Minnesota’s Economic News — W/E 2/3/22
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This week the Tax Foundation, in collaboration with the Minnesota Business Partnership, released Minnesota Illustrated: A Visual Guide to Taxes & the Economy. The guide provides a chart book that illustrates how Minnesota’s economy and tax system compare to the rest of the country, paying particular attention to Midwestern peer states.
This is the latest in series of chart books that the Tax Foundation has created for various states. The primary goal for each book is “to help readers understand [the state’s] overall economy and tax system from a broad perspective.”
Regarding Minnesota’s economy, the chart book is the latest in growing list of reports that conclude Minnesota’s traditionally strong economy may be weakening. Broadly speaking, the report finds, “Minnesota’s economy has been strong compared to other states for decades, but trends for many variables, such as employment growth and migration, are falling behind, suggesting Minnesota’s competitiveness is being challenged.”
Their findings are consistent with Center of the American Experiment’s recent report, Minnesota’s Economy: Mediocre Performance Threatens the State’s Future. In that report, economist Joe Kennedy uncovered a number concerning economic trends. Comparing the state to national averages between 2000 and 2015, Minnesota jobs grew at a slightly slower pace, productivity consistently lagged behind, fewer workers were employed at new and young firms, the rate of entrepreneurship sunk, venture capital fell, and the state consistently lost population to domestic migration.
Similar reviews of Minnesota’s economy by the Brookings Institution, the Harvard Business School, the Minnesota Department of Employment and Economic Development and the Metropolitan Council all raise concerns that Minnesota historical economic strength is slipping.
The Tax Foundation’s overview of Minnesota’s tax code provides insights on why the state’s economy might be weakening. The report highlights a number of elements of the tax code that are not competitive with other states. By my count, here are the top ten most challenging aspects of the state’s tax code that the Tax Foundation identified.
1) Minnesota has one of the worst business tax climates in the country. Minnesota ranks 46th out of 50 in the [Tax Foundation’s] State Business Tax Climate Index (2017).
2) Minnesota has the 8th highest tax burden in the nation.
3) Minnesota’s state corporate income tax rate of 9.8 percent is the 3rd highest in the nation, following only Iowa (12 percent) and Pennsylvania (9.99 percent).
4) Corporate income taxes do not provide stable revenue. Minnesota’s corporate income tax revenue has varied by as much as 42 percent year-over-year, making it difficult to properly budget when revenues are unpredictable.
5) Not only is Minnesota’s top marginal individual income tax rate the 3rd highest in the country, but the top rate of 9.85 percent kicks in at a relatively low income level of $155,650.
6) Minnesota’s combined state-local sales tax rate is higher than in many other states. It is higher than neighbors Iowa (6.80 percent), South Dakota (6.34 percent), and Wisconsin (5.41 percent).
7) Minnesota is an extreme outlier with 52 property tax classifications, resulting in immense complexity. South Dakota has the second most nationally with 14.
8) Minnesota’s rapidly growing state property tax … dramatically increases the effective tax rates paid by businesses in the state. The effective tax rate paid for a commercial property of $1 million in Minneapolis is 3.25 percent, compared to 1.422 percent for a median-priced home in Minneapolis.
9) Minnesota is one of only 18 states and the District of Columbia that has an estate or inheritance tax.
10) Minnesota’s excise taxes are high on alcohol and cigarettes, ranging between 8th and 16th highest in the country.
Unfortunately, this is not a short list. There are plenty of opportunities to improve the competitiveness of Minnesota’s tax code. The only question is: Where to start?
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