Minnesota ranks 46th out of 50 states for business taxation

This week, the Tax Foundation released its 2018 State Business Tax Climate Index. The news was not good for Minnesota.

How does Minnesota score? 

The headline is that, overall, our state ranks 46th out of 50.

Why do we rank so low? 

The first problem is corporate taxes, where we rank 43rd out of 50 states. Minnesota’s corporate tax rate of 9.8% is the third highest in the nation after Iowa and Pennsylvania. We are one of only eight states to have an Alternative Minimum Tax for corporations. This  puts us at a competitive disadvantage through needless tax complexity. Also, our state is one of thirteen whose deduction for natural resource depletion does not conform to the federal standard, adding further compliance issues.

Then there are individual taxes, where we rank 45th out of 50 states. Minnesota has the third highest top marginal tax rate in the country, 9.85%. Our state also imposes an Alternative Minimum Tax on individuals, which generates the same problems with complexity that the state’s corporate AMT does.

We fare better on sales taxes where our score, 25th out of 50 states, puts Minnesota right in the middle of the pack. Our state has the eighth highest rate of sales tax in the country at 6.875%, but items like food and clothing are not covered.

We do slightly less well on property taxes, coming in 28th out of 50 states.

Our state does slightly less well on unemployment insurance taxes, coming in 37th out of 50 states.

What are the effects? 

As Gov. Dayton put it recently, “Incentives do make a difference”. We tax cigarettes because we want people to do less smoking so what happens when we tax labor and business activity?

As our forthcoming report The State of Minnesota’s Economy: 2017 shows, since 2011, our state has suffered domestic out migration in every age category and every income group above $25,000 annually. Furthermore, venture capital – which is vital for start up firms – is relatively low in the state. For the US as a whole, the amount of venture capital per worker was in 2015 was $391. For Minnesota, it was just $108. And, while new business formation has declined nationally since the onset of the Great Recession, it has declined more steeply in Minnesota. In 2000, the share of new and young businesses in our state as a share of all businesses was just 2% behind the US average of 43%. By 2014, the US average had fallen to 34% but in Minnesota it had slumped to 30%.

Tax cigarette and we get less smoking. Tax labor and business, and we get less of both.

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