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Rep. Garofalo: Moorhead Retail Would Be Destroyed!

Category: Economy
Posted: 01/31/13 00:54

by Dave Mindeman

Rep. Pat Garofalo went into a tirade during an appearance on Almanac: At The Capitol. He was warning of the dire consequences when North Dakota proposes an end to its sales tax on clothing.

Oh my God....how would Minnesota compete? Garofalo actually said in reference to the North Dakota proposal:

"Retail businesses in border communities like Moorhead will be destroyed."

Garofalo loves that flaming rhetoric doesn't he?

Fact: North Dakota sales tax is currently 5.0%. Fargo, ND which is the booming ND metropolis across the river from Moorhead adds a 2% city tax. So here is the facts. Under Dayton's tax proposal, Moorhead (which adds no city tax) would be 5.5%. Fargo would charge 7.0% Clothing may be exempt in the future, but Moorhead will still have clothing under $100 exempt as well.

(Incidently, Fargo would probably oppose a sales tax exemption on clothing because that would greatly reduce revenues from the city tax.)

Now I ask you....does that sound like imminent destruction?

Frankly, all this talk about sales competiton with other states based on sales tax rates are mostly bunk anyway. Minnesota's current tax rate of 6.875 is higher than all of our neighbors currently. If anything, we should get a sales boom the other way since our overall rate will go down to 5.5% under Dayton's proposal....if such differences actually made any real difference.

It would be nice if, just once, Rep. Pat Garofalo would offer an actual legitimate argument.

Just once.
comments (9) permalink
02/01/13 12:00
South Dakota has business to business taxes. Yet they are considered one of the most business friendly states in the country. I think we have to quit looking at individual aspects of Dayton's plan as if that one part is the issue. There is a reason that Dayton put this together as a comprehensive package. He wants to change the system -- this really is a reform and reacts to the way the economy is now. Details need to be looked and maybe the South Dakota method in regards to BtoB transactions should be the model.
02/01/13 10:19
Just a slight expanson of one of Charlie's points. There is a pretty good reason that North and South Dakota have major cities on the Minnesota border. Economic activity. You don't see economic centers on the Montana or Wyoming borders. Its not taxes - it is economics.
02/01/13 01:23
I see Ford's second comment went up as I was typing mine. My statement was in response to the migrating retail sales question, not his post about corporate relocations.
02/01/13 01:15
Somehow the fact that some of North and South Dakota's major cities are located close to the Minnesota border is supposed to indicate the superiority of these thinly populated states.

Dave's right about tax differences being over-estimated. The points commenters make here depend on anecdotes and supposition about cause and effect. The tax studies I've read uphold the principle that taxes make a difference, but the actual impact on measured behavior is small.
01/31/13 21:57
Dave asked "People will change their hair stylists and car repair shop relationships over sales tax differences?"

In some cases yes, in others no. This is not going to trigger much reaction. The damage doesn't happen immediately. It happens over time. Sioux Falls was not built in a day. Neither was Fargo, or Superior, or Hudson. The damage is done when it is time to evaluate where to locate business activity.

I'm not proud of my recommendations as a young staff tax analyst at Norwest (now Wells Fargo). Banking went through convulsions in the 80s and 90s. Decisions to locate their mortgage servicing facility in DesMoines (later sold to GM and is now the GMAC facility), and credit card processing to Omaha.

I was asked to cost Mpls, Sioux Falls, DesMoines, and Omaha. In the case of Mortgage servicing, DesMoines won. Was it one factor? Nope! It was a collection of factors. Clearly the property, payroll, and sales located in MN was the worst bottom line result because it threw worldwide income into MN even though that money was earned elsewhere. It's called the Unitary Method. The facility went from 60 jobs to 2500 overnight. I was one of the advisors the lobbying team working hard to get the Unitary Tax method adopted by Rudy Perpich back in the early 1980s. I was there Dave.

I was there when, as a young pup, watching the numbers flying across my desk and observing what happened to the financial models by moving huge blocks of money from one state to another--with the jobs flowing right along. At one point I was in a heated argument with the lobbyist over one point. What happens in 20-25 years? They KNEW how damaging this would be to MN mainstreet! The answer? "We'll get them to change it back in few years." It wasn't hundreds of millions of bottom line. It was multiple Billions! Well, those years came and went Dave. I'll tell you what happened. 1983 became 2003, and then 2008, and nothing got changed back. Meanwhile, we moved credit card processing to Omaha, mortgage servicing to DesMoines, and branch banking has turned our main street banks into Zombies. It didn't happen over night. The laws changed over night and the world adapts over time as opportunity avails itself.

It has only been recently we have seen the Unitary Method, which is still the law of the land, neutered by reducing the corporate rate and moving to single factor sales.

My warning to St. Paul still applies. Start figuring out management techniques to throttle spending in accordance with 15.5% personal income or the deficits will continue. Put sunsets on EVERYTHING! Make whoever is running the place in 5 or 10 years re-evaluate periodically. If it's working, then fund with a new sunset. You have to reduce the footprint on personal income or create headwinds for the state. It's raw mathematics Dave. 15.5% is the line in the sand. Cross the line to your party's peril.
01/31/13 18:25
Will it "destroy" Moorhead/Breckenridge/East Grand Forks businesses?

There are two answers to that question:

1) There really isn't much to destroy. Look at where the development is in Fargo, Grand Forks and Wahpeton/Breckenridge; the ND side. Not only is the state sales tax lower, but all the other taxes are too, and have been for decades. In each case, the commercial, political and social cores of each of those clusters are on the ND side - and the disparity has been growing over the past 20 years. The North Dakota side is a better place to do business all over. The change in MN clothing taxes (stupid as they are) and the potential abolition of them in ND may not have a cataclysmic effect, but it'll be part of a disparate burden of taxation that are making North Dakota a better option for business AND living, where a choice exists.

2) People along the border have always played games with taxes. We used to drive to Moorhead to buy big-ticket things (musical equipment was a big one), and have them shipped across the river to ND. Moorhead people would come to ND to buy cars and save 3% (later 2%) on the sales taxes; compare the number of car dealers in Fargo, the Forks and Wop with their MN suburbs sometime.

Garofalo was making a hyperbolic rhetorical point. Picking apart the hyperbole is an adequate pretext for a "oh, no, it i'nt" blog post, but it's no more factually accurate.
01/31/13 13:06
People will change their hair stylists and car repair shop relationships over sales tax differences? Really? As usual, you guys assume that everybody is going to jump ship over a few dollars. There will always be some but as usual you guys overestimate tax issues.
01/31/13 12:47
The unfortunate businesses located in the metro area eastern suburbs will soon be heading to Hudson for car repairs, hair cuts, and accounting services. This should prove to be a major boon for Superior WI as well. And on the SW border, the drive towards Sioux Falls you don't need a sign to know where the border might be. You can see it from space. To the east is desolation. "Go west my son" has real meaning in Worthington.
01/31/13 10:36
People in Fargo don't come to Moorhead to save a few cents on small clothing purchases. They come to Moorhead to make large clothing purchases. These purchases are usually higher end items which make the retail outlet more money. This will end this practice. Leave it to Demoncrats to know half the truth. Moorhead can say goodbye to The last retail stores we have if this hair brain scheme goes thru. We already lost all our major electronics stores to Fargo and the Demoncrats are ready to make the last of the other larger stores leave. The Demoncrats call that progress.

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