Make Minnesota business friendly again
Minnesota’s economy is atrophying under the weight of anti-business policy.
Since Fortune magazine started listing the 500 largest companies in the United States in 1955 — popularly known as the Fortune 500 — three Minnesota companies have made the list every year: 3M (formerly Minnesota Mining and Manufacturing Company), General Mills, and Hormel Foods Corp. This is thanks in part to the fact that companies founded in Minnesota are more likely to grow and survive longer than those created in other parts of the country.
However, out of the 15 Minnesota companies on the 2023 Fortune 500 list, only two were founded after 1960. The last time Minnesota founded a 2023 Fortune 500 company was in 1977, with the creation of UnitedHealth Group. Three-quarters of all 2023 Fortune 500 companies in Minnesota were founded before 1950, with the majority before 1910. Meanwhile, at the national level, about 40 percent of all companies on the 2023 list were founded after 1960, a quarter were founded after 1980, and nearly 1 in 20 were founded after 2000. And while nationally only 49 or 1 in 10 companies have been featured on the Fortune 500 list every year since 1995, for Minnesota, the ratio is 1 in 5.
After extensive data analysis, it is evident that the churn and turn entrepreneurship-innovation cycle that breathes new life and innovation into the economy in other parts of the United States isn’t as vigorous in Minnesota. If left unaddressed, Minnesota’s below-average levels of entrepreneurship will continue to threaten the state’s prosperity and drag down the state’s economy.
Minnesota lags other states in creating new businesses
While Minnesota made up two percent of the total population of the United States in 2023, it only comprised one percent of new business applications, according to the U.S. Census Bureau. The same was true of business applications with a high likelihood of hiring employees, called high-propensity business applications. Among these, for every 100,000 residents, Minnesota had 380 new business applications — 40 percent lower than that for the entire nation, which was 531 applications. The median rate among the 50 states was also higher at 422 business applications per 100,000 residents.
Minnesota’s below-average 2023 performance is not a one-year anomaly; it is indicative of a pattern. In the period for which data is available — 2005 through 2023 — Minnesota has lagged the entire nation on business applications. Minnesota followed the median state closely for a few years, but the gap between Minnesota and the rest of the country grew after 2012. Indeed, while Minnesota ranked 20th on the rate of high-propensity new business applications per 100,000 residents in 2005, by 2023 it dropped 19 positions to 39th. Consequently, businesses established for less than one year made up seven percent of total businesses in Minnesota compared to nine percent nationwide, according to 2021 Census Bureau data.
Generally, the period before the coronavirus pandemic was marked by declining entrepreneurship nationwide. For both Minnesota and the United States, the share of new and young businesses (those aged five years and under) consistently declined between 2000 and 2014, started rebounding in 2015, and reached historic high levels in 2023. Minnesota’s share of new and young businesses, however, stayed below the national average throughout this whole period, according to data from the Bureau of Labor Statistics (BLS). In 2023, only 34 percent of all businesses in Minnesota were aged five years and younger, compared to 41 percent nationally. Among the 50 states, Minnesota had the third lowest share of new and young businesses.
According to popular news websites, business should be booming in Minnesota. CNBC, for example, has consistently named Minnesota as one of the best states in the country to do business since the inception of its “America’s Top States for Business” study in 2008. Except for 2012 and 2013, CNBC has ranked Minnesota among the top 10 states to do business in the U.S. between 2008 and 2023. In 2023, CNBC ranked Minnesota as the fifth best state to do business, surpassed only by North Carolina, Virginia, Tennessee, and Georgia. The reality and the data tell a different story, however. Among the top five states on this list in 2023, Minnesota had the lowest rate of high-propensity business applications at number 39 and the lowest share of new and young businesses at 47.
Unfortunately, Minnesota is not only a loser in creating new businesses, but existing businesses have also been reluctant to invest and expand here compared to other places. In its report published in 2023, the Minnesota Chamber of Commerce found that for projects with a minimum investment of $1 million, Minnesota ranked “near the bottom of Midwest states for new and expansion projects.” Specifically, “Minnesota ranked 10th out of the 12 states in the region in total projects from 2018 to 2022, and ranked 10th in projects per capita in 2022.”
In the 10 years between 2013 and 2022, Minnesota has ranked at the bottom of all Midwest states four times. In seven of those 10 years, Minnesota ranked number 10 or higher. Minnesota’s best year was 2021 when it ranked eighth. And, using data from fDi Markets (an online database that the Minnesota Chamber of Commerce used in its report), the Chamber noted that Minnesota-based companies are expanding in other states at a higher rate than out-of-state companies are expanding in Minnesota. The report found that “from 2020 to 2022, out-of-state companies invested in 101 projects in Minnesota, generating 9,835 new jobs and $4 billion in capital investments. However, companies headquartered in Minnesota invested in 155 projects outside of the state, resulting in 14,364 new jobs and $10.6 billion in capital investments in non-Minnesota locations.” As a result, “this gave Minnesota a net deficit of over 4,500 jobs and $6.6 billion in expansion projects so far this decade.” CNBC ranked Indiana, Florida, Colorado, and Texas worse than Minnesota in 2023, even as Minnesota companies invested heavily in these states between 2020 and 2022. Those states received $4.6 billion in capital investments in that period. The Chamber’s report also noted that Minnesota companies invested “$562 million more in neighboring states than companies from those states invested in Minnesota projects.”
Entrepreneurship is the key to growth
Due to their small size, startups tend to grow faster than mature firms, causing them to have an outsized impact on job creation, output, and productivity growth, making them vital to a dynamic economy. A 2017 study by the Census Bureau’s Center for Administrative Records Research and Applications (CARRA), for instance, found that “for output growth, young firms have higher median growth than their more mature counterparts.” About productivity, the study found that “at least half of within industry labor productivity growth for continuing firms is attributable to employment being reallocated from less productive to more productive firms within the industry.” Young firms are disproportionately responsible for productivity growth stemming from this reallocation of labor.
The same can be seen with job creation. While firms younger than one year comprised less than two percent of total employment in 2021, they contributed to over 12 percent of all new jobs created. For firms over six years old, the share of jobs created was generally lower than the share of employment. Indeed, young firms, especially high-growth young firms, are so vital to job creation that without them, “there would be no net job growth in the U.S. economy,” as one study by the Kauffman Foundation found.
Minnesota’s economy has consistently failed to keep up with the rest of the country in growth largely due to lower-than-average levels of productivity (and productivity growth) even though Minnesotans are relatively richer and enjoy a higher standard of living. Between 2000 and 2022, for instance, Minnesota’s per capita personal income grew by 25 percent. Nationally, per capita personal income grew at a slightly higher rate of 26 percent in the same period. Among the 50 states, Minnesota’s rate of growth was 29th.
The state’s slowing growth is especially stark when comparing the pre- and post-2000 years. Between 1950 and 2000, income per capita in Minnesota more than doubled, growing faster than the national average. Minnesota’s per capita personal income in 2000 was 213 percent higher than in 1950, while nationally, it grew 179 percent in the same period. Minnesota had the 14th highest growth rate among the 50 states between 1950 and 2000. In the 1950-2000 period, growth in per capita personal income for Minnesota mirrored the nation from 1950 until 1964, after which Minnesota grew at a higher rate through 2000. After 2000, however, Minnesota has underperformed the rest of the country in over half of the 23 years between 2000 and 2022.
The trend is the same when looking at other growth indicators such as GDP per capita, employment, and population. While Minnesota’s growth GDP per capita kept up with the nation in the early 2000s, it started lagging the national average in 2005, after which the gap widened. An American Experiment report noted that between 2000 and 2019, GDP per capita in Minnesota grew by just 20.6 percent, which was below the national growth rate of 25 percent. Between 2000 and 2022, employment in Minnesota grew by 15 percent, ranking 36th in the country. Nationally, however, employment nearly doubled the Minnesota rate, which was 28 percent. Minnesota’s population grew at the same rate as the nation only for the years between 2000 and 2003. After 2003, Minnesota grew at a lower rate than the nation, another continuing trend.
Make Minnesota business-friendly again
In the last two decades, Minnesota has consistently fallen behind on income and economic growth, population growth, and job growth. Minnesota also loses highly skilled, high-income people (and their incomes) to other parts of the country.
Minnesota needs to grow and entrepreneurship is an essential part. But new businesses form and take root where they are welcome. With high and increasing taxes, as well as a burdensome regulatory system, Minnesota is not a hospitable state for businesses.
Certainly, Minnesota has some positive attributes. When asked which factors make Minnesota an attractive place to expand, businesses surveyed by the Minnesota Chamber of Commerce in 2023 pointed to the state’s strong workforce. Indeed, a talented, hardworking, and educated workforce is at the top of Minnesota’s attributes. However, with an aging population, retiring Baby Boomers, and slowing population growth, Minnesota’s labor force faces significant headwinds. Without improving productivity, Minnesota’s economy will likely continue to underperform — and even decline.
Favorable rankings by CNBC can give local politicians good news to cling to. But when looking at the factors that matter for business creation, innovation, and productivity growth — such as taxes and regulation — Minnesota consistently ranks at the bottom, making it a less competitive state for investment. On the other hand, states that Minnesota appears to beat, such as Florida and Texas, rank at the top on these important metrics.
The Tax Foundation’s “State Business Tax Climate Index,” a study analyzing how favorable a state’s tax climate is to business, has ranked Minnesota in the bottom 10 of all states every year since 2010. Driving this concerning score is Minnesota’s progressive individual income tax system and high corporate income tax. As of 2023, Minnesota had the country’s seventh worst tax system for business, with corporate income tax ranking third worst. This ranking hasn’t yet incorporated the $9 billion in tax hikes that Minnesota passed in the 2023 legislative session, which will undoubtedly add to the negative appeal. As of Jan. 1, Minnesota’s 9.8 percent corporate income tax rate is the highest in the country since New Jersey cut its rate to nine percent, and Minnesota’s top individual income tax rate is now the sixth highest. It’s no wonder a whopping 39 percent of Minnesota Business Chamber survey respondents cited Minnesota’s high tax rate as the biggest barrier to “initiating or completing an expansion project” in Minnesota.
Minnesota does not fare well on regulation either. The Cato Institute’s “Freedom in the 50 States,” for instance, ranked Minnesota number 34 on regulatory policy for 2022. But when combined with the state’s burdensome taxes, Minnesota ranked number 40 on overall economic freedom. Another study by the Fraser Institute, “Economic Freedom of North America,” ranked Minnesota as the 43rd freest state in the U.S. for 2021, due to high taxes and the state’s stringent regulatory regime. Again, these scores have yet to incorporate the slew of new taxes and business mandates passed in the 2023 session, such as paid family and medical leave, earned safe and sick time leave, delivery tax, metro sales tax, and net investment tax, among others.
With the rest of the country leaving our economy behind, there is more urgency to make Minnesota more business-friendly. We must cut the red tape, dial down the taxes, and give entrepreneurs the green light to do what they do best: create, innovate, and grow.