A Fresh Take on Business Taxes

Conservatives and many business groups contend that Minnesota business taxes are high relative to other states. Apart from the dubious merit of some of these claims,* they generally do not take into account the level of economic activity that provides the base from which all taxes are paid. For example, businesses might be able to thrive in a state where business taxes are above average if there is an above average level of economic activity to generate revenue from which taxes and all other business expenses are paid.

In an October 2015 report prepared for the Council on State Taxation (COST), analysts at the Ernst & Young (EY) audit firm contend that:

State and local business taxes are imposed on a variety of tax bases, including net income, input purchases, payroll, property and other tax bases. Therefore, a broad measure of a state’s overall economic activity should be used to determine the measure of aggregate business tax burden that can be compared across states.

With this in mind, economists and statisticians at EY have calculated a “total effective business tax rate” (TEBTR), which is equal to the ratio of (1) state and local business taxes to (2) private-sector gross state product (GSP). The state and local business tax portion of this ratio includes corporate income taxes, personal income taxes on pass-through business income, business property taxes, general sales taxes paid by businesses on goods and services purchased for use in production, the share of excise taxes paid by businesses, the employer share of unemployment insurance taxes, and various other business taxes and charges for business licenses. Private sector GSP is based on data from the U.S. Bureau of Economic Analysis.

The TEBTR nationwide and for all fifty states for fiscal year (FY) 2014 as prepared by EY and published in the COST report are summarized in the following chart.

EY graph 1

Minnesota is solidly ensconced in the middle of the pack with an FY 2014 TEBTR of 4.6 percent—which equals the national average. Minnesota’s rank among the fifty states in terms of TEBTR is 25th (tied with South Dakota). In other words, 23 states and the District of Columbia have a higher TEBTR than Minnesota, while 25 states have a lower TEBTR. Minnesota’s TEBTR is somewhat below the average TEBTR of its four neighboring states (Iowa, North Dakota, South Dakota, and Wisconsin), although the four state average is pulled upward by North Dakota, which has the highest TEBTR in the nation as a result of severance taxes on energy production. Excluding North Dakota, Minnesota’s TEBTR is approximately equal to that of the remaining three neighboring states.

According to EY analysts, “Business taxes per private-sector employee presents an additional way to measure business tax levels.” Based on FY 2014 data compiled by EY and published in the COST report, Minnesota’s state and local business taxes per employee are $5,500—somewhat below the national average of $6,000. In terms of the ranking among states in business taxes per employee, Minnesota is tied with four other states (Arizona, Colorado, Florida, and Louisiana) at 23rd. In other words, 21 states and the District of Columbia have higher state and local business taxes per private sector employee than Minnesota, while 24 states have lower business taxes per employee. Business taxes per employee in Minnesota are somewhat less than the average among the four neighboring states, although this four state average is once again pulled upward by North Dakota.

The EY data from the COST report shows that business taxes in Minnesota as a percent of total private sector economic activity are equal to the national average—and below average per private sector employee. Subsequent articles in this series will explore state and local business taxes in Minnesota and other states as a percentage of total state and local taxes (including residential taxes) and relative to the benefits that businesses derive from public investments.

 

*For example, claims that Minnesota has high corporate income taxes are generally based on a comparison of nominal tax rates that do not take into account credits, shelters, deductions, and other tax preferences that can significantly reduce the actual effective rate that businesses pay. In addition, as noted in a recent North Star article, claims of high commercial and industrial property taxes in Minnesota relative to other states are not based on true statewide average tax rates and employ assumptions that exaggerate business property taxes in Minnesota relative to other states.