With manufacturing slowing, Minnesota’s uncharacteristically low taxes on manufacturers are more important than ever

Manufacturing has been something of a success story in Minnesota in recent years. As we note in out forthcoming report on the state’s labor market, between January 1999 and December 2018, manufacturing employment fell by 26.5% nationwide, a loss of 4.6 million jobs, compared to a fall of 18.1% in Minnesota, a loss of 72,000 jobs, as Figure 1 shows. Academic research shows that much of this was down to the ‘China Shock’, the admission of China into the World Trade Organisation in 2001, which gave American manufacturers new competition.

Figure 1: Change in manufacturing employment in Minnesota and the United States, 1999-2018, January 1999=100

Source: Bureau of Labor Statistics

But last week, which was Manufacturing Week in Minnesota, saw some concerning news. As the Star Tribune reported,

American manufacturers, after helping power the economy of the past decade, are losing momentum — hurt by trade wars and a slowing global economy.

A report Tuesday showed that nationwide factory activity in September fell to the lowest level since 2009, the last month of the Great Recession. Another report found that confidence levels among Minnesota and Midwest manufacturers fell into “fragile” territory in September, as factory activity contracted for a second consecutive month.

As a result, some economists now consider the manufacturing sector to be in a recession.

The article was titled ‘Manufacturing in Minnesota slumps but faring better than nation as whole’ which is consistent with the longer term picture painted by the employment figures above.

Why is manufacturing in Minnesota generally more robust than nationally? All states face the same monetary policy. The differences, insofar as they are driven by state government policy, must be driven by either fiscal (tax and spending) or regulatory policy.

When it comes to fiscal policy, we have a good idea of why Minnesota’s manufacturing fares comparatively well: the state’s uncharacteristically low taxes.

As I’ve written before, in 2015, the Tax Foundation’s Location Matters study calculated

…the tax bills of seven model firms. We calculate their tax liability in all fifty states, first as mature firms and then again as new firms more likely to be eligible for state incentives, allowing for an apples-to-apples comparison of how state taxes fall on distinct business types.

The study found that Minnesota

…ranks second for mature capital-intensive manufacturing operations, which experience a low 4.0 percent effective tax rate. The burden of the state’s 9.8 percent corporate income tax rate is largely avoided by this firm due to single sales factor apportionment and the lack of a throwback rule.

Manufacturing in Minnesota is a bit of a success story and much of that is down to lower than average taxes. They helped the state weather the ‘China Shock’ comparatively well and they can help insulate our state’s manufacturers from any economic downturn.

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