It isn’t Minnesota’s high taxes that make the state great

The Rochester Post Bulletin carries an op-ed today claiming that our ‘State’s taxes help support high quality of life‘.

If alarm bells aren’t ringing at the end of that, they will be when you read that “the state keeps attracting educated and energetic newcomers” and “keeps producing successful startups”. The authors appear not to have consulted the data before writing this. As we show in our forthcoming report, ‘The State of Minnesota’s Economy: 2018‘, between 2011 and 2016 Minnesota lost residents in every age group but saw the second biggest net loss among those less than 26 years old, according to IRS data, as Figure 1 shows. And, as Figure 2 shows, Census Bureau data show that in 2000, new and young businesses as a share of all businesses were 41% in Minnesota and 43% nationally. By 2014, the most recent year for which we have data, that number had fallen nationally to 34% but in Minnesota to 30%.

Figure 1: Net Flow of Taxpayers and Dependents to Minnesota by Age of Primary Taxpayer, 2011-2016

Source: Internal Revenue Service

Figure 2: New and Young Businesses as a Share of All Businesses, 2000-2014

Source: Census Bureau

The Post Bulletin goes on,

Now let’s look at the other side of the equation: quality of life. Minnesota consistently ranks near the top in “best places to live” surveys. The state was No. 2 in the 2018 U.S. News rankings, and No. 2 in the Politico rankings. CNBC ranked Minnesota No. 3 in “top states to live in,” and graded the state’s quality of life as “A+.”

By the way, CNBC, in a separate survey, also ranked Minnesota as the No. 4 best state in which to do business (sic), based on quality of workforce, technology and innovation, and quality of life.

It is true that Minnesota scores well, overall, on these rankings. But a closer look shows that there is no indication that its taxes are the reason for this.

The U.S. News ranking, for example, ranks Iowa top, Utah third, and North Dakota fourth. Of these, the recent Kiplinger state tax study ranks North Dakota among the ‘Most Tax-Friendly’, Iowa as ‘Mixed’, and Minnesota among ‘Least Tax-Friendly’. Very different tax policies but all in the top four ‘Best States’, according to U.S. News. The fact that Minnesota and two states bordering it score so well suggests that some factor related to geography might be more important.

And, once you dig down into it, U.S. News is actually pretty scathing about Minnesota’s taxes. Indeed, they rank our state 44th on the measure ‘Low Tax Burden’.

It is the same story with the CNBC ranking which the Post Bulletin cites. Minnesota comes 3rd here but North Dakota, with its very different tax policies, comes in 4th. How is it that North Dakota gets a similar quality of life with a much lower tax burden?

This survey is a subset of CNBC’s wider look at Top States for Business. Here, Minnesota came in 6th in 2018, down from third in 2017. And, again, when you drill down into how these rankings are constructed, Minnesota’s taxes get a roasting. The measure ‘Cost of Doing Business’ looks “at the competitiveness of each state’s tax climate, as well as state-sponsored incentives that can lower the cost of doing business”. Our state ranks a lowly 38th.

The Post Bulletin‘s editorial is wishful thinking without recourse to facts. This is a shame because there is ample and growing evidence that Minnesota’s high taxes are, indeed, harming its economy. To have a proper debate about our states economic future, we should always favor facts, however cold or hard, over comforting but inaccurate bromides.

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