Fact Check: Why businesses leave Minnesota

state_farm_building.jpg

Unquestionably, Minnesota is one of the highest-taxed states in the country for business, and that fact is being used by lawmakers who see cutting those taxes as the first step in creating and maintaining jobs.

Usually, anecdotal stories of companies folding up shop in the state are used to prove that taxes cause companies to leave Minnesota. But there have been few — if any — comprehensive (and objective) studies asking them why they left.

On Minnesota Public Radio’s Midmorning broadcast this morning, a caller asked why taxes couldn’t be raised to give Minnesotans a “21st century education” (whatever that is). That, the caller said, gives Minnesota an advantage over other states.

Rep. Marty Seifert, R-Marshall responded that politicians aren’t the ones to answer that question, but “it’s best to ask the people who create the jobs.”

“We lost the world headquarters of State Farm out of Woodbury. In my area, we’ve lost divisions of Schwann’s, Viessman Trucking, Anderson Trucking, Luverne Bumper Company, Luverne Fire Apparatus, Hill Stainless Steel, and the list goes on and on and on. Can can talk about Dayton Hudson and divisions of Honeywell. The reality is if you raise taxes and these folks leave, there’ll be no one to educate.”

Seifert is correct that State Farm moved out of Woodbury, fewer than seven years after building a huge campus in the city. Fifteen-hundred jobs were lost in the city; 350 of them moved to Mendota Heights. But he’s wrong that it was because of the state’s business climate. He’s also wrong that it was the world headquarters of State Farm, a company that calls Illinois home. The Woodbury office was a regional service headquarters for six states.

Before the company consolidated its operations in Lincoln, Nebraska, the company announced the two sites would combine, but at the time it didn’t say where. Area officials offered tax breaks to State Farm, but the company rejected negotiations, saying the decision wasn’t about taxes, it was about efficiency to save $26 million.

The theory that taxes prompted the move tends to ignore Nebraska’s business tax ranking at 33rd in the nation. That’s better than Minnesota’s, but not by a lot.

Dayton Hudson became Target, which is still headquartered in Minnesota. It sold its department store chain to May Department Stores, which eventually sold it to Macy’s, a company based in New York, another high-tax state.

This isn’t too suggest, of course, that taxes aren’t part of the mix. But to the original question of the caller, it’s unclear what the balance is between taxes and other factors.

Meanwhile, there were plenty of people e-mailing their commentaries during the show on the subject of the state budget Here’s a sample:

From Saginaw, Mn.

As a former employee of MSOP in Moose Lake, I here nothing of finding cuts within the state system. Currently in MSOP, consultants are utilized when there are qualified people within the state. Directors of a health facility, do not have any health care experience. They have been taken from the DOC system, where the emphasis is incarceration not patient wellness. It is a needed evil to have such a facility, however I think it could be managed more efficiently. Note the employee turnover in the last 4 years, also I think the taxpayers would like to know the amount of wages earned by the directors/consultants. How many state employees were laid off versus terminated in recent years? Look into cost overruns during the last construction phase, and see if the same expenditures are projected to the new construction phase. Thank You

From Alexandria:

Tax breaks might keep companies here, but how does cutting public services, education, health care impact the quality of living and the workforce? What happens when our most qualified and our best educated don’t want to live here because the standard of living decreases? People don’t come or stay in Minnesota just because of the jobs. They come and stay here because of the overall standard of living.

From Rochester:

If lawmakers are so concerned about lower corporate tax rates why aren’t state tax laws conformed with federal depreciation tax deductions to give small business the same faster write-off for capital expenditures that they enjoy for federal tax purposes?

(Photo: Loopnet)

  • Wilford

    Precious few facts in this fact check.

    When State Farm consolidated a regional service headquarters, they chose not to consolidate in Minnesota. For a reason, I presume. The efficiencies you cite came from the consolidation, not the location. So why not consolidate in Minnesota?

    When Delta and Northwest merged, they couldn’t move functions out of Minnesota fast enough. Care to compare Minnesota and Georgia taxes?

    Taxes aren’t the only reason businesses come, stay or go, but why would a rational executive pay more of his own or the companies income than necessary?

    Taxes do matter. We know they matter, otherwise SD would have stopped advertising their tax advantage long ago. They know that message resonates and yields results with some businesses that are able to move.

  • Rep. Seifert has been harping on this for years, and I’ve written on the topic and debunked anecdotes for years at Growth & Justice.

    You’re correct that studies on Minnesota business tax migration are few and rigorous surveys of businesses are fewer. Even Pawlenty’s economic development department doesn’t track this.

    That’s not to say we should ignore business tax reforms. But anecdotes about the few businesses that might leave the state are less compelling than specific testimony from business owners about how current tax policy affects their business decisions.

    I heard from one business owner who needed to buy a $350k piece of equipment before he could hire 3 new workers. But he couldn’t write off the cost soon enough to make the investment work. That’s something that could be fixed.

  • MR

    Taxes are probably one factor in a decision, but I think Bob’s point is that we are possibly overemphasizing how large a factor.

    Why did State Farm choose Nebraska? I have no idea–maybe they already had a larger facility there. Maybe land and construction labor was cheaper in Nebraska than in Woodbury. The cost of living in Lincoln is about 20% cheaper than in the Twin Cities, so maybe they were able to institute wage cuts and/or reduce raises. I’m just speculating.

    If all that matters is taxes, why don’t all businesses move to South Dakota and Wyoming? Presumably South Dakota has plenty of network bandwidth, with all of the credit card companies. Why do primarily online companies still locate in the Bay Area, where taxes are high and cost-of-living is astronomical? There have to be other factors that outweigh tax rates in most cases. Just because taxes are really easy to measure and compare doesn’t make that the most important factor. It doesn’t mean that we should entirely ignore them, but they get way more attention than they deserve.

  • John O.

    If the “business climate” is so bad, then can someone please rationally explain how it is that there was an average of 1.7 million employees in Minnesota in 1983 and are now somewhere around 2.6 million? That’s an increase of over 50 percent on my calculator that says “Made in China” on the back. I picked 1983 since that was the last time we were beginning to come out of that recession.

    Yes, Minnesota has lost a lot of manufacturing jobs since then–so have a lot of other states. More importantly, many of those jobs are not lost to other states, they are lost to other countries.

  • Al

    As much as I hate to seem like I’m agreeing with Seifert, my company expanded our facility in Singapore due to a tax-free agreement. I’m sure the ~30% savings in salaries didn’t hurt either.

    Of course any lowering of the business tax rate would have to be made up somewhere, which is impossible due to the Pawlenty tax pledge. It seems to me the real issue is that a re-balancing of the types of taxes (income, business, property, sales, fees) is needed. All have advantages and disadvantages. But a rebalancing means lowering some taxes and raising others. Which necessarily opens politicians up to claims of ‘You raised my taxes.’

    During a campaign there is little focus on discussions of how your taxes were raised here, lowered there, and how the pieces fit together ind order to provide a system that is fair, improves the business climate, and provides greater stability in state income. The solution to our long term budget woes requires leaders with the courage to approach this with nuance rather than sound bites.

  • Bob Collins

    //When Delta and Northwest merged, they couldn’t move functions out of Minnesota fast enough. Care to compare Minnesota and Georgia taxes?

    This is the problem. You’re assuming a cause and effect where one may — or may NOT — exist.

    Delta was the buyer. Delta was a Georgia company. Why would the buyer move its operations?

    This is how bad public policy happens. People look for data AFTER reaching a conclusion rather than reaching a conclusion AFTER obtaining data.

    You may be right. You may be wrong. But in both cases, the result happens by accident.

    Where State Farm is concerned — facts ARE facts. And when it was given the opportunity to make a decision based on taxes, State Farm declined to do so.

    By the way, it’s interesting to read the State Farm employment page and see what it stresses when discussing its call center in Minnesota:

    The area features many lakes, a clean environment, a diverse and friendly population, and a high quality of life. Minnesota may be known for its cold winters, but every season is full of life.

  • Likewise, Schwan’s. Seifert says Marshall “lost a division,” but non-local divisions seem based where the company made acquisitions.

  • bsimon

    Wilford asks

    “Taxes aren’t the only reason businesses come, stay or go, but why would a rational executive pay more of his own or the companies income than necessary?”

    I imagine it would depend on where their dollars buy the most value. Minnesota has a relatively high tax rate, but also has a fairly educated population. If you’re an executive who needs smart workers, are you going to site your business in proximity to those workers, or build in the cheapest state possible? If you’re an executive who has children, are you going to work where you can pay the lowest taxes, or where you can provide your children the best education? Maybe you’re an executive who likes the perks – are you going to move to Omaha to watch the fields of grain waving in the wind, or to MSP where you can get the company to buy boxes at Wild games, Twins games, Vikings games, etc?

  • jtb

    I believe that it is too easy to write that high taxes are the driving matter that businesses leave Minnesota. I believe it is just a scare tactic to get tax breaks, such as TCF bank moving its headquarters to SD announced a year ago this time. I do not see any follow up if they have…but I do see in articles at that time TCF sitting regulation as a reason.

    Whatever it is, I do not understand the rational of demonizing this state’s taxes when it was the structure this state had in place that made that company (TCF Bank) into the successful institute it is. One question is, why is there not a TCF Bank starting out of SD?

    I do not like paying taxes. I like seeing a nice big check back from the Fed/State once a year, but I moved here from out of state because of the amenities this state provides. I saw Minnesota is a tolerant state with good technological infrastructure, and very good talent where I can expand my own talents. I moved here in 1998 looking for a place that would be well formed to my needs and desires and now feel that I am being driven out by the talk of ‘what mine is mine, period’. If I wanted that, I would have moved to a SD with less sense of community and openness…

    Thanks for the two posts, Bob, about taxes. We should have been having this question a long time ago.

  • Bob Collins

    Bill Cooper, who runs TCF, is a former boss with the Minnesota Republican Party and is still the straw that stirs the drink.

    He retired a few years ago and then announced he’d claim residence in Florida because of its low taxes, only to return to Minnesota to help run TCF again.

    I’m pretty sure he doesn’t live in South Dakota at all.

  • vjacobsen

    Why talk about cutting taxes? If Minnesotans really want jobs, let’s cut to the chase and start competing with Asia for wages. We can all say we’d work for half– who’s in? THAT would be BOLD LEADERSHIP.

    Obviously, I’m not being serious.

    Thanks for the rational discussion. I know, many years ago, when Norwest Bank became Wells Fargo, one of the reasons that was cited for KEEPING a big part of the jobs in MN was the educated work force. Ah, but we need to raise tuition, don’t we?

    Sigh.

  • Michele

    Businesses make money by leveraging their assets (i.e. their employees) and getting more out of them than they put into them. In other words they hope to pay them less than the profit from their labor. Therefore businesses like places with low costs of living, perhaps more so than low state corporate tax rates.

    Minnesota should consider this factor when fashioning a strategy for keeping and attracting business. The business climate in the US is going to demand better educated workers and these workers will demand a reasonable standard of living.

    How are we going to provide a high quality of life while keeping a relatively low cost of living for average workers? Part of the solution will need to be solved by businesses, but states have a role too and states that are able to create positive climates for *educated workers* will have an advantage attracting business.

  • Michele

    @Wilford—Delta basically bought NWA. When that sort of “merger” happens ops typically get consolidated on the buyers home turf.

    Re South Dakota: What else doe SD have to advertise other than their low corporate tax rate? Not many people have SD on their “bucket list”. The PR firm that landed the SD job had to say something…

  • Bob Collins

    Updating. Via Ann Avery, spokesperson for State Farm. “I took a look at your Web site and what you’ve written is reasonably accurate and we don’t have a lot to add.”

  • John Spry

    Please read the objective, scholarly literature on the effects of corporate income taxes available on the 21st Century Tax Reform Commission Website (http://www.taxes.state.mn.us/mntaxreform/index.shtml) under Additional Readings: Theory and Evidence of Tax Reform.

    Here is a quote from Professor Larry Summers of Harvard University (on leave as an economic adviser to President Obama) and Professor Jim Hines of the University of Michigan.

    “A substantial body of research considers how taxation influences the activities of multinational firms. This literature considers the effects of taxation on investment and on tax avoidance activities. With respect to investment, tax policies are obviously capable of affecting the volume and location of foreign direct investment, since all other considerations equal, higher tax rates reduce after-tax returns, thereby reducing incentives to commit investment funds. This literature identifies the effects of taxes through time-series estimation of the responsiveness of foreign direct investment to annual variation in after-tax rates of return and cross-sectional studies that exploit the large differences in corporate tax rates around the world to identify the effects of taxes on foreign direct investment. The first generation of these studies, reviewed in Hines (1997, 1999), reports tax elasticities of investment in the neighborhood of –0.6. What this means is that a ten percent tax reduction (for example, reducing the corporate tax rate from 35 percent to 31.5 percent) should be associated with six percent greater inbound foreign investment. More recent evidence suggests that foreign direct investment is even more tax sensitive than this…

    For example, Altshuler, Grubert and Newlon (2001) compare the tax sensitivity of aggregate capital ownership in 58 countries in 1984 to that in 1992, reporting estimated tax elasticities that rise (in absolute value) from –1.5 in 1984 to –2.8 in 1992. Altshuler and Grubert (2004) offer evidence of a -3.5 tax elasticity of investment in a sample of 58 countries in 2000…

    Taken together, this evidence implies that the volume of foreign direct investment, and accompanying economic activity and corporate tax bases, is highly responsive to local tax policies. It follows that countries contemplating lowering their corporate income tax rates can reasonably expect to receive significantly greater foreign investment as a consequence.” (pp. 7-8)

    Hines, James R. Jr. and Lawrence Summers. “How Globalization Affects Tax Design.” National Bureau of Economic Research Working Paper 14664. 2009.

    (http://www.wcfia.harvard.edu/sites/default/files/Hines.pdf)

    Also see here. (http://www.nber.org/papers/w14664)

  • jtb

    I think I understand John Spry’s post saying that more taxes do hinder foreign investment, but I noticed:

    ‘With respect to investment, tax policies are obviously capable of affecting the volume and location of foreign direct investment, since all other considerations equal, higher tax rates reduce after-tax returns, thereby reducing incentives to commit investment funds.’

    To me, that means that ALL things are supposedly equal BUT taxes. This study does not take into consideration the special amenities (pro or con) that reside in a particular area such as infrastructure, schools/colleges, parks, community, and talent. I think investment definitely takes this into consideration as well.

  • Tom

    Multiple factors influence business location decisions. Different industries, and companies within those industries, are impacted in different ways by different factors. Much of that is beyond the control of policymakers. Natural resources. Location. Climate. Policymakers have a more direct influence over other factors, including taxes and regulation. In this respect, Minnesota has a very poor business climate. It’s not just the corporate income tax. We have high personal income taxes and business property taxes. As a result, we’re not even in the running for a lot of the business expansion, consolidation or relocation that takes place.

    Last March, 3M head George Buckley, speaking on MPR’s Midday program (http://minnesota.publicradio.org/display/web/2009/03/31/midday1/), was pretty frank about the impact of Minnesota’s tax climate on his company’s business decisions. I realize that’s annecdotal, but in Minnesota 3M is pretty big annecdote.

    Taxes aren’t the only factor, but they matter. And in an increasingly competitive global economy, the tax burden is becoming one of the few factors that state lawmakers have direct control over.

    Check out this story from Site Selection: “Costs Drive Corporate Migration: A national expert explains why Southern cities are reaping a windfall of regional headquarters operations.” (http://www.siteselection.com/portal/)

  • jtb

    With all due respect, but I believe the argument that taxes are scaring away businesses is way too simple. It is like saying…’yeah Starbucks is really good coffee and I like drinking it, but I found this five cent coffee, so Starbucks will go out of business.’ There is no straight linear rational to that argument.

    As Bob had originally posted, the unemployment under the current system of Minnesota is relatively better then the surrounding states and their ‘lower’ taxes. We can cherry pick that this regional headquarter is moving here or there and point, ‘look they have lower taxes’. And yes, we are in a global economy where jobs are starting in China, etc. (a buddy, originally from MN, works for 3M in China says that American 3M workers are pulling out of Asia. They are expanding production there to get profit share in those markets). But I do not see it, I do not see these companies (e.g. TCF Bank, 3M, etc.) pulling up tent in MN and moving to less taxed markets such as Sioux Falls (with all due respect to Sioux Falls).

    Look, I do not have a MBA or a business degree, but I do try to keep up on business by listening to MPR/NPR/CBC/BBC and PBS and reading the Economist, New York Times, and Wall Street Journal and I do not see many true articles of these taxed ‘less’ hot beds such as SD, Wyoming, Nebraska (I will give you a Austin, TX, Chapel Hill, NC). The way that some people argue that all the good paying jobs are going to these markets is just not there.

    Now, I am not arguing that taxes should be higher, I am arguing that the current tax structure of MN seems have been working pretty good because we are a small market and do have at least five top Fortune 500 companies in the Twin Cities alone, and by constantly putting our tax system down (and not doing anything about it but bitch with no alternatives except tax cuts), companies are going to question why come here. But the bigger point that needs to be made is that excellent talent like the entrepreneurs that started a Medtronic, 3M, Honeywell, Cargill, General Mills which started their ideas with other likeminded talent here will start somewhere else because all Minnesota is a ‘high taxed state’ instead of trying to attach them with great higher education, public schools, adult training and good healthcare and great music and arts and the open mind with the access to venues to meet and talk.

  • Greg Kapphahn

    If the overall business climate in Minnesota, including taxes, discourages the types of investors and business concerns that seek to maximally pad their own pockets and those of their executives, and maximally exploit workers while not having to worry about sharing the cost of the infrastructure they use and abuse, or about consumer or environmental protections, that’s not necessarily a bad thing.

    It seems clear to me that those who complain most loudly about Minnesota’s tax climate for business are seeking to damage the human climate in our state in order to bring in the kinds of businesses that will seek to lower the quality of life even further. For these types, the “business climate” is never favorable enough, no matter how pathetic the climate becomes for regular people (workers).

    In my anecdotal experience, the business leaders who shout the loudest about how taxes are the reason their businesses are struggling, are poor, if not downright incompetent, managers and/or are trying to milk bad ideas and the people who work for them as much (and painfully) as possible in order to create unjustified levels of compensation for themselves. Again, if those types of businesses and business leaders leave the state or never come here, it’s not necessarily a bad thing.

    Perhaps, it is the case that like our winter weather, our “poor business climate” is helping to keep some of the “riff-raff” out (said with tongue firmly planted in cheek).