Minnesota ranks poorly on new business creation, reducing taxes could change that

Minnesota leaders often boast about the state’s high business survival rate. Indeed, Minnesota ranks well when it comes to how many of its new businesses survive. According to the Bureau of Labor Statistics, in 2020 about 55 percent of all new businesses survived past five years –– the fifth-highest rate in the nation.

However, what they rarely talk about is the low and declining rate of business creation. Minnesota lags the national average as well as most states in creating new businesses –– which often provide job opportunities and add to economic growth.

In 2020, for example, Minnesota was among the bottom 15 states when it comes to the new and young businesses’ share of total businesses –– which can be an indicator of the rate of new business formation. A low and declining share of new and young businesses indicates that the state’s economy is not creating a lot of new businesses, at least compared to the past or to other states.

This is a trend that Minnesota has kept up during the pandemic. According to data from the U.S. Census Bureau, while Minnesota, as well as the rest of the nation, experienced a significant increase in new business applications, Minnesota ranked below the national average in its growth rate and recovery.

In 2020, monthly average new business applications for the U.S. were 25% higher compared to 2019. And in 2021, they were 53% higher. However, for Minnesota, in 2020 new business applications were just 15% higher compared to 2019, and in 2021, 40% higher compared to 2019.

The same is true for what the Census Bureau terms as high propensity business applications –– those businesses most likely to employ people. In 2020, the U.S. experienced a 13% growth in new applications for these types of businesses (as compared to 2019). However, in Minnesota, the rate of growth was just 7%. And between 2021 and 2019, applications for these businesses grew by 37% for the U.S. and 34% for Minnesota.

As shown in the table below, Minnesota has performed below the U.S. when it comes to new business creation recovery at almost every stage of the pandemic.

Reducing both individual and corporate tax rates –– which are among the highest in the nation — could be a step towards reversing this trend. Our historic budget surplus provides us the opportunity to undertake this much-needed reform.