Growth & Justice Blog

Weighing factors in Twin Cities and South Dakota corporate expansions

Here's some more grist for the taxes-hurt-the-business-climate debate.

The Twin Cities metro area ranks 5th on Site Selection Magazine's 2007 list of top metro areas for corporate expansion. With 74 projects, it was one expansion away from tying for 4th with the Houston metroplex. Last year, the Twin Cities ranked 15th among metro areas with populations larger than one million, about in line with its rank as the 16th largest U.S. metropolitan statistical area.

We'll offer our usual cautions about the validity of such state comparisons, and note that the rankings are based on numbers of projects, not type of industry, dollars of investment or number of quality jobs added. Still, Minnesota clearly had a better than average year.

The magazine also publishes a state business climate ranking that put Minnesota in 22nd place. That list is based on new projects, including number adjusted for state size and population, plus a survey of corporate real estate execs. The site selection criteria ranked most important by the real estate execs are shown in the sidebar. Workforce skills rank first.

The survey respondents rank the state much lower (30th) than actual expansion activity indicates, resulting in Minnesota's lower "business climate" standing. In previous years, the planners also scored the state lower than it has performed on the projects index.

Those who like to cite South Dakota as "proof" that low taxes attract business growth will also find something positive in the annual ranking. The Sioux City area ranked 1st among under-200,000 metros for the second straight year. Note, however, that the region includes communities in Iowa, Nebraska and South Dakota.

A Site Selection story said the Sioux City area is looking forward in 2008 to the construction of a giant oil refinery proposed by Hyperion Energy.

The company said it selected the Union County site because it "has a unique combination of characteristics that make it ideal" for the project. "Geographically, it is in the Canadian crude oil corridor, close to good rail and highway transport, in the vicinity of many major markets and has an abundance of water," Hyperion noted on its Web site.

The company also mentioned the pro-business attitude of South Dakota government officials and its low-tax climate.

With its biggest 2007 deals coming from ethanol, beef processing and other ag-related industries, it's clear the region's growth is based on more than workforce and tax considerations.

Debi Durham, president of both the chamber and the Siouxland Initiative, says it's no accident that the Sioux City area is being considered by major corporations. "You have to go back to a decade ago when the Siouxland Initiative stepped forward with a strategic plan for intermodal transportation, education, health care, quality of life and building our infrastructure," she says. "We worked on getting many industrial sites in our broader region certified. The fruit of that effort is the number one ranking in Site Selection."

That sounds like a familiar formula.

— Charlie Quimby

Business tax reform commission needs a balanced perspective

Last week, Growth & Justice sent a brief letter to the members of Gov. Pawlenty's new 21st Century Tax Reform Commission offering support and suggesting questions we hoped the business leaders on commission would consider:

• How will changes affect your current and future employees, customers and communities where you do business?
• How might reforms impact the adequacy and stability of state and local revenue? 
• Can changes that help business also make the system fairer and less regressive?
• What is the value to business of public investment in education, transportation and health care, and what should be its ongoing contribution to this investment?
• How should government and taxpayers measure the effectiveness of tax cuts, business incentives or other reforms? 

We also weighed in with a post about the relationship between business taxes and business loophole seeking.

This week, Katherine Blauvelt at Minnesota Budget Bites surfaced a 2006 Star Tribune Business Forum commentary in which Michael Vekich, the newly appointed chair of the commission, set forth five tax policy principles that track pretty well with our questions. That's encouraging.

But we still have concerns about what outcomes we can expect from a business-centric commission with a charter that starts from the assumption that tax reform is the key to increasing Minnesota's economic competitiveness.

While the individual appointees are all worthy, as a well-rounded team, the commission has some holes. For example, there's no representation from green industries or agriculture (unless you somehow count General Mills). Both are important to Minnesota's future and are subject to a variety of specific tax policies and investment considerations. Also missing are any advocates for consumers, education and labor. Employers aren't the only ones concerned about the economy, job climate and impact of business taxes on costs.

We hope the commission will find ways to fill in these missing perspectives.

— Charlie Quimby

It takes two to tangle a tax system

Last week, when Gov. Pawlenty announced his 21st Century Tax Reform Commission to reform business taxes, in Massachusetts

Governor Deval Patrick's quest to tighten corporate tax laws and reap hundreds of millions of dollars in new revenue might be undermined by a last-minute amendment providing new offshore tax breaks that was tacked onto the legislation by the House, according to state officials.

I'm not going to prejudge the outcome of the Minnesota Commission's work, but it will be interesting to see if this panel of business people will operate under any different mindset than their business lobbyists do, slipping in amendments that take money out the back door while reformers like Patrick are walking around closing the windows.

The issue hinges on a complex tax regulation called combined reporting, which is designed to prevent large, multistate corporations from shifting certain profits to other states that have lower tax rates. The House-approved corporate tax legislation would require companies in Massachusetts to combine all income and apportion the Massachusetts share.

Minnesota is gradually shifting its apportionment of corporate taxes toward a heavier weighting on sales versus property and payroll. This will benefit companies with headquarters or a major facility in Minnesota that sell products nationally or worldwide. Companies that sell in Minnesota but have relatively modest in-state operations may pay more with a sales-only formula.

Whenever there are differentials in tax rates, businesses will try to exploit them. While those favoring reduced state taxes focus on the threat of businesses leaving the state, uprooting operations carries its own costs and risks. It's usually more practical for a company to do the same thing any governor does — shift the money.

Instead of moving revenue between departments and programs, the business seeks ways to move sales and expenses to different states or countries with more favorable policies.

For example, this Wall Street Journal article described a Wal-Mart maneuver establishing an office in Florence, Italy, for the purpose of avoiding Illinois taxes.

The dispute with Wal-Mart is part of a wider effort by some states to crack down on what they believe is abusive use of so-called 80/20 companies. These companies are domestic subsidiaries that conduct at least 80% of their business overseas. States typically don't tax income from outside the U.S., and many companies have used 80/20 subsidiaries to legitimately shield foreign operations from state taxation.

The Commission's charter is to look for tax-related barriers to business investment and capital formation and for ways the business tax system can be simplified. So far, so good. But no government sets out to create a complicated tax system. It gets that way over time as individual and business taxpayers seek ways to pay less — and seek incentives that supposedly advance the public good.

Almost any change in the tax code contains potential for new mischief. If the Commission's recommendations can help state businesses without creating new losers and new loopholes, the members will have done great work indeed.

— Charlie Quimby

Why is Minnesota a donor state?

Oklahoma blogger Derek Baker did a red/blue analysis of the Tax Foundation's list of states and their ratio of federal aid to federal taxes paid. Looking at the top 10 and bottom 10 (which includes Minnesota), he found that states with a Republican-leaning Congressional delegation tended to receive more money back.

He admits that other factors besides party affiliation come into play, but concludes:

[I]t does seem to further belie the claim that the GOP is the party in favor of "fiscal responsibility" and against "the redistribution of wealth."

We might suggest the average incomes of the 10 donor states — which rank in the top 21 nationally — could have a lot to do with it. After all, to be a donor, you have to be healthy.

— Charlie Quimby

Toward a less regressive property tax with the Lenczewski-Marquart proposal

How regressive are residential property taxes? Very. Way. Hugely.

Households in the top 1 percent of incomes (those making more than $450,000) are projected by the 2007 Minnesota Tax Incidence Study to pay on average about 0.7 percent of their income in residential property taxes in 2009. A regressive tax means people who earn less would pay a higher percentage of their annual income in taxes, and that's exactly what we see with the residential property tax.

According to the study, the average Minnesota household will pay about 2.5 percent — more than 3 times the effective tax rate of the top-enders. Those earning just below the median income will pay about 3.5 percent of their income in property taxes — or 5 times the effective rate at the very top.

That's why it was so encouraging this week to see state Reps. Ann Lenczewski (chair of the Taxes Committee) and Paul Marquart (chair of the property tax subcommittee) come forward with a very straightforward reform proposal aimed squarely at reducing the regressivity. Their bill, H.F. 1222, is similar in some respects to legislation proposed last year that was even better, and which included the restoration of higher income tax rates to reduce regressivity. 

The latest Lenczewski-Marquart concept is revenue-neutral, meaning it doesn't cost taxpayers as a whole any more or less. But on average, according to preliminary research produced by legislative staffers, those with incomes higher than about $160,000 would pay modestly more and those with incomes below that level would get a bigger break.

The individual benefits and costs are highly variable and would depend on the relationship of a household's income to its property taxes. But if your property taxes amount to more than 2 percent of your income, you would be eligible for the new Homestead Credit State Refund.

Check out the Minnesota Budget Project's  take on the proposal in its new "Budget Bites"  blog. Also, check out news coverage of the proposals, along with positive reaction to the concept from Growth & Justice,  in both the Star Tribune and the Pioneer Press Tuesday.

— Dane Smith

Dropout costs are too big for the state to ignore

On yesterday's Midmorning program on MPR, Superintendent of St Paul Public Schools, Meria Carstarphen, joined John Bridgeland, CEO of Civic Enterprises, in a conversation on high school dropouts in Minnesota. 

Bridgeland authored a study in 2006 that surveyed high school dropouts [Download pdf] and found that the problem is far worse in the nation's cities than in suburbs. Supt. Carstarphen serves on a Growth & Justice steering committee that is developing a “Smart Investment" strategy for education in Minnesota. Their conversation tracked closely with our analysis on the staggering social and economic costs of the high school dropout epidemic.

According to the 2006 American Community Survey of the US Census Bureau, the median earnings of a worker with less than a high school diploma are just a little over $19,000, whereas earnings for an individual with a high school diploma rise to $27,500. The cumulative difference in lost income totals nearly a half a million dollars over a lifetime.

Said another way, the individual who finishes high school gains substantially higher income; society and the taxpayer gain as well.   

Research commissioned by Growth & Justice confirms this impact in Minnesota. Lifetime taxable wages in the state grow approximately $251,900 for every non-graduate who becomes a graduate. Economic analysis by Henry Levin and Clive Belfield estimated that the increased tax revenues, plus 10-20% reduced criminalization and lower welfare and government health program enrollment, produced a social benefit to Minnesota of about $1 million for every additional graduate.

Conversely, every dropout will cost the taxpayers $1 million. 

With nearly 10,000 new dropouts each year, the opportunity cost to the state increases almost $10.6 billion annually. The cost of dropping out of high school is clearly too expensive — for both the individual and the state. Increasing high school graduation rates should be among the state's top priorities.

— Angie Eilers

Accentuating the positive about taxes

Over the last several decades, anti-tax terminology has moved from political play books and partisan rhetoric into everyday discourse. For example, "death tax" was introduced into official language in 1982 by President Reagan during a speech in Minnesota. Now, I routinely find it embedded in government web sites and budget line items.

Since death tax is a term championed by those who seek to abolish the estate tax, such use by revenue and treasury departments seems as counterproductive as fast food menus calling their burgers Gut Bombs.

Then there's "burden," a good and useful accounting term that carries excess baggage when the word "tax" is loaded aboard.

At Growth & Justice, we try to avoid such loaded language, although some claim "investment" just means a tax by another name. (Actually, it means "spending" with a "smart" in front of it and a payoff on the other end.) Making taxes a dirty word is a much easier job than accentuating the positive.

As Richard Coniff pointed out this week in the New York Times, the word "tax" itself

comes from the Latin for “appraise” with punitive overtones of “censure” or “fault,” as if wage-earners have done something wrong by their labors. “Dues,” in contrast, is rooted in social obligation and duty.

[...]

Instead of denouncing taxes, politicians would do better to appeal to the patriotic corners of our hearts that warm to phrases like “we the people.” “Taxation” is a throwback to the time when kings picked our pockets. “Paying my dues,” a phrase popularized in the jazz music world, is language by which we can stand together as Americans.

Union members and country clubbers both pay dues, too. But changing the word is less important than establishing the values that reinforce shared purpose and solidarity — and connecting what's paid in with what comes out.

— Charlie Quimby

Like politics, all taxes are local.

When Minnesotans argue about taxes, we usually start with the personal state income tax, which is used to support the persistent claim that we're one of the highest-taxed states in the nation. (Dane Smith deals with that here; the Minnesota Taxpayers Association recently ranked

Minnesota

23^rd for state and local taxes as a percentage of income. Looking solely at state income tax also pushes Minnesota higher in the rankings because other states raise more revenue at the local level.)

Severance taxes on mining have far less visibility in Minnesota, because we derive such a small portion of annual revenues from taconite extraction (in the $7 million range). By contrast, Alaska funds about half its state budget from oil revenues, and Wyoming is close behind. These resource-based taxes have the added advantage of "exporting" some of the state's tax burden as the oil, gas, coal and other minerals are paid for by others.

Still, the tax arouses feelings on the Iron Range, as Minnesota Brown reminds us:

What Pawlenty and many outside the Iron Range often fail to understand is that our taconite tax revenue, while significant during good times (and not all times are good), is not a secret pot of cash that we use to buy beer and ammunition. It is what mining companies pay IN LIEU of PROPERTY TAX. Mines own or lease thousands of acres of enormously valuable land in northern Minnesota and they don't pay a dime in property tax. Suburbs raise their revenue from those sleek office buildings along the freeways and in overpriced residential homes. The Iron Range raises its school and community funds from taconite taxes, and per capita we get less money over time as a result. But wait, there's more. All the while over Range history a portion of these taconite taxes have gone to the state general fund or to the University of Minnesota fund, money that has benefited more than a million people who couldn't find the Iron Range on a map.

Gov. Pawlenty frequently laments any Iron Range project or program that doesn't rely exclusively on our taconite taxes. We aren't deserving of general state funds, because of our financial privilege. (Anyone who has been to my native Iron Range understands my implied sarcasm).

There are good reasons to have a mixed basket of revenues (fairness, more stable revenue sources). But instituting an array of taxes and fees can lead to undesirable effects, too (obscuring who's paying for government, dedicating funds to narrow purposes that restrict flexibility in tough times).

One side effect of the anti-tax climate in the state has been to build credence for the consumerist notion that every tax dollar should be earmarked for a purpose that benefits the person or corporation paying in. In one sense, like politics, all taxes are local, but this mentality can only reduce the kind of wealth-building investment in education and infrastructure that benefits all Minnesotans.

Government should be accountable for spending, of course. But accountability is about measuring what the money does, not just remembering where it came from.

Wisconsin benchmarks Minnesota: How do we look?

We constantly hear anecdotal comparisons of Minnesota to surrounding states, usually based on "tax rankings," "business climate" and "business owners are bolting for South Dakota." But how do border states actually compare themselves to Minnesota?

Competitive Wisconsin provides one answer. It recently published its tenth annual benchmark survey comparing Wisconsin to U.S. averages and to its border states, including Minnesota. I found the report handy for its comparison to the U.S. averages on dozens of benchmarks. The benchmarks typically included the most recent year and the five year trend. Comparisons are drawn from various sources and cover different time periods, depending on the available data.

Rather than extract the Minnesota numbers here with all the necessary qualifiers, I've simply noted where we clearly ranked above or below the U.S. averages. (It's a somewhat subjective, not a scientific, sort. For example, I put Minnesota's private new business starts in the worse category, though the five-year growth rate is slightly above average. But the latest year is half a point and 20 percent below average.) You can see the actual data for Minnesota and the other states here [Download pdf].

Where Minnesota ranks worse than average

• Personal per capita income growth
• Median household income growth
• Employment growth
• Violent crime growth rate
• Cost of living
• Science doctorates granted
• State and local tax burden
• Return on Federal tax dollars
• New business starts
• Exports
• Invested venture capital

Where Minnesota ranks better than average

• Percentage of uninsured
• Violent crime per capita
• Home ownership
• Poverty
• Low birth weights
• Math proficiency
• ACT/SAT scores
• High school graduation rate
• Percent of college grads
• Manufacturing jobs
• Energy costs
• Research & development
• Patents
• High tech employment

In other areas, such as unemployment, highway condition, government employees per capita, obesity and smoking, we were more or less average. Change in state's share of farm income was exactly average, but our five-year trend was through the roof. Ethanol? Hard to say, since it's not about us.

One observation. Where we rank better than average, it might be argued, historic investments in education, health care and infrastructure built up an long-term advantage. Indices where we're worse than average seem more sensitive to current trends and might be leading indicators of erosion in areas where we now do pretty well.

— Charlie Quimby

 

Income gap: It could be worse

A new report on economic inequality contains some old news. The gap between top earners and the rest of the population continues to grow. For Minnesota, the only good news is, it could be worse.

The study by the Center on Budget Policy and Priorities compared income growth rates in each state for three comparable periods in the business cycle over the last two decades. CNN/Money reports it found:

The income gap between the rich and the rest of the population is widening. In 22 states, the top fifth of families made more than seven times what the poorest fifth took home, according to the report. In the late 1980s, only one state — Louisiana — had such a spread. Meanwhile, in more than two-thirds of the country, the wealthiest saw their income grow more than twice as fast as the middle-class over the past two decades.

In Minnesota, the gap was greatest between the top and middle fifths, with top earners seeing average income gains of 50.7 percent over the past two decades, compared to 28.1 percent for the middle. Compared to other states, our rate of growth in inequality was about average (27th) and the size of the gap between the top and the middle ranked 36th. [Download MN summary pdf]

It's worth noting here that the study looked at average incomes and did not track individual households, which would give a more complete picture of changing prosperity for families. (I've written more about that here.) But the trend — driven by wage stagnation at the bottom and growth in forms of income such as rent, interest, dividends and capital gains at the top — is still unmistakable.

The benefits of economic growth were broadly shared for a few years in the late 1990s — the only period in the past two decades for which this was true — but this broad-based growth ended with the 2001 downturn. Once the effects of the recession were left behind, the trend toward greater inequality quickened, as the incomes of the richest families climbed while those of low- and moderate-income families stagnated or declined.

The report also points out that some government policies contributed to the expanding wage and income disparity, including deregulation, trade liberalization, ineffective labor laws and tax changes.

Many states made their tax systems more regressive during the 1990s. Early in the decade, when a recession created budget problems, states were more likely to raise sales and excise taxes than income taxes. Later in the decade, when many states cut taxes in response to the strong economy, nearly all chose to make the majority of the cuts in their income taxes rather than sales and excise taxes.

With the current recession, states are again likely to shift costs to regressive taxes and fees, while resisting investment in education, infrastructure and social programs that can help increase participation in the economy. If recent post-recession patterns hold, the wealthiest families will see their incomes resume healthy growth; the other 80 percent will emerge farther behind than before.

— Charlie Quimby