Report: Minnesota has the sixth worst business tax climate

Minnesota has the sixth worst business tax climate in the nation, according to a report released this week by the Tax Foundation.

TF's 2023 State Business Tax Climate Index reports how well states structure their tax systems and indicates how to improve those systems. The report ranks the states based on a point system of 0 (worst) to 10 (best) with five unequally weighted variables: individual income tax (30.6%), sales tax (23.5%), corporate income tax (21.1%), property tax (15.0%) and unemployment insurance tax (9.8%).

Minnesota has the 43rd best corporate tax rank and individual income tax rank. It has the 29th best sales tax rank and the 31st best property tax rank. Its unemployment insurance tax rank is 34th best in the nation.

The North Star State is one of 13 states that the report penalizes because the state doesn’t fully conform to federal depletion schedules.

“Tax complexity would be staggering if all 50 states imposed their own depletion schedules,” the report said.

Minnesota is also one of five states that has an Alternative Minimum Tax for corporations. These taxes require some taxpayers to calculate and compare their tax liability under ordinary income tax rules and under the AMT and pay whichever amount is higher. The report said research has indicated the AMT doesn’t really increase efficiency or tax fairness.

“It nets little money for the government, imposes compliance costs that in some years are actually larger than collections, and encourages firms to cut back or shift their investments (Chorvat and Knoll, 2002),” the report said. “As such, states that have mimicked the federal AMT put themselves at a competitive disadvantage through needless tax complexity.”

The other states with AMT on corporations are California, Iowa, Kentucky and New Hampshire, the report said.

Individual income taxpayers in Minnesota also need to pay this tax. California is the only other state that has both AMT for individuals and for corporations, according to the report.

Minnesota also has among the highest top marginal individual income tax rates (9.85%), statewide sales tax (6.88%) and tobacco taxes ($3.70 per pack).

Minnesota has held its ranking as the sixth worst since the 2020 report, when it was the fifth worst. Before then, it had been the seventh worst since 2015. Gov. Tim Walz was first elected in 2018. Republicans have held majority control of the Senate since 2016 while the Democratic-Farmer-Labor Party has had the majority in the House since 2018.

The Top 10 best states in this year’s index are Wyoming, South Dakota, Alaska, Florida, Montana, New Hampshire, Nevada, Utah, Indiana and North Carolina. Among these states, only Indiana and Utah levy all three major tax types: corporate income tax, individual income tax or sales tax. And those two states have low rates on broad bases, the report said.

New Jersey, New York, California, Connecticut and Maryland ranked lower than Minnesota.

New Jersey has some of the highest property taxes, corporate income taxes and individual income taxes.

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