Average Business Taxes, Above Average Return

October 03, 2011 By John R. Van Hecke, Executive Director & Fellow

If conservatives were serious about creating jobs and attracting companies to Minnesota, they’d stop trumping up unfounded rhetoric about the state as a burdensome, high tax business environment.

Think about it. If you were a business owner and a state’s leaders constantly harped about all of its burdens while downplaying its assets, would you want to come?

In reality, Minnesota is fairly typical among states in terms of the overall rate of business taxation. Using broader measures that more fairly evaluate the state, Minnesota ranks among the lowest third of states in total business taxes.

When considering the highly skilled workforce, low poverty rate and quality of living, Minnesota provides great value on public services’ investments.

One number conservatives enjoy highlighting is our corporate income tax. But looking at the rate in a vacuum is misleading because significant differences in tax bases make it difficult to rank corporate income taxes.

While Minnesota’s has the fourth highest statutory top corporate income tax rate in the nation, businesses in Minnesota enjoy numerous exemptions and deductions which reduce the tax base. Thus, a ranking based exclusively on nominal corporate tax rates is not particularly meaningful.

The single most useful and comprehensive measure of business taxes is total business taxes as a percent of private sector economic activity. In this category, Minnesota ranks 16th among the states (i.e., only 15 other states have a lower taxes) and is modestly below the national average, based on DEED and other publicly available data.

If we focus exclusively on the tax liability on new business investment, Minnesota’s rank among states improves. Minnesota has the 10th lowest effective tax rate on new business investment when the various components on the tax calculations are weighted by capital investment (13th lowest when weighted by jobs).

In terms of average workers’ compensation rates per $1,000 of payroll, Minnesota ranks 36th among the states. However, Minnesota’s rate per $1,000 of payroll ($2.27) is only modestly above the median for all states ($2.04) and is competitive with most neighboring states, including Wisconsin, South Dakota, and Michigan.

While Minnesota has a relatively high state sales tax rate, it has relatively low local sales taxes. In an effort to take the bite out of this otherwise regressive tax, Minnesota exempts food and clothing from the sales tax, but—unlike many other states—Minnesota also does not tax materials and fuels used in the manufacturing process and refunds sales taxes paid on capital equipment.

Minnesota is at or slightly below the national average in terms of property taxes on a $2.5 million industrial property for both urban and rural areas. Furthermore, because Minnesota provides a preferential class rate to the first $150,000 of real property value, Minnesota property taxes on a $250,000 value industrial property are significantly below the national average.

Minnesota’s relatively low industrial effective tax rates are largely due to the fact that—unlike many other states—Minnesota does not tax personal property (e.g., equipment, inventories, and fixtures).

However, in an effort to keep the “no-new-tax” pledge, conservative policymaking pushes more of the state’s budget balancing burden off to local governments, resulting in local business property taxes' growing regressivity.

As part of the 2011 special session budget compromise, the state cut more than $630 million in property tax aids and credits to local governments. This will have a broad impact on overall property taxes, including business property taxes.

Nonpartisan House Legislative research projects statewide business property taxes to increase in 2012 by almost four percent. In Greater Minnesota, business property taxes could rise by as much as 6.6 percent.

Big tax cuts going into last decade didn’t produce economic gains conservative policy promises. In fact, since 2002 job, income, and GDP growth in Minnesota has been below the national average.

When it comes to business taxes, one can’t look at the rate in a vacuum. It’s a matter of how credits and deductions are structured and what a business receives in return for its tax dollars.

Minnesota businesses receive a tremendous return on their public investments in high skilled workers, a strong public health care system, quality roads and infrastructure, and a number of other benefits other states don’t provide.

We must continue working to ensure a fair and progressive fiscal system that benefits businesses and the citizens that work for them.

Photo credit: Enrico Fuente, Creative Commons

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