High Taxes, Low Results

High Taxes, Low Results

Minnesotans pay a lot to rank among the best, but lower-tax competition is beating us.

High Taxes, Low Results

I’m the fortunate product of family that had scant resources and did the best it could in a state abundant with helpful neighbors, problem-solving farm kids and a public education system that was the envy of most other states. Trips to Wisconsin and the Dakotas were memorable in part because of how much smoother the roads were once we crossed back into Minnesota.

I later came to realize what made much of that possible was the state’s unique and diverse range of major industry players, from 3M, General Mills and Cargill to Dayton-Hudson (Target), Best Buy, Medtronic and UnitedHealth Group. Leaders from these and other businesses gave back to our communities, mentored up-and-coming trailblazers and funded thousands of startups that went on to become successful businesses that, in turn, supported our community with more jobs and charitable contributions.

I—and, I think, most other Minnesota natives—took all this for granted, believing it was self-sustaining. Many still believe this. But it’s not, and we’re losing ground as other states have spent years figuring out how to outflank us.

We’re still an awesome state in which to work and live for a variety of reasons I’ve written about over the years. But Minnesota is no longer a leader in public education. Our roads and bridges are now worse than our neighbors’. We’re losing major corporate headquarters (most recently G&K Services, St. Jude Medical and Valspar). We’ve gone from one of the best places to start a business to one of the worst. And we’re losing hundreds of our most successful business leaders—from entrepreneurs to industry titans—as they move to states that are friendlier to business and less pernicious with their tax policies.

The three states Minnesotans move to the most—Florida, Arizona and Texas—are beating us not only with better weather, but with better college readiness, roads and bridges, and other infrastructure (see chart). They also have no or low personal income tax, and the fourth-, 21st- and 14th-best overall business tax climate ratings among states, respectively. In comparison, Minnesota has the second-highest personal income tax rate and the fourth-worst business tax climate rating.

Almost a year ago, Twin Cities Business published a comprehensive analysis of wealth migration from Minnesota and found $1.5 billion in taxable income and $22 billion in gross estate value left the state, or began leaving it in 2014 or 2015 because of the state’s taxes and tax policy. (See the full report at bit.ly/1UJaWyA for the full report.)

Some have since said to me that, while we have high taxes here, it’s for good reason as our state has some of the very best publicly funded programs. I certainly remember when that was true, but it’s not anymore, and we’re chasing away those who could help us regain such status.

To get our mojo back, the administration and Legislature need to stop treating financially successful individuals poorly and instead, try to attract more of them like other states, such as Florida and Texas are doing. A high percentage of Minnesotans moving there are people in their 40s and 50s who not only appreciate paying no income tax, but know those state governments welcome them, in part, with much better overall business climates. Texas alone has gained 58,000 former Minnesota taxpayers since 2000, according to the Tax Foundation.

Indiana, Ohio, North Carolina and Tennessee have turned more tax friendly as well. They found ways to reduce high personal income tax rates and some corporate rates by eliminating loopholes or adding taxes elsewhere. North Carolina, for example, added new sales taxes on repairs, installation and maintenance. (See bit.ly/1YwkM6X for more examples of what other states have done). As Minnesota’s population shrinks (minus immigrants), other states’ populations are growing, increasing their tax revenues without increasing (or even after reducing) tax rates.

So what can we do here?

To make us more financially welcoming, we could convert to a flat tax. North Carolina’s personal income tax rate was cut to a 5.57 percent flat tax rate in 2013; the corporate rate was cut as well. Tax revenues rose 6 percent and 188,000 new jobs were created as the tax reform attracted business leaders and investors, some from here.

We also could increase the threshold for our top-tier personal income tax rate. This state has the most expensive combination of low threshold (household income of $259,200 or more) and high tax rate (9.85 percent) in the nation, second only to California. The household income should be increased to $500,000 for top tier payers.

To help pay for these changes, we could eliminate dozens of sales tax exemptions currently provided for special interests such as poultry feed, ski areas, logging equipment, horse feed and medications, and aquaculture production equipment. And we could finally address the biggest lost tax-revenue opportunity of all: clothing tax. Only three other states totally exempt clothing from taxation; four others have partial exemptions.

Sacrilege, you say! After all, what would happen to the Mall of America? I don’t know. But if we’re willing to forgo a major source of tax revenue, we should have an independent analysis of exactly how much economic benefit Minnesota receives from not taxing clothing and compare it to how much we could gain if we decide to tax it.

I’m sure there are several counterpoints to these ideas. But we need thoughtful discussions of what we can do to correct our present course. If it remains as is, Minnesota will someday be known as the once great state that lost it all to others because it sat on its laurels and chased away its most economically important citizens.

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* In U.S. News & World Report’s Best High Schools 2016, the highest ranking for a Minnesota public high school is 227th (St. Anthony Village Sr. High); Arizona, Florida and Texas have several public high schools that rank much higher.

Sources: U.S. News &World Report, Best High Schools 2016; American Association of Civil Engineers 2013 Report Card for America’s Infrastructure (2017 report is due out in March); Reason Foundation 21st Annual Report on the Performance of State Highway Systems, 1984-2012; America’s Top States for Business 2016, CNBC; Tax Foundation’s 2017 State Business Tax Climate Index; and U.S. Census Bureau.

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