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

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

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

Tax rankings: When "facts" obscure the truth

A letter in the Park Rapids Enterprise contains a common set of distortions about taxes in Minnesota. I've debunked similar statements before, but I guess one broken record deserves another.

Passage of Minnesota’s largest tax increase in history by the DFL controlled legislature has triggered a barrage of editorial comments both pro and con. Although most have expressed strong opinions, few have provided factual data in support of their positions. Here are the facts regarding Minnesota’s tax burden per capita relative to the national average and comparable surrounding states:

Minnesota, ($2,871), 4th highest; Wisconsin ($2,283) 12th; national average ($2,000).

These data were last revised March 6, 2008 by the US Census Bureau and represent an accurate, non-partisan viewpoint. I am certain most reasonable people would agree there is no logical reason why Minnesota should be the 4th highest taxing state in the nation and substantially above all surrounding states with similar geographic and demographic characteristics.

The 10-year, $6.6-billion transportation bill might qualify as the "largest tax increase in history" because the amount funded — to start making up for 20 years of neglect — covers a longer span than typical revenue bills. It also gets called out because legislators  spelled out the cost in the bill, unlike the increases in tuition, fees and property taxes that have fallen on taxpayers since 2003. If all those "no-new-taxes" increases had been put in one, 10-year bill, they'd add up to far more.

Now, what about those facts?

Though I haven't found updated per capita rankings the letter writer attributes to the Census Bureau, the Bureau tax rank data covers only state taxes, not local sales and property taxes. Using only state taxes for comparison distorts the relative tax burdens, since service costs for transportation, education, etc. are borne at different levels of government state-to-state. Relative dollar amounts per capita are also misleading, since states have different average incomes and costs of living. A poor state has less revenue-generating capacity than a wealthy state.

(The Census Bureau's most recent 2004 ranking of state revenue per capita shows Minnesota at 18th. Alaska and Wyoming, with their small populations, no income tax and large mining and oil royalties, rank 1 and 2.)

A better measure comes from the Tax Foundation, which includes state and local taxes and calculates tax burden based on a state's total income. Using income is appropriate because it reflects the overall capacity to pay and does not count every two-year-old in the census as if they were taxpayers.

By this more complete measure, Minnesota ranks 11th, 0.8% above the median for all states.

While there are legitimate reasons to compare our level of taxation with other states, numeric rankings are among the least useful measures — except to make a political point. Clearly, using the "4th highest" ranking suits the anti-tax argument that Minnesota taxes are "sky high" far better than saying "8/10ths of a percent above average."

Repeating this sort of thing over and over does not make it true — but can make people believe it. So we have to object, whenever the "facts" are used to paint a false picture.

— Charlie Quimby

Minnesota's B- is not quite ahead of the curve

What a concept. Instead of simply toting up tax rates or doing a subjective survey on state livability, the Pew Center on the States has graded state governments' management performance based on a comprehensive process that interviewed about 1,400 state officials and experts, and studied states' budgets, workforce plans, auditors' reports and official websites.

Dane Smith was one of the non-governmental observers cited in the Minnesota report.

It's been discouraging for the Pawlenty administration, which has done some very good work on other fronts. Dane Smith, the president of Growth & Justice, a liberal activist group, strongly opposes Pawlenty on most issues, but gives the governor credit for paying attention to the day-to-day aspects of state management. The governor has made efficiency a hallmark of his administration, most prominently through his Drive to Excellence, a series of 11 projects that have run the gamut from new workforce planning to building a centralized property management system.

Minnesota earned a B-, along with 17 other states. Thirteen states earned B or higher.

The point of this exercise is to show states where they have room to improve. As with other ranking systems, I'd caution against reading too much into relative rankings. Minnesota's grade is lower than Louisiana's, for example, yet in the state summaries, Minnesota received more "strength" and fewer "weakness" performance ratings.

Perhaps some strengths are stronger than others. Or maybe the academics, Pew staff and Governing magazine journalists who did the grading gave extra credit for a levee collapse versus a bridge collapse.

No matter. Only low-tax, low-services New Hampshire, with the lone D+, appears to be appealing its grade, according to columnist Neal Peirce.

More important, the Pew Center staff is willing to sit down for free with states to discuss how they can learn from other states to improve their management performance. Peirce quotes Michigan Governor Jennifer Granholm as one leader who has used the state's severe budget problems as "a huge opportunity to make management changes that would otherwise be impossible."

So she consolidated departments, eliminated some agencies, and now holds weekly meetings at which Cabinet and other officials are held accountable for meeting goals ranging from economic development to infrastructure repair. A "fix it first" policy, to repair roads "rather than paving the cornfields," has increased roads rated in good condition from 60 percent to 92 percent.

For better or for worse, Minnesota has the same "opportunity."

— Charlie Quimby

______________

Governing magazine, which collaborated in the study, has produced a series of articles and maps showing how the states scored in the categories of Money, People, Infrastructure and Information. At the Pew site, the map below is interactive and links to individual state reports.

Poor might not give more, but Minnesotans can

I thought I saw a parallel between philanthropy and tax paying in story about Colorado's list of the state's largest charitable donors, compiled by the Rocky Mountain News:

Studies consistently show that lower-income people give away a much bigger percentage of their income than the rich do. But the bulk of charitable giving still comes from well-off donors.

Sounded right. Wealthy individuals contribute the bulk of charitable dollars, just as they pay the lion's share of taxes. And lower-income people give away a larger share of their income than the rich do, just as they pay a higher proportion of their income in taxes.

But before posting this little tidbit, I decided to look for one of those studies that showed the greater contribution from the low end of the income scale.

Turns out it's a myth that poor people are more charitable than the wealthy. The story's statement isn't quite true.

Low-income people who give to charity donate a higher proportion of their income, but most poor households don't give at all, for obvious reasons. In one study, about 18% of households making between $10,000 and $20,000 gave to charity, while 97% of those making $300,000 to $400,000 gave.

While I was digging around for this information [no link because of a barely legible table], I found a very  interesting comparison of states in a report on charitable giving [Download givingindices.pdf] from the Boston College Center on Wealth and Philanthropy.

It shows that Minnesota ranks number 2 nationally for household after-tax income adjusted for cost of living, based on 2004 data. Using one cost of living calculation, only Utah, with adjusted after-tax income of $61,070, ranked higher than Minnesota's $59,629. Under a different cost of living calculation, Minnesota ranked second ($61,978) behind Maryland ($63,418). In both cases, the U.S. average was $48,410.

Either way, despite what we're hearing during the gas tax debate, Minnesota still has a high capacity for charitable giving — or for paying taxes.

—  Charlie Quimby
 

Anti-tax propagandists try again

A recent Wall Street Journal editorial packs up some loosely related facts and delivers a familiar  conclusion — state income taxes motivate people to move.

But let's dig into those facts...

[Note: A slightly edited version of this is cross-posted at Across the Great Divide.]

The editorial, based primarily on a yearly report of inter-state shipping records from United Van Lines, says a record number of Americans moved to other states last year.

Without interviewing the departed, it's impossible to know the reasons for this outward migration. No doubt overall economic prospects, climate, quality of life and housing prices play a role.

Why people move

Well, yes, those are the reasons suggested by actual studies of migration. The Wall Street Journal didn’t interview the 212,917 departed represented in the shipper's data, but the Census Bureau does ask people why they move.

Between 2004 and 2005, for example, it counted more than 39 million changes of residence. Of the 15 million who moved at least one county away (it did not break out answers by inter-state moves), 90 percent gave reasons that were evenly split among work, family and housing.

It did not ask specifically whether people were fleeing taxes — or fleeing cooties, for that matter. So maybe some of those movers who said they moved to take new jobs, look for work, avoid crime, get married, move closer to family or find a better house were really basing their decision on the income tax rate.

Maybe.

By the way, Journal's alarming declaration that "a record eight million Americans — some 20,000 people every day — relocated to another state last year" fails to clarify that the "record" is due to population growth. The rate of about 2.6% relocations is midway between the rates from 2000 and 2005.

The editorial continues:

But one reason to conclude that taxes are also a motivator is because the eight states without an income tax are stealing talent from other states. They are Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming, and each one gained in net domestic migrants. Each one except Florida — which has sky-high property taxes on new homesteaders — also ranked in the top 12 of destination states.

Why the numbers are deceptive

Before you swallow that, let's look at the actual number of households involved in those moves. That's important, because the United Van Lines report ranks its high-move states by the differential between inbound and outbound moves in each state — not whether there's a large number of moves.

Drilling down, we find those seven states in the “Top 12” destinations accounted for 37,302 inbound moves, but had a total net gain of only 5,772 households. Altogether, South Dakota, Wyoming and New Hampshire accounted for a grand total of 390 new households.

Hardly a groundswell.

 Now, let's compare the eight states without an income tax to Minnesota, which ranked number 12 in per capita state and local taxes in 2007. Why, high-income-tax Minnesota had more inbound than outbound moves, too!

Suppose we look at inbound moves as a percent of state population to even out differences among different-sized states. Of the nine, Minnesota has the fourth best inbound ratio, behind Nevada, Washington and Wyoming. And more households moved into Minnesota in 2007 than Nevada and Wyoming combined.

The implication that low-tax states are “stealing talent” is not exactly borne out by the data. Another way to view it is that two states with good quality of life and a strong creative climate are attracting lots of talent, while two other states are drawing a few people with a real estate bubble and an oil and gas boom.

Higher income, less migration

But the Journal just can't help itself. It concludes with an ominous warning to state governments:

The people who tend to be the most mobile in American society are the educated and motivated — in other words, the tax-paying class. Tax them too much, and you'll soon find they aren't there to tax at all.

The highly mobile, well-off taxpayer sounds right, but it simply isn’t true. I’ve written about this before, so let’s look here at some new data.

The Census Bureau also tracks moves by income level. People with the lowest income are actually the most mobile, including those moving between states. Top-earning households — incomes above $75,000 — are the most stable, with only 9 percent changing residence in the prior year, compared to 19 percent at the bottom.

Why some trips cost more

Finally, let’s look at one more misdirection in the editorial, which sent readers to the U-Haul web site to see  how much more it costs to rent a truck leaving a high-tax state for a low-tax state versus one going the other way.

King Banaian was skeptical but still fell for it, citing these examples:

A 26-foot truck from Minneapolis to Sioux Falls from U-Haul was $489, from Sioux Falls to Minneapolis $288. St. Cloud to Rapid City $880, Rapid City to St. Cloud $518.

Let’s help out the econ professor and the editorialists on this one.

First, most moves are local. Movers tracked by the Census Bureau stayed in-state by a ratio of at least 4 to 1, depending on the income group. Most moving equipment rented in a market stays there. In-town moves in Minneapolis are priced at 39 cents per mile vs. 49 cents in Sioux Falls, so let's dismiss any implication that the higher tax state starts out higher cost.

Second, sending units to another state is only desirable if there’s higher utilization at the destination.
I called U-Haul headquarters to ask about the interstate pricing discrepancy, and sure enough, they said they often discounted rates to encourage more equipment going back to cities where more moves occur.

Other explanations

Another view on this subject comes from Wendell Cox, a smart growth opponent, who says housing affordability is the problem.

He looked at the Census Bureau migration patterns and notes that high-tax states like California and New York have been high tax for decades, while exploding out-migration is a newer development.

He says the problem is high housing costs relative to income. Some high-cost locations like Las Vegas are able to attract inbound migration only because their housing is less expensive than neighboring California's.

Should states like Michigan be concerned about continuing to lose population? Certainly. Should Nevada be worried about whether the influx of new people are financially stable? Apparently.

But without better supporting evidence, don't buy any attempts to hang those troubles on taxes.

— 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