Minnesota loses out in tax index

By John LaPlante

How is Minnesota like the Chicago Cubs? They’re both “lovable losers.”

Another season of Major League Baseball has expired, and the Cubs failed, again to make it to the World Series. And as another year has passed, a tax-policy organization has once again said that Minnesota is a cellar-dweller.

The Tax Foundation recently released its annual “State Business Tax Climate Index,” and Minnesota came in with a low score. Its position of 47 puts it just ahead of California, New York and New Jersey.

The report attempts to compare all of the 50 states against each other, using 100 factors that are grouped into five broad groups: corporate taxes, individual income taxes, sales taxes, unemployment insurance rates and property taxes. Taxes are not the only factor that individuals and businesses consider, but in a competitive world in which people and businesses have options, they do carry some weight. And in the case of Minnesota, the tax system has been a weight.

Minnesota shows up several times in the index, and not for good reasons. It has the fourth-highest corporate income tax rate, for example, and the third-highest state sales tax. It also gets nicked for complexity. For example, it is one of a few states that has an alternative minimum income tax. It exempts clothing from the sales tax, but taxes materials that businesses use to make their products, which are then taxed again. In other words, Minnesota’s tax system is skewed towards high rates, applied to a small base, which is the opposite structure of what economists recommend. And for sheer frustration, the state’s tax laws vary from the federal tax code in several key ways, further adding to complexity come tax time.

The state is still riding its glory days of large companies that could handle high tax rates and tax complexity. Some of those, such as Cray or Lockhead, have disappeared. Others, such as 3M, have aggressively expanded elsewhere. Yet still others, such as Medtronic, have even talked of leaving the country.

While Minnesota has been raising income tax rates and imposing new taxes such as the warehousing tax, other states have been lowering rates and simplifying their tax code.

Even though New York scores even lower than Minnesota overall, its position on the corporate tax component of the index will move from 24 to 20 as a result of recently passed changes. Colorado will move from 20 to 12, and North Carolina will gain five spots.

North Carolina shows that it is possible to make dramatic changes in a state’s position relative to other states. On the overall index, its position rose dramatically, from 44 to 16. How did this happen? It flattened its personal income tax system, made sales taxes more uniform across the state and reduced the corporate income tax by 13 percent.

If there’s a default way that Minnesotans have of improving the tax climate, it may be to offer special incentives to select businesses. See, for example, the deals offered up to the Vikings and the Mayo Clinic.

But again, North Carolina is instructive. It lavished tax incentives on Dell Computers, which announced just four years later that it was leaving the state. It’s better to create a system that works well for all rather than pin hopes on a few politically connected players.

Can Minnesota ever make it to the top 10 states, which start out with Wyoming, South Dakota, and Nevada? With some hard work, yes.

It’s true that some states in the top 10 have unique qualities Minnesota cannot hope to replicate. It’s not going to be able to offload the tax burden on tourists (Florida) or people who buy its petroleum (Alaska). And the political climate won’t let it join the ranks of states with no income tax, such as South Dakota or Nevada.

But Utah and Indiana are in the top 10, and they, like Minnesota, have both a state sales tax and a state income tax. What have they done? They have kept the base broad and the rates low. Again, this is the opposite of what Minnesota has done.