The cost of high taxes

Economist John Phelan says government policies undermine Minnesota’s need to replenish its workforce. Here’s a snapshot of his report.

Minnesota is a hard-working state with a low-productivity economy. We achieve above average levels of GDP or Personal Income per capita because of the above-average number of people participating in the labor force. As the number of Minnesotans in the labor force is forecast to fall to 64.6 percent by 2035, the state will need its remaining workers to become more productive to continue raising its per capita incomes. Sadly, Minnesota’s economic policies run in the opposite direction. Minnesota needs to retain the skilled workers it has and attract new ones, but the state’s high rate of personal taxation compounds this challenge. Our top rate of income tax is higher than all but three other states. But it is not just “the rich” who are taxed heavily; Minnesota’s lowest tax rate is higher than the highest tax rate in 25 states.

Minnesota lags in investment and entrepreneurship.

In 2017, the average American worker had $581 of venture capital behind him; in Minnesota, that figure was just $185—68.2 percent less. Between 2002 and 2018, Minnesota’s inflow of venture capital increased by 74 percent in real terms, compared with a 427 percent increase nationally. In 2014, new and young businesses made up 30 percent of all businesses in our state compared to 34 percent nationally. This poor showing is the consequence of Minnesota’s high corporate income taxes, the fourth highest in the U.S.

Per-worker performance is concerning.

Minnesota’s GDP per capita was $65,640 in 2018, 14th highest in the U.S. and 4.6 percent higher than the national average of $62,641. By contrast, our GDP per worker was $123,348 compared to $131,571 nationally. Our state ranked 20th in the nation on this measure, 6.7 percent below the national average. If we look at GDP per worker for the private sector, we see that in 2018 Minnesota’s workers produced an average GDP totaling $119,671—8.1 percent below the national average of $130,261. On a GDP per hour worked basis, the story is the same. In the goods producing sector, Minnesota’s workers produced $82.45 of GDP per hour, 4.7 percent below the national average of $86.52. In services, our state’s workers produced $67.63 of GDP per hour worked in 2018, 6.9 percent below the national average of $72.66.

A hardworking workforce.

In 2018, Minnesota’s Labor Force Participation rate was 69.7 percent, the third highest in the country. As we have a greater share of our labor force working to produce GDP or Personal Income, so we have a greater GDP or Personal Income to divide among the population. Minnesota’s above average figures for household incomes reinforce this point. Median household income in Minnesota was $71,817 in 2018, 18.8 percent above the national average of $63,179. However, households with two workers accounted for 34.0 percent of households in Minnesota that year compared to just 28.6 percent nationally. Minnesota also had a smaller portion of households with one worker or no workers

Minnesota needs lower taxes.

Higher taxes are exactly what our state does not need. Minnesota needs to maximize the share of the younger workers in our labor force. Minimum wage policies prevent young workers from joining the labor market. Excessive rates of personal taxation push productive workers out and deter others from moving to Minnesota. High rates of business taxation deter investment, entrepreneurship, and the formation of small businesses.