Minnesota has been on fire lately. With a low unemployment rate and state-level surplus, it would be easy to point at the Governor’s increase in both the income tax rates and minimum wage as “proof” that high taxes solve all problems. The Daily KOS did just this in a post this past February, but be warned Daily KOS readers: even the Governor that enacted these measures notes that it isn’t because of them that the state is in its current position.
It is Minnesota’s economic successes, not tax increases, that have produced our present budget surplus
– Governor Mark Dayton
What can other states and, for that matter, the country do to emulate what Governor Dayton already knows? Well for starters, all states can recognize that state taxes on businesses do far more harm than good. Dayton’s administration has pushed tax breaks and subsidies for businesses to attract them to (or keep them from leaving) Minnesota. Businesses can then expand through capital investments and hiring.
The sweet spot – right where Minnesota is – comes from a state that invests in education and infrastructure while keeping taxes and regulations on business low / manageable. Minnesota’s higher state income tax rate allows the state Government to benefit from the increased economic output of the business community and the people of Minnesota, in turn, benefit from the increase in funding to education and infrastructure, both which are rated highly in Minnesota.
For states like Rhode Island, languishing at 48th place in the same CNBC review, the Minnesota model offers a playbook of what could be done to improve the state’s positioning. Implementing this type of program needs to be done with care, though, as a blanket copy will likely result in a high tax state bleeding wealthy residents. Further, the allure of higher tax revenues consistently causes some states to hire bodies into non-value add Government bureaucrat positions. No State in the union is currently hurting because of a lack of Administrative roles.
The key points that States should target include:
1. Cut business taxes and remove regulations that prevent business formation and / or expansion (for example, cutting costs on business licenses for business that do not deal with food or dangerous materials).
2. Create “Economic Improvement” zones in a similar manner to New York State to attract businesses to the state or to encourage expansion of existing businesses within the State. The rationale here is simple, no / low income taxes on a business that hires 100 employees at livable wages is an easy trade to make when the alternative is those same 100 households on welfare.
3. Invest in infrastructure projects. A UK-study noted that there are links between strong, modern infrastructure and economic growth. A State investing in infrastructure projects not only gets the short-term positive impact of the capital investment on employment and tax revenue, but also gets the long-term ability to remain competitive and flexible in the face of changing economic conditions.
4. Investments in public education and training. Drawn from increasing tax revenues (fueled by points 1-3), state-level education programs should invest directly into Pre-k to 12th grade, community college, vocational, public college, and rapid re-training programs. Well-educated workers are a key component to attracting new businesses to a state and there have been countless examples of businesses placing new facilities near education hubs (Recently several businesses opened new facilities in Pittsburgh, PA because of the robotics work being done by Carnegie Mellon).
These aren’t hard ideas for a state to tackle, so why do many states fall down? First, many states continue to languish in debates about exactly “what” policies to enact. This inaction never accidentally produces the desired outcomes so politicians need to learn how to compromise. Second, many states that want to raise taxes attempt to do so with a fire and brimstone campaign against the state’s wealthy.
Well-educated, wealthy citizens have the ability to leave the state if the message becomes too toxic (see California), but many wont if there is a clear plan in place for what these tax increases are for. Maybe that is the clearest point that Minnesota makes: don’t demonize the business and wealthy communities as a way to popularize support for new taxes. Instead create a win-win and let them come to you.