Minnesota has the third highest combined rate of state and federal corporate income tax in the United States – Hiking it would be a bad idea

In our recent report ‘Closing Minnesota’s Budget Deficit: Why we should make spending cuts and not raise taxes‘, we wrote that our state has the fourth highest top rate of corporate income tax in the United States. When we wrote that last year it was true.

But tax rates change. As I wrote recently, as of January 1, 2021, Iowa’s corporate income tax rate was cut from 12.00% to 9.80%, the same as ours. As John Hendrickson of the Tax Education Foundation of Iowa explained last week, that is no coincidence: Iowa is competing with Minnesota. The result is that, just by standing still, Minnesota now has the third highest rate of corporate income tax in the United States.

On top of this, corporations in the United States pay federal corporate income taxes levied at a rate of 21%. Putting state corporate income tax rates together with the federal rate and accounting for deductions, we get the number shown in Figure 1. Minnesota has the third highest combined rate of federal and state corporate taxes in the United States.

Figure 1

Source: The Tax Foundation

In a globalized world, Minnesota is not just in competition with neighboring states but with other countries. Figure 2 shows how our state’s combined rate of state and federal taxes compares with the central and sub-central government corporate tax rate across member nations of the Organisation for Economic Co-operation and Development (OECD).

Figure 2: Combined corporate income tax rate, %

Source: Organisation for Economic Co-operation and Development

Research shows that high corporate tax rates lower entrepreneurial activity and reduce aggregate investment, Foreign Direct Investment, and economic growth. Our state’s government itself says that corporate tax hikes are paid for by ordinary Minnesotans. Given all this, Gov. Walz’ plan to hike Minnesota’s corporate income tax even further, to 11.25%, the second highest rate in the United States, is a terrible idea.

John Phelan is an economist at the Center of the American Experiment.