A common Minnesota GOP talking point is that Minnesota has an unfriendly tax environment for business. It’s taken as an article of faith by Republicans, and many in the media and the general public just accept it as fact at this point. Carver County Republicans, in particular, really love this talking point. One just posted something on this very point the other day, and our representatives in the state legislature have all backed bills designed to help with this problem.
The reality, though, is quite different from the rhetoric. In fact, significantly different. The data shows that Minnesota — in most respects — has a tax climate that is better than the national average.
Let’s talk about some specific points as it relates to this.
Minnesota businesses pay less in state and local taxes than the national average
Republicans are correct that Minnesota does have a high base corporate tax rate — at 9.8%, it is the third-highest corporate income tax rate in the nation. But it’s just one element in the overall state and local tax picture for Minnesota businesses. Keep in mind that businesses here and in other states pay a wide variety of taxes: state and local property taxes, sales taxes, excise taxes, unemployment insurance, licensing fees, and for some types of businesses the income goes to the owner’s individual income tax return.
If you look at the picture in its totality — despite the high corporate income tax rate — Minnesota business still pay less (as a percentage of gross state product (GSP), or the sum of private sector economic activity) in state and local taxes than the national average.
A study by the Council on State Taxation (a consortium of 600 major corporations) and the accounting firm Ernst & Young found that Minnesota businesses pay 4.3% of GSP in state and local taxes. That’s less than the national average of 4.7%.
It’s also less than South Dakota – the place Minnesota Republicans and the Sioux Falls radio guy love to cite as a tax haven – which comes in at 4.9%. It’s less than North Dakota (8.2%). It’s less than Wisconsin (4.6%), and it’s less than Iowa (4.6%). It’s less than Florida (5.3%), Texas (4.9%), and Nevada (4.9%). The closest states where businesses pay a lower percentage of GSP in state and local taxes are Missouri at 4.0% and Indiana at 4.1%.
Business taxes in Minnesota are growing more slowly than taxes on individuals
The same study also looked at the five-year trend is business taxation by state (not adjusted for inflation). In 2009, Minnesota businesses paid $900 million more in state and local taxes than they did in 2005, a 10% increase. Again, this figure was lower than the national average, which saw a 15.5% increase in business taxes over that time.
The 10% growth rate was also lower than that for individuals in Minnesota, who saw a 12% growth in their state and local taxes paid over that time. So, the tax situation for Minnesota businesses isn’t getting worse compared to national average, nor are Minnesota businesses taking a larger hit than individuals in the state over recent years.
Republican plans to lower business property taxes will actually have the opposite effect
Legislative Republicans have touted their plans to cut state property taxes for businesses as part of their budget bills. However, research by the state Department of Revenue shows that the other provisions in the bill — specifically the cuts to local government aid included in the bill — will result in Minnesota businesses paying $63 million per year more in property taxes.
A better path forward
A factor that does make the tax situation in Minnesota problematic is that we’ve built a corporate tax code littered with the deductions and credits. While this does lower the tax burden on business, it does increase costs of compliance and can — in some circumstances — cause a situation where government is favoring some businesses over another. Instead of blanket cuts to corporate income or property tax rates, as Republicans have proposed, we should take a smarter look at business taxes.
We should look at removing the specialized credits and deductions instead. This would allow the state to lower the rate across the board while maintaining the same level of revenue that state takes in today. This would be a fairer — and more fiscally responsible — approach, given our current budget crisis.