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Tax Foundation report finds business taxes in Minnesota are among the least competitive

The Tax Foundation released their 2017 State Business Tax Climate Index today and, as usual, Minnesota ranks very poorly.  The state ranks 46th overall.  Looking to specific categories, Minnesota ranks 43rd for corporate tax, 45th for individual income tax, 25th for sales tax rate, 28th
for unemployment insurance tax, and 33rd for property tax.

Minnesota’s bottom-of-the-barrel ranking shows the state’s tax system is one of the least competitive in the country.  Competitiveness is exactly what the index aims to measure.  As the report explains:

The modern market is characterized by mobile capital and labor, with all types of businesses, small and large, tending to locate where they have the greatest competitive advantage. The evidence shows that states with the best tax systems will be the most competitive at attracting new businesses and most effective at generating economic and employment growth.

Considering Minnesota’s poor ranking, it’s not too surprising that our recent report on Minnesota’s economy found the state’s rate of new business formation is on the decline.  The percent of Minnesotans employed in new and young firms consistently dropped every year since 2003.  And, as the figure below shows, the percent of Minnesotans employed in new and young firms consistently lags the nation.

figure-22

These are even more concerning trends when you understand that, on net, new and young firms from year to year tend to be responsible for all of the new jobs created in Minnesota.  The state does not appear to be competing well for the new businesses that will create the new jobs of tomorrow.  Our own state agencies project job growth in Minnesota will lag the nation in 19 of the 22 major occupations they forecast.

While there are certainly a number of reasons for why new business formation is on the decline in Minnesota, the Tax Foundation’s State Business Tax Climate Index points to one important factor: Taxes.

The great value in the Tax Foundation’s index is that it identifies what part of Minnesota’s tax system creates the largest drag on the state’s competitiveness.  And, based on their index, restructuring Minnesota’s individual income tax and corporate tax offer the quickest path to a more competitive tax system.

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