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Sour tax climate bad for business

This op-ed appeared April 19, 2018 in the Duluth News Tribune

Every now and then, some ranking emerges of the states, and Minnesota often does well. Recently, U.S. News ranked Minnesota second best for great places to live. These rankings are the result of several inputs, and Minnesota generally does well on quality-of-life measures. This was where we were ranked highly by U.S. News.

But our state’s economic policies are usually a downward drag on our rankings, as they also were with U.S. News.

One reason is Minnesota’s corporate-tax regime. Business taxes here are more complex and levied at higher rates than in most other states. As a result, the Tax Foundation ranks Minnesota 46th out of the 50 states for its business tax climate.

Fortunately, there are bills in progress at the Capitol to alleviate this burden.

The first, HF 2526, introduced by Sen. Ann H. Rest, DFL-New Hope, would repeal the corporate alternative minimum tax and the corporate minimum fee.

As we at the Center of the American Experiment wrote in our recent report, “The State of Minnesota’s Economy: 2017,” Minnesota is one of only eight states to have an alternative minimum tax, or AMT, for corporations, which adds another layer of compliance difficulties beyond the federal. With the repeal of the federal alternative minimum tax and various modifications throughout the Internal Revenue Code, Minnesota’s AMT would be even more complicated and burdensome. And, when the Department of Revenue last published a corporate income-tax bulletin (about a decade ago), the corporate AMT constituted about 1 percent of state corporate income tax collections. Quite simply, the state’s separate AMT for corporations is more hassle than it’s worth.

The second bill, HF 3989, introduced by Rep. Joe McDonald, R-Delano, would lower Minnesota’s corporate tax rate from 9.8 percent to 8.8 percent.

This is sound economics. Minnesota’s 9.8 percent top rate of corporate income tax is third highest in the U.S. The state’s relatively uncompetitive position can be seen in its poor recent record in attracting venture capital. In 2015, the average American worker was backed by $391 of venture capital. In Minnesota, the figure was just $108.

The effects of this lack of venture capital can be seen in Minnesota’s relatively poor record on new-business creation. In 2000, new and young businesses as a share of all businesses were 41 percent in Minnesota and 43 percent nationally. By 2014, that number had fallen nationally to 34 percent but to 30 percent in Minnesota.

High rates of corporate tax cut into the amount of money businesses have to plough back into investment and employment. So with our high rates of corporate taxation, it is no surprise our workers have $4,000 less capital behind them than the national average.

This, in turn, contributes to Minnesota workers being less productive than the national average both on a per-worker and a per-hour basis. And, with Minnesota’s working population set to shrink as a share of total population, continued per-capita economic growth will require the workers who remain to become more productive. This is not going to happen with the third-highest corporate tax rate in America.

Taking these bills together, it is encouraging to see a bipartisan appetite to address the worrying situation of complex business taxes and high rates in Minnesota. Even if Rep. McDonald’s bill is passed, Minnesota will have the eighth-highest corporate tax rate in the United States. The bill is a small step, but it is a step in the right direction for our state.

John Phelan is an economist at the Center of the American Experiment (americanexperiment.org), based in Golden Valley, Minn.

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