Growth & Justice Blog

A Minnesota business expands out of state. Are taxes to blame?

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

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

Rybak gets it. Are other leaders listening?

You don't build a recession-resistant economy that creates lasting prosperity with a one-time rebate check or tax cuts for only the very wealthy. The sad state of the economy today is living proof that a tax cut to the wealthy without investments in people has been a failure.

Minneapolis has shown that you build common ground for a recession-resistant economy by investing in people and investing in an environment where opportunity and innovation is fostered.

— Minneapolis Mayor R.T. Rybak

The Star Tribune devoted more column inches editorially praising Mayor Rybak's State of the City address than it gave to reporting on it.

So much for the paper's focus on local news.

Or maybe, in Minneapolis at least, wise investment in economic growth and opportunity for its citizens is no longer considered news.

While the last seven years at the state and national levels have been characterized by trickle-down tax cuts, revenue shifts and disinvestment in the common good, Mayor Rybak's tenure has been guided by the knowledge that a city's business climate can't thrive without patient investment in its people and infrastructure. And city residents need education and a thriving business climate to achieve their own dreams of prosperity.

His annual report on the state of the city nicely makes the case. [Minnesota Monitor has the full transcript.]

But cities can't do it on their own. The state still has a major obligation to fund education, and infrastructure linking cities with the rest of Minnesota is an important part of keeping the regional economy competitive.

More and more, we're seeing other local government executives and leaders around the state speaking out against short-sighted public investment policies — most recently, from Bloomington council member Steve Elkins. 

We couldn't have said these things better ourselves.

— Charlie Quimby

Not enough gold with that maroon

I was looking up some other demographic information when I found this graphic in a presentation [Download.ppt] from State Economist Tom Stinson and State Demographer Tom Gillaspy.

It shows, with few exceptions, that Minnesota's employment growth has been below the national average — and it's getting relatively worse.

We've heard that, maybe, but this picture in maroon and gold brings it home.

But growth in the employment rate doesn't capture everything — especially when a relatively high percentage of the workforce is already employed.

So, checking out the Twin Cities Compass site Dane mentions in the previous post, I took a look at another key measure — proportion of adults working in the seven-county metro area.

This chart shows a slight closure of our region's lead over the U.S. average in recent years. There are lots of other ways to slice the data, too. You can drill down from there and see the Minneapolis-St. Paul-St. Croix greater 13-county metro ranks first among national metropolitan areas.

So, maybe not as  alarming a trend as it appears in the employment growth chart, but it confirms we're heading in the wrong direction.

One quibble. The time scale on the chart isn't apparent to me here, and other charts on the site are arbitrarily divided into quarters that don't correspond to years. For more volatile trends, I want to be able to isolate easily individual years when changes occur.

[At my other blog, I've posted seven brief profiles of people I know who might fit in one set of these numbers, but not the other.]

— Charlie Quimby

Check out the "Twin Cities Compass"

Wonks take notice. There's a great new website, Twin Cities Compass, out there for your enjoyment and edification.

I had the privilege this morning of being briefed on the launch of this impressive new project. It provides a treasure trove of facts and figures that relate to the Twin Cities, and our position relative to metropolitan areas across the nation. It's an effort that should help all of us in the world of think tanks and public policy study.

I dipped in and immediately found a statistic I had not seen before that sheds some light on the transportation pickle we're in. If you click here, you'll see transportation costs as a percent of consumer expenditures in the Twin Cities is significantly lower than the national average. For those of us who are pushing for more investment in this vital common good, it would suggest that we can afford to invest a lot more to relieve a distressing deterioration in road condition and travel times. 

(Check out our own Growth & Justice research on transportation disinvestment.)

Particularly impressive at the launch and community leaders' breakfast in St. Paul was venture capitalist Michael Gorman, of Split Rock Partners, who spoke eloquently of Minnesota's distinctive investment in human capital, and particularly education, over the last half-century. There was a general consensus among speakers at the event that the Twin Cities is still far above average but clearly beginning to decline on important socio-economic indicators.

The Twin Cities Compass project is the product of a partnership with the Itasca Project and Wilder Research. The project brought together groups of policy-makers, business and community leaders, nonprofit organizations, and other stakeholder groups to determine what information will be most useful to them to measure community progress, to identify solutions and to build consensus to take productive action.

More than 300 volunteers from academia, private industry, public and non-profit sectors have helped to shape Twin Cities Compass — serving on topic advisory groups, a technical advisory committee and a disparities advisory group. Angie Eilers, our research and policy director, served as a member of the Early Childhood and Civic Engagement task forces.

— Dane Smith

Progressive taxes AND real prosperity

Groups such as Minnesota Citizens for Tax Justice have been pointing to evidence since the mid-1980s that fair and progressive taxes do not necessarily hinder economic prosperity and growth. That argument is a central tenet here at Growth & Justice, and we've been a leader making the case for a more progressive tax structure in Minnesota since our founding five years ago. We're not territorial about this distinction or this issue and we're always happy to see other groups take up the fight.   

The latest to weigh in is Minnesota 2020 fellow Jeff Van Wychen, who has also worked with us on tax-and-budget issues, in a study that correlates progressity of taxes with indicators of economic vitality and quality of life.   

In an impressively documented study, Van Wychen shows that:

States with progressive tax systems do at least as well as states with more regressive tax systems in economic performance, business climate, and general livability...Why is this?  One explanation is that states with the most progressive tax systems are better able to finance the educational and transportation infrastructure and the public services that a modern economy requires because they don't shift a disproportionate share of the burden of paying for these investments to households with the least ability to pay.  The loss of high income households due to progressive taxation is offset by an increased ability to pay for public investments.

Despite the careful and understated tack taken by Van Wychen — and a finding only of a "slight tendency'' for states with more progressive tax structures to actually perform better economically — his work drew a sharp critique from conservative Minnesota Free Market Institute Fellow Craig Westover, and a counter-reply from Van Wychen.   

Westover, as usual, poses thoughtful questions and counterpoints but without evidence implies bad faith when he dismisses the study as "little more than (an) attempt to support a partisan position,'' and of "not even trying to get it right.''   

We agree with Van Wychen that if progressive taxes (in shorthand, tax rates that are higher on higher incomes than in states with regressive tax structures) really are bad for business, that evidence should have come through on at least one of his study's six bar graphs representing rankings of states on economic vitality measures.   

Moreover, for two decades, it's conservatives who have been the aggressors on this correlation front (progressive taxation is bad for rich investors) in their relentless crusade to undo the New Deal and the progressive tax structure that created it. And finally,  even Westover acknowledges that Minnesota was near the top on every business and life quality measure.   

Despite our decline in relative tax progressivity since the big income tax cuts earlier this decade, we still rank 11th in progressivity. If any state has done it right in matching progressivity and prosperity, it's us.

— Dane Smith 

Falling behind Wisconsin and Peircing analysis on states' fiscal woes

For years I've worked this friendly Minnesota-centric shtick about how good ol' Wisconsin is our closest relative, a kind of sister state that has a very similar history, culture and progressive instincts.  But the punch line is that they are cheeseheads and Packer fans after all, and just a little behind us for the title of Paragon of Progressive States, and not quite as far above average as a result.

  It's time to drop that routine from the repertoire and to acknowledge that the Badger State is more progressive and far-sighted economically than the Gopher State.  Lori Sturdevant's excellent Star Tribune OpEx piece and Q&A with Wisconsin Gov. Jim Doyle Sunday provides more evidence that Wisconsin is moving ahead with aggressive efforts to ensure more access to affordable higher education and health-care coverage.   Higher taxes (on cigarettes) and an imaginative partnership with business helps pay for this "human capital investment surge'' to the east, Sturdevant writes. 

When I was doing research in the mid-1980s for the Star Tribune for a fiscal study of Minnesota and other states, Minnesota unquestionably was one of the biggest spending states (and our economy was doing fine).  We ranked significantly ahead of Wisconsin on the bottom line:  state-local taxes and state-local spending as a percent of income.   That hasn't been true for several years now.   Latest figures from the Minnesota Taxpayers Association (not to be confused with the anti-tax League) show that Wisconsin ranks 10th in state-local taxes as a percent of income and Minnesota is 23rd.   On state-local spending as a percent of income, Wisconsin is 23rd and Minnesota is 31st.   Watch for right-wing business interests in Wisconsin to start making exaggerated claims about employers and jobs fleeing to low-tax Minnesota.  Boy that's going to feel weird.

Meanwhile, Neal Peirce, one of the nation's foremost authorities on the states and their governments, has produced a strongly persuasive case for states to reinvest, focusing on nation-state California.   His latest nationally synicated column makes the case and these excerpts get right at it:

Many states have never fully recovered from the sharp cutbacks they made in education, health coverage and child care in response to the economic slump of 2001-2004 that was triggered by the technology stock slump and the 9/11 terrorist attacks. And inflation is driving up the cost of government services.

So should governments just slash their budgets willy-nilly, hoping for a better day?

No. That's the firm opinion of Stephen Levy, director of the Center for Continuing Study of the California Economy in Palo Alto. Levy focuses his argument on California, but it fits most of the country. We have strong growth sectors in Internet services, biotechnology, trade, finance and entertainment. But with a tidal wave of skilled baby boomers soon to retire, our work force will include fast-rising numbers of Latino and Asian immigrants, their children and grandchildren -- many of them lagging in the critical educational skills needed in a high-tech, intensely competitive global economy...

But look at what California has done instead (of investing in education). From 1984 to 2008, it let its per capita spending on prisons increase 126 percent while its per capita spending on its public universities -- once its claim to world fame -- declined 12 percent. "Prisons," the Sacramento Bee editorializes, "are sucking the life out of higher education in this state -- and thwarting the aims of economic advancement and social mobility."

So what's Schwarzenegger's solution? Shorten sentences of 28,000 prisoners, saving $1 billion by the next budget year -- but still go ahead with his program to build 53,000 new cells at a numbing cost of $15 billion for construction and debt service.

A sane California, Levy argues, would raise taxes $7 billion this year, (our italics) recession notwithstanding. The increase would be about one penny out of every $2 that Californians -- whose aggregate income is about $1.5 trillion -- actually earn. The collective family of California, he suggests, can take the one cent from eating out or buying a fancy car and put it into education -- a small enough sacrifice compared to the kinds of tough decisions our grandparents had to make during the Great Depression.

Dane Smith

Rep. Seifert tells some scary stories

According to the Redwood Falls Gazette, Rep. Marty Seifert received the Minnesota Licensed Beverage Association's Legislator of the Year Award Monday. In his remarks, the House Minority Leader made some comments that we may be hearing again during the legislative seasons.

Seifert said in 1972 the top three job providers in the state of Minnesota were 3M, Honeywell and Dayton-Hudson.

They were big companies that provide good benefits to their employees and families.

"Today three of the top five employers in the state are State of Minnesota, the University of Minnesota and federal government," Seifert said. "I don't know about you, but that is getting to be a little bit scary in terms of fewer and fewer job providers because o[f] more and more regulations and taxes."

"You folks are pulling the wagon," Seifert added. "And everyone else is riding on the wagon."

We're certain Rep. Seifert did not mean public sector jobs do not provide good benefits to employees. After all, he himself draws two paychecks from the taxpayers — one as a legislator and one as an admissions officer for Southwest Minnesota State University.

Instead, he repeats a different and even less supportable horror story: Big Bad Government is bumping off private enterprise.

Here's his story line: Private employment is giving way to public employment in the state; growing regulation and taxes are responsible; and small businesses like bar owners and liquor distributors are pulling the wagon for a bunch of freeloaders.

Picking 1972 for his comparison puts solid data a bit out of reach, but some of the beverage sellers in his audience might recall that a lot of things were different then.

Bars were selling Hamm's and Grain Belt, and two of the nation's biggest brewers were Pabst and Schlitz. Honeywell was in the computer business and weapons business then. Dayton-Hudson was opening its 100th B. Dalton, Bookseller store and was considering selling off its Target discount chain, which had started well but was sputtering.

There's no question Minnesota's corporate employment has shifted from those old guard companies. (Even 3M, which was 57th on the Fortune 500 list in 1972, has dropped to 97th today.) And if the decline of those big, patriarchal employers is your point of reference, these structural shifts in employment may indeed be troubling.

It's plain misleading to imply with the example that big private employers have been displaced by big government. Or that government is the cause of the real pain being felt today by low- and middle-income families.

The Minnesota Department of Employment and Economic Development publishes comprehensive employment statistics going back to 1990. In that year, government employment was 16.2 percent of the total. In 2007, it was 15.5 percent. I examined the 17-year trends line for private jobs growth vs. growth for federal, state and local jobs in Minnesota.

Here's a chart showing growth rates for total employment and government employment [click to enlarge]. You can see the steeper blue growth line for total employment. The growing divergence of the lines is similar for jobs broken out at federal, state and local levels.

Back to Rep. Seifert's statement, it would make sense that as large companies move, restructure and go out of business, the more stable government sector would become relatively "bigger." After all, we don't outsource road maintenance to India, New Jersey hasn't launched a takeover of Dakota County, and the state colleges don't move to South Dakota because the taxes are lower!

Seifert's claim of "fewer and fewer job providers" is simply wrong. If total employment grows and large companies account for fewer jobs, we should actually have more private job providers in the state. And that's the case — from 148,715 in 2000 to 161,300 in 2006.

In another post, I'll show other reasons this "big government riding the wagon" story is — dare I say it? — a fairy tale.

— Charlie Quimby

What helps business growth? Smart public investment!

The question was:  "What helps or hinders growth in Minnesota?" The venue was a luncheon program in Bloomington this week at the "Grow Minnesota'' project sponsored by the Minnesota Chamber of Commerce. 

The answer, in large part, turns out to be smart public-sector investment. And those weren't our words, although we say them often enough at Growth & Justice, but the implicit and explicit response from four exemplary real-world business executives.

In introducing the four senior execs, Chamber senior vice-president Bill Blazar said the project's extensive surveys and outreach to businesses across the state revealed "over and over and over again'' that business values "the availability and training of workers in Minnesota.'' For other companies, Blazar said, increased transportation and infrastructure investment "is the biggest issue in the world.''

Blazar cited the obligatory and predictable concerns in a survey of businesses to "hold the line on taxes'' (Minnesota now ranks 23rd among the states in total taxes as a percent of income) and the perennial desire to hold down worker's comp and unemployment comp costs. But the four business leaders who followed him said hardly a word about their tax burden or regulatory concerns. And rather than casting state and local government as a problem, some of them lavished praise on the efforts, especially by local governments and redevelopment agencies, at retaining and expanding their enterprises.

Here are excerpts from all four, who also were quoted on the Star Tribune editorial page this week.

From Don Pyatt, president of Viracon Inc., a thriving Owatonna-based company that has become one of the leading architectural glass manufacturers in the nation (Freedom Tower in NYC and flashy new high-rises in Las Vegas will be clad in their product): Health-care and energy costs are the biggest hindrance to growth, Pyatt said, and his company most needs an increased supply of skilled and trained workers. His only criticism of state government had to do with not doing enough, namely that the state college system (MNSCU) had recently cut back its training program for electricians.

From James A. Sieben, vice-president and general manager of Nova-Tech Engineering LLC, in Willmar,  manufacturer of various technology for U.S. and international poultry hatcheries: Local government economic development officials had a vision for helping Nova-Tech locate its operations on the campus of an abandoned state regional treatment center. Sieben proudly showed pictures of how the state facility has been transformed into a thriving corporate campus. One little nit about government:  the local historical society has been an obstacle to the company's efforts to renovate some of the buildings on the campus.

From Jeff Strauss, director of operations for Total Card, Inc., a  Luverne company that serves credit card customers. The southwestern community leaders and the state's JOBZ program "came together'' to help the company expand in Minnesota and the company has thrived and grown in Minnesota, experiencing a dramatically lower turnover rate than in its South Dakota operation. The state could do something locally to reduce taxes for workers who are living in Iowa and South Dakota and also paying taxes there, Strauss said.

From Brett Weiss, president of WSB & Associates, a Minneapolis infrastructure engineering firm: Of the four, Weiss was perhaps the most emphatic about the damage done by "a lack of investment on our government's side,'' especially in  transportation. The failure to invest was causing state construction companies to fail and forcing developers themselves to pay for infrastructure. "It's time to do business in Minnesota,'' Weiss said.

At Growth & Justice, now a dues-paying member of the Minnesota Chamber of Commerce, we couldn't agree more.

—Dane Smith