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Legislature trashes tax break despite IBM's pleas

Despite stiff opposition from IBM, the DFL-led Legislature approved scrapping a tax break some local Republicans fear could further discourage the company from investing in Rochester.

"This is going to make it much harder for companies like IBM to stay here," said Sen. Carla Nelson, R-Rochester.

Lawmakers voted to get rid of the Foreign Royalty Deduction, which allowed companies such as IBM to enjoy a sizable tax break on revenue generated by royalties at its foreign subsidiaries. It's not unusual for high-tech companies to license a Minnesota invention to one of these related foreign companies. State law had exempted 80 percent of the royalties generated by such an invention.

Throughout the session, local lawmakers said, IBM lobbied hard to keep the tax break. That included IBM Vice President Walt Ling contacting DFL Gov. Mark Dayton's office, asking Dayton to reconsider his support for the plan, according to Sen. Dave Senjem, R-Rochester. The measure was part of a tax bill that raises $2 billion in new revenue. The governor signed the bill on Thursday.

An IBM spokeswoman did not return calls seeking comment.

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Senjem voted for the DFL tax bill, which also included a $585 million funding package for Mayo Clinic's Destination Medical Center. But Senjem said he is concerned that eliminating the tax break will lead to more job cuts in Rochester and that it will discourage companies from reinvesting royalty dollars in Minnesota for research and development.

"That's a disincentive that IBM doesn't have to incur in Minnesota. They can take those tables and chairs and blackboards and whiteboards and they can move those things," Senjem said.

Job loss

The tax increase comes on the heels of an IBM announcement in March that it would be moving the bulk of its manufacturing operations off its Rochester campus to Mexico and New York.

Critics of the Foreign Royalty Deduction have called it a corporate loophole that allows companies to avoid paying Minnesota taxes while taking advantage of countries with little or no taxes. Its elimination is expected to generate an estimated $189 million in state tax revenue over the next two-year budget cycle.

Dayton has long supported eliminating the tax break. Minnesota Department of Revenue Commissioner Myron Frans said the tax law change is intended to make sure that all businesses in the state, whether they are Minnesota-based or multinational corporations such as IBM, are treated the same. It's also about investing in key areas to make sure the state has a world class, well-trained workforce, he said.

"If you want to set the table for economic expansion in Minnesota for the long term, you are going to have to pay for it, and to do that you are going to have to establish a tax system that is fair and levels the playing field," he said.

Frans said he met with IBM representatives a number of times to talk about their concerns. Ultimately, he said, the administration believes it makes more sense to provide across-the-board tax cuts benefiting all businesses rather than continuing to allow deductions that only benefit a select few.

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Research investment

Still, some fear that eliminating the Foreign Royalty Deduction will lead IBM to invest its research dollars somewhere other than Rochester. Minnesota High Tech Association President and CEO Margaret Anderson Kelliher said the deduction has been unfairly lumped into discussions about getting rid of overseas tax havens for businesses. In reality, the former DFL Speaker of the House said, the money generated in growing overseas markets has been used to support high-paying research jobs in the United States.

"All of these companies have good markets here in the United States, but their growing markets are in the rest of the world," Kelliher said. "The concern for IBM and others is that they look at this and say it's easier to co-locate a majority of our research in another place."

The organization backed a compromise proposal that would have allowed companies that invest a certain amount of money into research and development to still qualify for the Foreign Royalty Deduction. But that plan failed to win enough support to pass. Still, Kelliher said she remains hopeful lawmakers will be willing to re-examine the issue next year.

Rep. Kim Norton, DFL-Rochester, said she also heard from IBM representatives concerned about losing the tax break. But she said IBM had a tough time convincing lawmakers that the deduction would lead to job losses after the company announced layoffs in March. She said it appears the company wants to blame the tax change for cutting jobs in Rochester even though it's been steadily cutting its local workforce for years.

"You are already leaving, so don't say this is the reason," Norton said. "Their concern would have been more justified if they had not just made the announcement they were leaving."

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