Minnesota is in many ways an economic marvel. It's long been among the most innovative states. Companies like 3M, an iconic Minnesota company, and Medtronic come to mind. Minnesota is home to 17 Fortune 500 companies, including Target and Best Buy, as well as the nation's largest privately held company, Cargill. Minnesota performs well in a number of business benchmarks: It ranks fourth in a technology and science workforce index, fourth in patents per capita, in the top 10 in business formation and survival and 16th in entrepreneurship.
But Minnesota fares much less well in its tax competitiveness, which poses a real drag on business performance and therefore the prosperity and opportunity potential of its residents. Minnesota's corporate income tax, 9.8 percent, is the third highest in the nation. The pass-through on individual income tax rates that many small business owners pay also ranked third, at 9.85 percent. These high rates pose very real financial headwinds that businesses and individuals must strain to overcome. Minnesota's high state and local taxes mean that residents pay, on average, $1,000 more per capita than the national average.
Minnesota's uncompetitive tax rates might, in fact, be one of the reasons that since 2001, more people have left Minnesota than moved to the state-a net loss of 38,178 people from 2010 to 2016. Minnesota's reputation for being a high-tax state makes it more difficult to attract job seekers and entrepreneurs.
Tax rates and other cost-of-doing business barometers are acutely felt in border cities like Moorhead. North Dakota's top corporate income tax rate is less than half of Minnesota's, ranking 43rd in the nation at 4.31 percent.
Minnesota business leaders have identified tax competitiveness as one of the state's major obstacles to address. The Minnesota Chamber of Commerce has made tax reform one of its top legislative priorities. The Minnesota Chamber has advanced a very reasonable tax relief proposal. It advocates reducing the state corporate income tax rate from 9.8 percent to 8.8 percent. The annual revenue impact is $110 million. The Chamber recommends reducing all four state personal income tax rates, starting with a three-tenths to five-tenths of 1 percent reduction. The cost of reducing all four of the individual rates by one-tenth of 1 percent amounts to a modest $168 million annually-a mere drop in Minnesota's two-year $46 billion budgetary bucket.
The timing for tax relief is both ideal and pressing. Minnesota has achieved five straight years of budget surpluses. The current two-year state budget is up $4.7 billion, or 11.4 percent, from the previous two-year budget. The effects of federal income tax changes add urgency to the need for income tax relief in Minnesota. Minnesota must conform to federal tax changes or risk handing taxpayers major tax preparation headaches-and, if the state simply accepts the new federal definitions, Minnesota taxpayers would be stuck paying an additional $1.6 billion over the next four years.
For a host of reasons, now is the perfect time for state income tax relief in Minnesota. Officials should start down that path.