Minnesota slips a place, to 46th, on the Tax Foundation’s State Business Tax Climate Index

We at the Center have recently released a report, Minnesota’s Border Battles: How state policy affects economies at the margin, which looks at how state’s economic policies impact their economic outcomes. The results suggest a reasonably strong effect of state economic policy on economic outcomes, and in particular, they support the consistent research finding that high taxes have significant negative effects on economic growth.

The report notes that, in 2020, Minnesota ranked a lowly 45th on the Tax Foundation’s State Business Tax Climate Index. Sadly, the 2021 rankings are now out and our state has slipped even further: we are now ranked 46th in the United States. We are hurt by our high income, corporate tax, and sales tax rates, but also by having our own deduction for depletion, an Alternative Minimum Tax for corporations, one for individuals, and a marriage penalty.

2021 State Business Tax Climate Index, 2021 State tax rankings Tax Foundation

Our neighbors continue to do better than us. South Dakota held on to 2nd place while North Dakota slipped one place to 17th and Wisconsin edged up one spot to 25th. Most impressive was Iowa, which jumped from 42nd to 40th. To the extent that taxes negatively impact economic growth, this is bad news for Minnesota.

We don’t want you to leave the state, so, if you are looking to reduce your tax burden while remaining here, another new ranking, this by Smart Asset, offers some suggestions. Ranking our state’s 87 counties by tax burden, it finds that the lowest is to be found in Koochiching, with an index score of 73.56. The highest rates are clustered in the Twin Cities metro area, with Carver County taking bottom spot with an index score of 53.30.

There are issues with this ranking. Smart Asset writes:

To better compare income tax burdens across counties, we used the national median household income. We then applied relevant deductions and exemptions before calculating federal, state and local income taxes.

This seems inappropriate to me. The Median Household Income in Koochiching County was $46,281 in 2018 and $104,248 for Carver County. The tax burden of $12,547 Smart Assets calculates for Koochiching County is 27% of that, for Carver County – tax burden $15,318 – it is just 15% of that. It would seem to me that the tax burden is heavier in Koochiching County than in Carver County.

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