A valued, long-time Minnesota business announces it's expanding across the border. Is this more fodder for those who claim corporate taxes are driving business to lower-tax neighbors? Or does it illustrate how business expansion plans respond to a complex mix of factors?
South Dakota is usually cited as the destination for migrating Minnesota businesses — typically without naming any specific companies. But in this case, it's North Dakota that will benefit from an expanding Minnesota company.
Marvin Windows, headquartered in Warroad, has announced plans to nearly double the size of its facility in Grafton, ND, adding up to 50 new jobs over the next five years. Marvin's Warroad location employs about 2,500.
But lo and behold, North Dakota isn't quite a low tax haven of the sort we're told is going to strip Minnesota of its economic growth. In fact, it ranks just above Minnesota in total state and local taxes as a percentage of income and two places higher in corporate income tax rankings percentage of income. The complete state rankings compiled from Census Bureau data by Growth & Justice and the Minnesota Budget Project are here [pdf].
It's true North Dakota is a comparatively low personal income tax state, but the company isn't moving to there to lower income taxes for the owners. The Marvin family is staying put in Minnesota, and most of the 475 jobs created at the Grafton plant, which opened in 1997, have been filled by local residents.
(1)Total revenue includes federal government revenue and own-source general revenue — which together make up general revenue — combined with utility, liquor store, and insurance trust fund revenue.
Let's look at some of the likely factors figuring in Marvin's decision.
Labor. The labor supply has to be a concern for Marvin, with its major manufacturing facility located in remote Warroad. Polaris Industries has a large plant in Roseau, the next nearest town. With two large employers drawing workers from the thinly populated region, at some point as they grew, they'd likely look elsewhere for labor.
Grafton, with a population of 4,600, is roughly the size of those two cities combined and is located in farm country, where skills, work ethic and the lagging farm economy offer a ready source of workers. Labor costs were lower in 2003, with the average job in the county paying $22.2k vs. $27.9k in Roseau county.
Location and Infrastructure. Though like Warroad, Grafton is relatively isolated, it's near the major north-south freeway artery Interstate 29, which meets east-west I-94 at Fargo. Grafton also connected east-west to Warroad. Marvin undoubtedly saw that infrastructure as an advantage when it originally located there. And having a plant already in that location meant the company was more likely to expand there than in a new place. Also, as an energy producing state, North Dakota has lower industrial power costs than Minnesota or South Dakota.
Incentives. Rolling out the green carpet might have a modest attention-getting effect — if the financial incentives are coupled with other positives in a community. Grafton was not one of the locations originally considered back in 1996 when Marvin was looking to expand, but it did put together an incentives package that included a new industrial park and a spec building to help interest site selectors.
This time, Marvin already announced its plans to expand before the city votes on a possible 10-year tax exemption for the addition and sponsoring an interest buydown on a loan. As we've noted before on subsidies, they make the less sense when a company is already in the region. It's unlikely, given the current housing construction market, that Marvin would be very interested in breaking ground in an entirely new location.
Business Taxes. Lest anyone think I'm gaming the numbers, here's the low-tax-advocating Tax Foundation's ranking of the states. Although North Dakota generally scores better than Minnesota on the "business friendly" indexes, it's nowhere close to South Dakota.
Let's pause here to make our general disclaimers about all tax
rankings. Numeric rankings can distort small differences; they're based
on averages or rates that don't necessarily apply to actual taxes in
individual cases; they may not measure what they claim or even measure the
right things in the first place. And just about any state or advocacy group can find a ranking that either rankles or reinforces, as shown in Grading Places: What Do Business Rankings Really Tell Us? [pdf].
Thirty-four of the 50 states can claim that they are in the top 10 in terms of business climate or competitiveness; they just have to pick which of the five indexes they want to point to. Business interests in just about any state can find at least one ranking to support an argument for cutting business taxes to make the state more competitive. In all but eight states, one can find at least one index that puts the state in the bottom half of all states.
Bottom line? While tax considerations may be part of a business expansion equation, it's never as simple as the low-tax advocates would like you to believe.
— Charlie Quimby