Is Minnesota's tax structure costing jobs?
Posted at 11:36 AM on February 11, 2010
by Bob Collins
(22 Comments)
Gov. Tim Pawlenty has adopted familiar themes in his State of the State address to the Legislature today.
"Minnesota's tax structure is costing us jobs," he said a few seconds ago, as he outlined a "jobs creation bill" that includes a tax incentives package to encourage job creation, including a 20-percent corporate tax break and angel investment tax credits. He also proposed giving the Ford plant in St. Paul tax incentives modeled after his Job Opportunity Building Zones program.
Is Minnesota's tax system costing jobs? Prove it.
The Freedom Foundation of Minnesota issued a report on Wednesday that said people are moving out of Minnesota, to states with more competitive tax rates. It listed the most popular destinations as Florida (21,256), Arizona (19,605), Wisconsin (9,449), Colorado (6,894) and Texas (6,551).
There are significant flaws in the study, beyond the fact the word "snow" appears only once.
"People are most inclined to move where taxes are lower (especially income taxes), union membership is lower, population density is higher, the cost of housing is lower, and the weather is warmer. Additionally, AGI is the most sensitive variable when it comes to state and local tax (and income tax) burdens, union membership and average temperature," the report said. But it offered no proof of its conclusion.
The word "age" also did not appear in the report at all. How can one attribute an out-migration to union membership, if we don't know the percentage of people leaving for sunnier climates who are retired?
It would appear the report started with a conclusion, and then built data around it; a not-unusual tactic for special-interest groups on both sides of the issue.
For example, I could conclude that when people leave Minnesota, they're looking for more opportunities to be unemployed. Silly? Of course it is. But Florida (11.6%) , Arizona (8.8%) , Wisconsin (8.3%), and Texas (8%) all have higher unemployment rates than Minnesota (7.3%). Colorado has the same unemployment rate, but a better hockey team. So maybe people are moving there because of hockey.
The Tax Foundation released its annual survey last fall which ranks states by their "business friendly" nature, that is: taxes. It considered business tax, individual income tax, sales tax, unemployment tax and wealth and property taxes.
Minnesota was #43. Wisconsin was #42. So much for the theory that people are moving to Wisconsin because of taxes.
The 10 "best" states for business tax climate were South Dakota, Wyoming, Alaska, Nevada, Florida, Montana, New Hampshire, Delaware, Washington, and Utah.
South Dakota is where banks set up their operations, but it's not where people move to. It ranks 46th in population (812, 383). True, 86,000 people have moved in, but 82,000 have moved out. For states gaining population, South Dakota has one of the lowest rates. Wisconsin has the lowest, according to a Pew Research study. South Dakota's percentage of people born in the state and still living there, is one of the nation's lowest. Minnesota, on the other hand, is one of the highest.
If the "business friendliness" of a state is all it takes to create and maintain jobs, how do we explain the fact that Wyoming (7.6%), Alaska (9%), Nevada (12.8%), Florida (11.6%), Delaware (8.6%), and Washington (9.5%) -- that's 6 of the top 10 -- all have more joblessness than Minnesota?
Two of the "best" states -- Florida and Nevada -- lead the nation in foreclosures.
And one of the "worst" states -- Iowa -- has an unemployment rate that's nearly half of the fourth-friendliest state for business.
Minnesota's budget deficit in fiscal 2009 was huge, to be sure; it was 5.5% of the state's General Fund. Three of the friendly states -- New Hampshire (6.4%), Florida (11%), and Nevada (13.5%) -- had budget deficits that were worse. In the current budget year, most of the states with the most severe budget problems, are states with a better tax rank than Minnesota.
Politicians try to make simple comparisons in support of their political agenda. Sometimes they're right; sometimes they're not. But it's always important to question their assertions.
On MPR's Midmorning the other day, St. Paul Mayor Chris Coleman defended taxes. "If no taxes was the key, then Mexico would be the richest and most successful country in the world," he told a caller. He's also wrong. Mexico has a maximum corporate tax rate of 35 percent on profits. Minnesota's, by the way, is 9.8 percent on all corporate income.
But Coleman is probably right in saying businesses are looking for something else besides tax rates. One of these days, someone will determine exactly what that is, and perhaps define a vision for Minnesota that's complicated enough to accommodate business.
In his speech today, Gov. Pawlenty said Minnesota Twist Drill's expansion and creation of jobs shows the effect of tax breaks. What he didn't say is the company recently expanded by adding a company in Illinois with the help of the Iron Range Resources Board. He also didn't say that one of the reasons the company didn't move out of state was two bank participation loans, a direct loan, and an employee grant from the IRRRB. an agency with a spotty record of investments.
How is the IRRRB funded? A tax on business.
Comments (22)
Great post, that deserves widespread distribution.
I lived in NH for 4 years, almost 10 years ago. I hit me yesterday that, even with zero income taxes, there weren't tons of businesses seeking shelter from mean old taxes. People weren't fighting to move there. I left in 2002, and the jab market was crummy. The schools were BAD (unless you could afford private schools), the roads were in rough shape, it took forever to plow roads, property taxes were KILLER, and on and on....
Why on earth do people think no taxes equals a quality life?
Thank you for looking at this more than a sound bite would allow!
Fantastic post--this is why I support MPR. Keep up the great work, Bob.
I agree with critics of the MFF report who say the report's conclusion is not supported by the data; however, the data and analysis I've seen from the report's critics don't negate the conclusion nor do they address fundamental economic principles.
The hodge podge of statistics here are an example of that.
Just one example. In this piece Minnesota's corporate tax rate is quoted at 9.8 percent. that is accurate, but misleading. Capital flows to where it is most productive anywhere in the world. When the 35 percent federal corporate tax is added to the Minnesota tax, our state has the third highest corporate rate in the world. That is not competitive.
But some say, business must pay the 35 percent in all states so what's the big deal about a mere 9.8 percent versus say the 4.5 percent rate in some other state?
Without getting to deep in the economics, taxes produce what economists call excess burden -- that is economic loss to the economy over and above the dollar amount of a tax. At the margins, actions taken to minimize taxes reduce economic growth. Excess burden increases geometrically (the square of the tax rate) as taxes increase (somewhat like the Richter scale for earthquakes).
Very high and narrowly targeted tax rates on productivity are job killers over and above the dollar amount of the tax. This is the "structural" element of our state tax system that no one is really talking about.
Tax revenue and tax rates are not our big problems. The ways we tax and our motives in taxing (fairness rather than efficiency) are the problems. A "balance" between spending cuts and tax increases will not address the fundamental structural problem with Minnesota's budget.
vjacobsen, as a son of the Bay State, I know that the reason southern New Hampshire had a big boom in the '70s and '80s is because people were moving there to avoid paying income taxes, and it was close enough to the jobs in Massachusetts (one of the most heavily taxed states).
Why were the jobs in Massachusetts? Because that's where the smart people are. That's where the education was. You went to school in Massachusetts, you got your college education in Massachusetts, you made your money in Massachusetts, and then you moved to New Hampshire so you could have your cake and eat it, too. Until, of course, you started your own family and realized the keys to YOUR success (well, not YOURs, per se, but you know what I mean), was something you'd deny your children if you stayed in New Hampshire.
So the trick isn't taking only one side of the equal sign. It's figuring out exactly where the balance is for all the competing elements of why businesses locate (and stay) where they do.
Fifteen years ago in Minnesota, the argument wasn't about the sum of taxes. It was about the role of education. There were fears that there weren't enough educated people for business. The debate was actually about the ROLE of education -- as a breeding ground for the needs of business, or as a development ground for well-rounded people to think critically.
Minnesota has been a high-tax state for a long time, even through the period where our crisis was that our businesses couldn't get enough workers.
Back in the '60s and '70s, Massachusetts lost its manufacturing plants to North Carolina and the south. Taxes were a big reason, so was the willingness of people to work for next-to-nothing and the fact the natural resources -- chiefly, water -- that powered that manufacturing base was no longer needed.
North Carolina was a boom state, until the jobs moved to Mexico for the same reason they moved to North Carolina.
Theoretically, the answer would be for North Carolina to become Mexico. There's absolutely no logic in that, however. The answer to the economy is not to create more opportunities for poverty.
As you know, by the way, New Hampshire also, it should be remembered, had two very large employers who were very large employers -- Pease AFB and the Naval shipyard -- because of the federal government.
As for "hodgepodge" of numbers. Numbers don't lie, unless you want them to. But an awful lot of people complaining about Minnesota, are staying here, anyway. Why?
Spot on.
Today's speech could have just as easily been delivered in 1984. The issues of the day (as I recall) were unemployment insurance, taxes, workers' compensation and the "poor business climate" in general.
According to Bureau of Labor Statistics data, the 12 month average 1983 employment in Minnesota was roughly 1.7 million. For 2009, it's roughly 2.6 million--an increase of roughly 50 percent.
Mr Westover continues to play the farcical argument that taxes paid are a dead loss to the payer. We can quibble over which spending paid through taxes is more efficient than private spends (I happen to also not buy into the 'private is always more efficient' and 'waste is all we need to fix' memes, but those are not on the table in Westover's argument). But, to suggest that paying taxes is no more helpful to the payer than would be simply going to the casino and dropping it all on 27 on the roulette table is disingenuous -- to use the nice word for it.
We've long heard the argument that tax cuts by a larger unit of government (the state) are replaced by tax hikes by a smaller unit of government (the city). Until the smaller unit of government can't cover for the loss of revenue from the larger unit. Then "essential" services get "reorganized".
If someone wants to do a study I'd like to know what happens to property values and the corresponding insurance rates when a city is forced to consolidate fire companies, creating fewer stations farther apart, or in smaller communities going from a paid professional to a mixed or all volunteer fire department. (This says nothing about volunteer fire departments. My brother is a life member and former chief of a volunteer FD in NY. I know they do the job.) My interest is to see what the "cost" of lower taxes are in payments we make elsewhere. We rarely look at the shift of cost from the public to the private sphere.
Micheal --
You misread the argument. Dead weight loss is the effect on society from a tax irrespective of how the tax money is spent or the benefit to the tax payer.
Taxes are necessary to fund the constitutional obligations of government. We can debate what "fully funding" those obligations means, but state obligations are defined by the state constitution.
Perhaps private construction of roads would work better, but our state constitution provides for state construction of roads so we tax for that purpose. Roads are a public good -- I benefit from them even if I never leave my house (they are the conduit for police and fire protection and delivery of goods). there are economic criteria for a public good and roads meet those criteria. I benefit from the taxes I pay for roads and for the bureaucracy that administers them (again we can argue about the size of the bureaucracy, but its existence is justified). There is still dead weight loss to society from taxes collected for road construction, but eliminating that dead weight loss is a function of how taxes are collected, not for what they are collected.
The only analogy between a roulette wheel and taxes is the arbitrary way the legislature imposes taxes is like dropping a ball in the wheel and taxing whatever entity the ball lands on. We tend to tax for revenue with no consideration for the aggregate impact of the tax on the overall economy.
Careful, Bob. More posts like this and you're going to bridge the gap from blogger to journalist. ;-)
Not to rattle your cage Bob, but this is one of the best posts you've ever done.
JackU writes
"My interest is to see what the "cost" of lower taxes are in payments we make elsewhere."
Keep your eye on Colorado Springs. Voters there have elected a council that has pared back taxes, and to balance the budget, services. That's certainly the right way to do it, if you're taxaphobic. One suggestion from the city was that people begin mowing the public space near their homes, because the city doesn't have the budget to do it anymore.
Sorry Craig -- All you've done now is opened up the quibble over what's good spending versus bad spending, which wasn't on your first argument. But, once you do that, it also undermines the point you made in the first instance, that "taxes produce what economists call excess burden -- that is economic loss to the economy over and above the dollar amount of a tax." That statement presumes that taxes are inherently less efficient than a private pay for the identical goods and services, and on that point I will never agree.
(And, you seem to argue in your last post that you wouldn't even allow the legislature to tax for roads but for the fact that the Constitution requires it. You can believe that and I'm not here to disuade you of your own desires. But, I think it's fairly certain that most Minnesotans would heartily disagree with that notion -- Certainly I do. Paying through a collective system, with enforcement known as "tax", is in many cases the most efficient means to obtain the goods and services we desire as a community. The exercise our representatives should be spending more time on is determining which are on one side and which are on the other (public versus private), and we should stop wasting time with libertarian fantasies that posit that ideally the government really shouldn't exist in the first place.)
I agree with Mark. But gol dang it, it would've been better if you didn't write about all that stuff that actually happens, and stuck to economic principles.
President Obama's Director of the National Economic Council Larry Summers and a co-author wrote in January 2009:
“Greater international mobility of economic activity, and associated responsiveness of the tax base to tax rates, increases the economic distortions created by taxation. Countries with small open economies have relatively mobile tax bases; as a result, they rely much less heavily on corporate and personal income taxes than do other countries. The evidence indicates that a ten percent smaller population in 1999 is associated with a one percent smaller ratio of personal and corporate income tax collections to total tax revenues. Governments of small countries instead rely on consumption-type taxes, including taxes on sales of goods and services and import tariffs, much more heavily than do larger countries. Since the rapid pace of globalization implies that all countries are becoming small open economies, this evidence suggests that the use of expenditure taxes is likely to increase...
Changing world economic conditions, the globalization of production and markets, and the economic awakening of much of the world’s population, have contributed to the problems confronting governments of affluent countries even as they have made possible some of the most exciting developments of modern times.
Economic theory offers insights chiefly into the dire consequences of possible methods that governments might use to address their financial difficulties. Efforts to tax mobile economic activity stimulate mobility and thereby create economic distortions as business activities, capital and labor are reallocated for tax rather than productivity reasons. Sophisticated tax avoidance through financial and other means reduces the revenue potential of high rates of income taxation and further contributes to the economic cost of taxation. Taxes on capital income distort the intertemporal allocation of consumption due to the compounding of effective tax rates over time. And redistributive taxation that subjects income to high marginal rates of effective taxation creates its own economic distortions."
The entire paper is worthy of careful reading, even by individuals who are not fans of President Obama and his adviser Larry Summers.
Hines, James R. Jr. and Lawrence Summers. "How Globalization Affects Tax Design." National Bureau of Economic Research Working Paper 14664. 2009. Also see here.
Wow, Bob. Excellent post, really impressive. It's obvious that you worked very hard on this analysis, and I really appreciate it. I'm going to pass this one around!
I like where you're going with this. Prior to talking "taxes" I think it might be useful to see all, and I mean all, the ways money flows thru the state government system: where it comes from, where it goes and what it accomplishes. Then it might be possible to compare what we're currently doing with what we believe we should or need to do.
Isn't it important for all citizens to have access to this information so they can make informed opinions.
Many people still agree with Reagan's view of government as "bad"; does that include the National Highway Traffic Safety Administration, the people that blew the whistle on Toyota?
Everyone wants more efficient government, but that isn't necessarily less money (taxes); its addresssing the needs of citizens.
According to George Lacoff the purpose of government is twofold: protection and empowerment.
Prior to talking taxes we should agree on purpose.
Some years ago Oregon developed a health care reimbursement program based on effectiveness, i.e. "bang for the buck".
It might be interesting to see how our programs stack up.
You've hit on the chicken-and-egg situation precisely, Joel. Which comes first: a budget and then a vision. Or a vision and then a budget to accomplish it.
It's continually amazing to me to see how piecemeal legislators/governor are toward working toward something that neither side can define in contextual terms.
Take yesterday, for example. A lawmaker throws a bill in the hopper to sell the Metrodome to the Vikings for $1, and the media picks up on it. Nobody, for some reason, asks the Vikings if they like that deal (they don't) and it doesn't appear the legislation comes out as a result of conversations with the Vikings.
That's crazy.
Why not have a plan, a well thought-out-plan and THEN legislate toward that plan?
It might not be a bad idea to start out by figuring out what we all agree Minnesota should look like in 10 years and work toward policies that meet that agreed vision, then work on those areas we don't agree on.
Why are we all here? And why don't we move? What's the attraction? Whatever it is, that's our state's strength.
Michael --
Correcting a couple of misconceptions.
First, there are many economic "public goods" that government can deliver more effectively than the private sector and personally I think roads are among them. I would argue that gov't using market mechanisms rather than politics to determine transportation strategy would work better than what we have now, but basically I agree gov't should tax for roads.
That government can more efficiently build roads does not mean there is no excess burden in play when government taxes for funds that eventually wind up building roads. Excess burden is based on how a tax is collected, not the amount nor what it is spent on. A marginal dollar to government from income (productivity) tax has a higher excess burden than a marginal dollar collected via a sales (consumption) tax.
Because taxes always produce excess burden, it would behoove us to collect a minimum about of taxes and confine government to a minimum of activities. In a republic, government activities are defined by a constitution. "Good" spending and "bad" spending is not the issue -- constitutional or extra-constitutional spending is. We can argue over what that means, but right now, legislators don't even have the debate. They argue, on a partisan and arbitrary basis, what is good and bad spending.
Quick note to Charlie -- "what happens" happens because of economic principle. Perverse inputs produce perverse outputs, but the economic principles don't vary.
I recommend the paper John Spry cites above.
Great post, Bob.
I'm skeptical that lower taxes would actually increase jobs. It sounds good in theory, but there seems to be such a focus on headcount (at least for publicly traded companies) that it's hard for me to believe that hiring would be a real priority. Can anybody explain why business wouldn't just pocket their savings?
Great analysis. That's what I love about MPR: taking the time & effort to look beyond the rhetoric and past the dominant media narrative.
I would add, Minnesota's current unemployment rate, while high for us, is still in the bottom one-third of all states: http://www.bls.gov/web/laumstrk.htm
So the real question is: What is MN doing right? What makes our economy more resilient than most other states. Could Minnesota's relative economic resilience be partly due to our tax-supported investments in infrastructure, education, health, culture (ie, social-networking), diversification, and livability? Yes I think so.
I'm a republican but I agree that other factors effect a state.Mn doesn't have a low income white population like some states or a high minority population, one reason why it outperforms Texas which has a high hispanic population and an average size black populatoin. Not to sound racists but this is true. Years ago, California outperformed Texas since its hispanic population was smaller than Texas and it had less blacks. Now, California poverty is about a point below Texas since it ties in the percentage of the population that is hispanic.
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