Minnesota is ranked as the fifth worst state business tax climate in the nation, according to an October Tax Foundation report for 2021.
The state placed behind New Jersey, California, New York and Connecticut, with a score of 4.26. Like those other four states, Minnesota has held its rank since at least 2019, according to the report. Unlike its peers, which have budged at least .01 points, Minnesota's score hasn’t changed at all in the last year.
Kentucky (ranked 19th best), Mississippi (32nd best), Montana (fifth best), New Hampshire (sixth best) and South Dakota (2nd best), are the other states that had no change in score from 2020 to 2021.
The Tax Foundation report said Minnesota’s tax base causes “an unnecessary drag” on economic activity.
The Gopher State’s corporate tax rank is the sixth highest (9.8%) as of July 1, 2020. Its individual income tax rank is the fifth highest, the report showed. Its highest top income rate, 9.85%, is among the highest in the nation, after California (13.3%), Hawaii (11%), New Jersey (10.75%), and Oregon (9.9%).
Its state sales tax rate is 6.88%, which follows California (7.25% and includes a mandatory, statewide local add-on tax) and a four-way tie with Indiana, Mississippi, Rhode Island and Tennessee (7%).
Minnesota’s average local rate is 0.58%, which is lower than Tennessee’s (2.55%) and California’s (1.43%) but higher than Mississippi’s (0.07%). Rhode Island and Indiana do not have local sales tax.
Minnesota is one of about 10 states that charge more than $3 in excise taxes per pack of cigarettes.
The report docked Minnesota for lack of full conformity to the federal deduction depletion schedule and an Alternative Minimum Tax, which was meant to ensure all taxpayers pay at least some taxes annually by creating a parallel tax system to accompany the standard corporate income tax code.
“Evidence shows that the AMT does not increase efficiency or improve fairness in any meaningful way,” the report said. “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). As such, states that have mimicked the federal AMT put themselves at a competitive disadvantage through needless tax complexity.”
Iowa, California, Kentucky and New Hampshire also have the AMT.
On the other hand, its sales tax rank (28th best), property tax rank (31st best) and unemployment insurance tax rank (32nd best) are more toward the center of the pack of states.
The state joins New Hampshire, New Jersey, North Dakota and South Dakota in exempting most business tangible personal property from taxation. Property tax rates collected per capita is $1,599 and 2.91% of personal income.
The state rose two places in rankings, from 34 to 32, for unemployment insurance tax this past year. Its minimum rate is 0.10% and its maximum rate is 9%, with a taxable wage base of $35,000.
It provides tax credits for jobs, research and development, and investment.
For its state corporate income tax and business tax bases, Minnesota provides carryforward for 15 years and an unlimited carryforward cap for net operating losses deductions, as of July 1, 2020. States have high scores on the index if they either conform to federal treatment (like South Dakota) or provide a strong system of carryforwards and carrybacks, the report said.
“The longer the overall time span, the higher the probability that the corporate income tax is being levied on the corporation’s average profitability,” the report said. “Generally, states entered FY 2021 with better treatment of the carryforward (up to a maximum of 20 years) than the carryback (up to a maximum of three years).”
North Carolina (15%) and Minnesota (20%) are the only two states that provide some Section 168(k) expensing, as the rest provide either 0% or 100%. Both states conform to Section 163(j) limitation and decouple/95% exclude Global Low-Taxed Intangible Income (GILTI).
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