, the US has created 60k high-tech targets for the type of products my company creates. 40k+ of these were created in CA alone. Of the remainder 10k+ are located on the East Coast. 95%+ of them are located in states with much higher taxes than MN because of point 7. What about MN? Only 300 – almost all in medical. 85% of our customers are now outside MN.
9) VC funding in MN is almost dead and has gone down every year since 2000, the end of Pawlenty’s term saw the worst investment performance in MN ever. Of the VC’s I talk to, this is due to lack of suitable targets, which = shortage of educated people & related culture. See the above points. Where are almost all the VC’s? CA and East Coast.
10) Capital is key although not part of the credit I was asked to endorse today. By contrast, while we in MN are agonizing over a $10MM seed fund, Massachusetts has spent over $3B (yes $B) in funding the items talked about today in just the last few years. They are on track to reclaim their spot as one of the leading technology hotspots in the world. Invest and you get return. Don’t invest, you get beat- turn out the lights.
So, there is a debate over the “cost” of this miniscule program? And many of the legislators in attendance were concerned about “taxes” and they are “pro-business”?
I certainly don’t know what businesses they are “Pro” for. As they were crowing today about the “success” of the GOP programs that are “creating” the budget “surplus”, I am sure that they are already hoping to give that money away in lower taxes, as opposed to say paying back the $B’s we have borrowed from our schools to fake balance the budget?
As I noted, this credit is a mandatory no-brainer.
Bren Kyriagis before the House Comittee:
My name is Ben Kyriagis. I am a small business owner and the President of a new group called Small Business Minnesota. A nonprofit, nonpartisan association of Minnesota small business owners.
I am here to testify in SUPPORT of the GOVERNOR’S TAX CREDIT on behalf of myself and of Small Business Minnesota.
I will not talk about the obvious benefits of this TAX CREDIT- I.e. the simplicity, the targeting of specific groups, or that it will pay for itself. I think you already have heard that.
I will try to address instead the following 4 POINTS:
Is this necessary since most businesses would hire the people regardless of the Tax credit?
The answer is maybe so. The great advertising man David Ogilvey said this about advertising expenses. “ Half of all advertising expense is totally wasted. The problem is… we do not know which half”.
Perhaps most businesses would hire the people anyway without this credit. Perhaps not. The TAX CREDIT will surely make the difference in cases where some extra incentive is needed. It will give an extra psychological boost.
Are we perhaps spoiling businesses to expect incentives of this type ? Our entire economy is based on incentives. The Free market depends on them. One way we can look at this is “ as incentive for training”.
All businesses have to invest approx. 3 months of pay in training of any new employee before they become fully productive. A $ 3,000 Tax Credit only covers approx. one month of that three month investment. And it is an investment for the hiring company as well as for the state. The new employee will gain new skills and can be more productive for the company and therefore more productive for the state in the form of higher tax contributions and positive impact on the economy. In general, investments in training and education always pay off.
Is there anything wrong with this plan? Sure. No plan is perfect. I already mentioned that we will not know which companies would hire any way without this tax credit. Another thing that I do not like is that companies that had less than five employees in December of 2011 do not qualify. In my view we need to encourage all small companies to hire and this five employee restriction should be eliminated so that all companies that had at least one full time employee in December 2011 will qualify for the tax credit on first come first serve basis like the rest.
What is the best thing about this plan? This is easy. This is not perfect but it is a reasonable, rational, modest, JOBS PLAN. Our economy runs on consumer and business confidence. If you pass a bipartisan JOBS PLAN this Spring it will send a message to all businesses that our politicians are trying their best and they are working together. And this will help improve the overall business climate and confidence. This new climate in itself may actually help create more jobs than the TAX CREDIT. I hope you will keep this psychological factor in your mind as you vote for this bill.
Thank you very much.