Conservatives regularly claim that business taxes in Minnesota are high relative to the rest of the nation, but an examination of fiscal year (FY) 2015 total state and local business taxes per private sector employee in each of the fifty states reveals that Minnesota is actually below the national average.
Each year, the Quantitative Economics and Statistics practice of Ernst & Young (EY) prepares and publishes, “Total State and Local Business Taxes” in conjunction with the Council on State Taxation (COST) and the State Tax Research Institute.* The FY 2015 version of this report contains estimates of total state and local business taxes in all fifty states and the District of Columbia, as well as national totals. According to EY:
The state and local business tax estimates presented in this study reflect tax collections from July 2014 through June 2015 in most states. [This coincides with Minnesota’s 2015 fiscal year; four states have a different fiscal year.] These include business property taxes; sales and excise taxes paid by businesses on their input purchases and capital expenditures; gross receipts taxes; corporate income and franchise taxes; business and corporate license taxes; unemployment insurance taxes; individual income taxes paid by owners of noncorporate (pass-through) businesses; and other state and local taxes that are the statutory liability of business taxpayers.
Based on data from the EY report, the composition of state and local taxes in Minnesota by tax type is similar to the national composition. Both in Minnesota and nationally, the property tax is the single largest tax, followed by sales taxes, excise taxes (including public utility and insurance taxes), and corporate income taxes. For both Minnesota and the entire U.S., unemployment insurance taxes, individual income taxes on business income, and license and other taxes are the smallest of the business tax categories examined in the EY report. Due to rounding of the tax totals presented in the EY report, the percentage distribution of business property taxes presented below should be considered approximate.
In Minnesota, business property, sales, excise, and “license and other taxes” as a percent of total state and local business taxes are somewhat below the national average, while corporate income, unemployment insurance, and individual income taxes on business income are each above the national average. In aggregate, however, the mix of Minnesota business taxes by tax type is fairly close to what is seen in the nation as a whole.
The EY report also notes that total state and local business taxes in Minnesota declined by 0.2 percent from FY 2014 to FY 2015, while nationally they increased by 1.9 percent. Minnesota was one of only seven states (and—along with North Dakota—one of only two in the Upper Midwest) that saw a decline in business taxes over this period. (The decline in North Dakota business taxes is most likely driven by fluctuations in oil and gas prices.)
Neither the composition of business taxes in Minnesota nor the year-to-year change in these taxes reveal anything about the overall level of state and local business taxes in Minnesota relative to other states and the national average. The EY report examines the FY 2015 level of business taxes among states using several measures, including total state and local business taxes per private sector employee. Based on this measure, state and local business taxes in Minnesota are less than the U.S. average.
Despite being one of the few states with a decline in state and local business taxes from FY 2014 to 2015, North Dakota’s business taxes per private sector employee ($13,300) are more than double the national average ($5,800), and the highest among all states and the District of Columbia. (This is almost certainly due in large part to state severance taxes on energy production.) Meanwhile, Minnesota’s business taxes per private sector employee are $5,400—seven percent below the U.S. average. Minnesota is tied with four other states (Massachusetts, Oklahoma, and South Dakota) with the 23rd highest level of total state and local business taxes per private sector employee. (Because EY rounds business taxes per employee to the nearest $100, ties among states are common.)
Contrary to conservative conventional wisdom, Minnesota ranks among the middle of states in terms of state and local business taxes per private sector employee and is modestly below the national average. These findings are based on FY 2015 data and thus do not include the impact of business property tax relief enacted this year. The EY state business tax report contains various other measures of state and local business taxes in each state, which will be explored in subsequent articles in this series.
*COST is a non-profit trade association based in Washington, D.C. and has an independent membership of nearly 600 major corporations engaged in interstate and international business. The State Tax Research Institute is affiliated with COST and was established in 2014 to provide educational programs and conduct research.