The Minnesota Short-Sell
By Mitch Berg
Yesterday, I noted that all that talk about companies leaving Minnesota for lower-tax states like the Dakotas is not, in fact, wind in sails.
Over on Twitter, someone thought he had me cornered:
Except taxes didn’t go up & they are still expanding in ND
That’s true, but for purposes of business, irrelevant. Businesspeople – smart ones, anyway, especially in capital-intensive businesses like the one I highlighted yesterday – don’t plan based on the current year. They plan ahead.
And what does someone who plans ahead see in Minnesota’s not-too-distant future?
- Tim Pawlenty – the state’s sole bulwark against a DFL whose economic philosophy is “spend other peoples’ money like we’re one of those Sweet Sixteen contestants” – is leaving office at the end of this term.
- The
Ventura“Independence” Party – which, in soaking away center-left votes from the DFL, likely kept Pawlenty in power, added a few points of padding to Paulsen’s winning margin, and arguably helped keep Bachmann there – is going to lose major-party status one of these next go-arounds. - The Minnesota GOP hasn’t inspired confidence in the past three cycles; the new regime on Park Street (including my friend Michael Brodkorb) has to earn their spurs by winning some elections. There is hope – I suspect Obama is going to melt down and take a lot of Dems with him, sooner than later – but if you’re a businessman, hope isn’t a plan.
- If 1 through 3 are true, then the DFL will very possibly seize un-fettered (or barely-fettered) control of this state in the next few years. The GOP will likely register gains – but eight years of Republican governors, even good years with an excellent governor, could very easily lead to a “backlash” among the same horde of bovines who thought Jesse Ventura would be a good idea, and whose votes count as much as those of smart people.
- And if/when that happens (heaven forfend), all hell will break loose in this state. A DFL-controlled legislature with a DFL government will treat Cy Thao’s classic quip (“when you win, you keep your money; when we win, we take your money!”) as gospel; you will be Happy To Pay For A Better Minnesota, or the Minnesota Department of Revenue will do to you what the NYPD did to Abner Louima.
Given that forecast – complete control, over the next 2-4 years, of state government by a party that is less responsible at spending than The Real Housewives of Orange County – where would you put your business?
Pawlenty’s holding of the line on taxes is just the calm before the storm grinds the levees into cat litter.
July 28th, 2009 at 9:08 am
“put Paulsen in Washington”
that’s a stretch.
July 28th, 2009 at 12:48 pm
Business will exit the state as if someone had cried fire in a crowded theatre if the DFL takes full control. And it is a certainty that the bread and butter middle class will follow.
July 28th, 2009 at 1:21 pm
Mitch,
I’m sorry, but this is a non sequitor. The areas of the country with the highest “capital intensive” requirements are areas with higher taxes than ND and Miississippi.
Further, since many companies now shed their profits through shifting funds to holding corps, paying out bonuses or stock dividends to such a high degree so as to avoid both state AND federal corporate income tax, your point is simply not really relevant.
July 28th, 2009 at 1:43 pm
“Further, since many companies now shed their profits through shifting funds to holding corps,”
This is now mostly illegal thanks to Enron and Sarbanes Oxley
“paying out bonuses or stock dividends”
Dividends are paid after taxes, and are themselves taxable as ordinary income.
“to such a high degree so as to avoid both state AND federal corporate income tax,”
See above.
“your point is simply not really relevant.”
I’ll let the irony speak for itself.
July 28th, 2009 at 1:44 pm
I’m sorry, but this is a non sequitor. The areas of the country with the highest “capital intensive” requirements are areas with higher taxes than ND and Miississippi.
What “capital intensive requirements” are you talking about, here? I think you’ve got the non-sequitur; I was referring to capital-intensive industries, like the manufacturing business that is moving to NoDak.
Further, since many companies now shed their profits through shifting funds to holding corps, paying out bonuses or stock dividends to such a high degree so as to avoid both state AND federal corporate income tax, your point is simply not really relevant.
Again, not sure what you’re getting at, here. Taxes directly affect the cost of doing business; there’s no way to “shed” that. Hence, businesses, especially manufacturing businesses, are moving.
Tell it to the Fargoans who will have manufacturing jobs, and the Minnesotans who won’t.
July 28th, 2009 at 2:40 pm
Not sure I’d have picked Fargo. If Democrats pass Cap-and-Tax, the price of carbon will skyrocket. Guess what makes electricity for the lights and heats your plant – right, carbon, the active ingredient in coal and natural gas.
If I were looking at moving a plant, I’d give serious consideration to a state with lower direct taxes than Minnesota, and also lower indirect taxes such as cap-and-trade or worker’s comp premiums.
It’s not any one straw that breaks the camel’s back, it’s that one straw added to all the other staws. They all affect my bottom line as a business owner. The more burden I shed, the more reward I get to take home.
.
July 28th, 2009 at 5:47 pm
Foot 60% of businesss pay no federal income tax – Sarsbannes certainly did NOT make divesting oneself of profits illegal – and while it was SUPPOSED to prevent shadow corps, it hasn’t done that very well AND it never prevented pushing profits upstairs, never.
As someone who has helped perform SOX audits (as many of us reading here have) helped draft SOX compliance policies (within financial services and technology services) I can say with some confidence, SOX really isn’t doing very much at all. Senior leaders are required to sign financial statements under penalty of 10 years in prison vs. 5 previously – or 10 vs. 20, as if that really keeps people from lying.. sure, and we don’t have a financial crisis right now.
SOX has primarily resulted in business being required to validate where there money is being expended and even more so, that they have “appropriate measures and controls” in place to prevent cross-over of access and duties in a way that might allow for financial malfeasance by line workers. It has been pathetic in it’s attempts to prevent financial misconduct – as our current, oh, I don’t know, mortgage crisis, CDS/sub-prime swap environment shows. The irony of you suggesting that Sarsbannes somehow prevents financial misconduct is rather, oh, let me say, ironic.
Mitch, sorry, I was busy talking and typing. Capital intensive industries, to me, also include things like, banks, loan companies, investment companies, etc..
Manufacturing is moving to where labor is cheapest which can do the work – it has far less to do with taxes than labor expense. That said, when Goldman Sachs or Smith Barney or Charles Schwab move their headquarters to Bismark or Pierre, let me know. The problem is too few educated workers. Without meaning to sound condescending like say, saying “people who aren’t smart enough to vote” – I think it’s plausible to understand the fish caneries operate in Mississippi because it doesn’t take a college degree to gut fish – and you can assemble snowmobile engines in Bismark because there are a. people who’ve been displaced from farming, who may well have a decent education, and who are looking for ANY kind of job that pays a bit better than nothing. However, getting a bunch of pretty sophisticated technology workers to move to Billings isn’t that damned easy, for that matter, when I was at USB, it was a helluva challenge to get enough in good ole Minneapolis.
So, I understand you believe it’s about tax policy, but having talked to a fair few people who talk about locating businesses, mostly it’s still about access to affordable, educated labor. It’s not taxes, certainly not very much.
July 28th, 2009 at 5:47 pm
Actually, ND just CUT taxes.
http://www.taxfoundation.org/blog/show/24724.html
And after Penigma learns how to spell non sequitur, let him or her work on ceteris paribus.
July 28th, 2009 at 6:21 pm
So basically you don’t disagree with anything I said. Glad you’re in agreement with me. Now piss off you little lightweight.
July 28th, 2009 at 6:59 pm
One thing about universal healthcare, if it passes, Peev will finally be able to get the help he so desperately damn well needs.
July 29th, 2009 at 8:53 am
I think it’s plausible to understand the fish caneries operate in Mississippi because it doesn’t take a college degree to gut fish.
Pfft- so, New York City/Jersey City has less (or no) fish canneries because, what, they have a surplus in Masters degree holders in Communication or Gender Theory? Fer sure?
July 29th, 2009 at 10:31 am
Pen,
SOX talk makes my eyes glaze over. While I don’t concede any points, I just have to move on.
Mitch, sorry, I was busy talking and typing. Capital intensive industries, to me, also include things like, banks, loan companies, investment companies, etc..
Then we have a problem with definition of terms. Banks/lenders/investers administer and “rent” capital – but other than needing capital to get started, really, it’s pretty much just people and computers. Which is why Kuwait, Dubai, the Swiss and the Caymans are so big in the field.
Manufacturing is “capital-intensive” in that you need to buy things – buildings, equipment, plant improvements, distribution systems – to even start production. You can’t build airplanes (as in the story I referenced) without an airplane factory of some kind. It hasn’t been a DIY thing since the Wright Brothers were in the business.
Manufacturing is moving to where labor is cheapest which can do the work – it has far less to do with taxes than labor expense.
Within certain limits, that’s true. Manufacturing is moving to where the labor that manufacturers need is available cheapest, and from whence their products can be brought to market most efficiently, and where the other ambient costs of doing business don’t make the bottom line too dicey.
You can manufacture Happy Meal toys in China rather than Brooklyn, because it’s cheaper to manufacture them, plop them in a container ship and some trucks and bring them to the store from China than it is to do it from New Jersey or California. Light civil aircraft are another matter.
That said, when Goldman Sachs or Smith Barney or Charles Schwab move their headquarters to Bismark or Pierre, let me know. The problem is too few educated workers.
No, the problem is a lack of critical mass of “Management”, capital and communication. New York, Chicago, Los Angeles, Minneapolis and the like have critical masses of all of them (and of other things; New York’s port made it a traditional trade headquarters; Minneapolis’ rail, river and shipping links made it a commodity powerhouse). And even that is changing, as the economy moves from manufacturing to information.
But remember – the key qualifier isn’t “labor”; it’s “labor manufacturers need“. We’ll come back to that.
Without meaning to sound condescending like say, saying “people who aren’t smart enough to vote” – I think it’s plausible to understand the fish caneries operate in Mississippi because it doesn’t take a college degree to gut fish
It’s incredibly condescending, but no matter. You reinforce my point. Remember; the point isn’t whether a place provides labor; it’s whether it provides it for the right price.
The big financials decamped thousands of their customer service and processing jobs from New York to Sioux Falls 20 years ago, because there was plenty of the right labor – smarter, harder-working, and yes, cheaper, because the cost of living in Sioux Falls is about 1/3 what it is in Brooklyn, and there are no income taxes at all. And while the call center jobs may not be the coolest jobs in the world, they have managers, and tech support people, and janitors, and telephone technicians and project managers and cafeteria workers and business analysts, and they need to buy things and services from office supply vendors and truckers and couriers and repair men.
and you can assemble snowmobile engines in Bismark because there are a. people who’ve been displaced from farming, who may well have a decent education, and who are looking for ANY kind of job that pays a bit better than nothing.
Which is generally true, although woefully displaced in re North Dakota, these days. The place has bucked this recession (which given that the place was perennially depressed when I was a kid, amazes me). It’s not just because of oil (although two years into the oil boom they still can’t find enough people to work in the fields; seriously, if you’re an out of work roughneck or trucker or anything related to oil, you can make $30 an hour and rent a place for peanuts, right now out in western NoDak). Microsoft has made Fargo, with its three universities, a good-sized software center (all of MS’s big-business accounting software comes from the former Great Plains Software operation). Minot, between oil and small manufacturing operations (like the one featured in my original post, the aircraft plant) and its success at drawing call-center operations away from India (and, let’s not forget, upsizing at the air force base) is doing very well.
Long ago, I did some PR work for a manufacturer based in LA, but which did all of its manufacturing in North Dakota. A couple of executives explained it to me; the workers in ND are the most reliable anywhere, the technical skills are second to none (it was a highly-skilled manufacturing operation), the taxes didn’t sap the bottom line, and the cost to distribute the products to the customers was plenty acceptable given the other conditions.
However, getting a bunch of pretty sophisticated technology workers to move to Billings isn’t that damned easy,
Probably not; Billings in particular is a bad example. No critical mass of capital, high-tech entrepreneurs or labor (no significant universities in Billings), and no real communications advantages.
But drive eight hours west along I94. Boise has boomed with highly sophisticated tech companies and workers, many of who’ve come from California because they are…
…ta daa! Disgusted with the personal and business tax situations!