With the State of Minnesota government shutdown going on 10 days, I’m having trouble understanding a key position stated in an op ed column by Roger L. Hale. Hale is an advisor to Governor Dayton. His piece was called “The Governor’s budget won’t send businesses scurrying.” Hale’s the former CEO of Tennant. He’s also been on the board of some of Minnesota’s largest corporations. His large company pedigree is impressive and, I believe, is exactly why he doesn’t get small business.
Hale suggests that business owners won’t leave if taxes go higher. He may be right. However, when more and more dollars go to taxes, it’s only reasonable to understand that fewer dollars remain for investing in the firm, hiring additional employees, and building new facilities. There’s also a general misunderstanding about earnings taxation for firms incorporated as an “S Corporation.”
As an owner of an S Corporation, I pay taxes on:
- My pay (like any employee)
- The firm’s earnings (regardless $’s taken for personal use)
Because my income is seen by the state and federal government as #1 and #2 combined—regardless of what’s taken for personal use—it’s not the same as being a highly paid executive receiving a six figure paycheck. For example, if the firm makes $250K and I issue a dividend for $15K for personal use, I’m taxed on $250K not on $15K.
Further, from a finance perspective, I personally must back every business loan or lease. If the business fails, I’m on the hook. Personal guarantees force me to ensure we’re making solid financial decisions. I would argue that most entrepreneurs are similar. Bootstrapping is required. If we took every dime out of our businesses for luxurious lifestyle, we’d be out of business. A growing firm needs cash – it doesn’t throw it off. That’s another reason to care about taxes.
Taxes are one of the top expenses for my firm. I understand taxes are needed for infrastructure, safety, and the well being of those who can’t take care of themselves. That said, we all—individuals, businesses, and governments—need to live within our means. Governor Dayton, Roger Hale and others at the head of the tax increase debate should be cautious.
This isn’t an academic exercise for me. At Intertech, we’re growing, adding to the tax base thru hiring, and close to purchasing a building which will engage a beat up industry—construction—to finish the project.