High Taxes Compound Economic Headwinds for Small Business
As Minnesotans begin the New Year, the National Federation of Independent Business in Minnesota is reminding small businesses that our state now has the highest corporate tax rate in the United States. NFIB Minnesota is calling for state lawmakers to create a fairer tax system for small businesses.
As of January 1, Minnesota’s corporate tax rate remains 9.8 percent. The previous highest corporate tax rate belonged to New Jersey, where the corporate rate dropped to 9 percent upon the expiration a 2.5 percent surtax on corporate income over $1,000,000 at the end of 2023.
“While some might think the ‘high tax’ label as applying only to very blue states in the Northeast or on the West Coast, Minnesota has one of the worst overall tax burdens in the country,” said John Reynolds, NFIB Minnesota State Director. “We rank in the bottom ten in major tax rates, a problem that Rudy Perpich campaigned on fixing 40 years ago.”
In Minnesota, most corporations – like most businesses regardless of how they’re organized – are small businesses. According to U.S. Census data, 65 percent of corporations have fewer than 20 employees and 80 percent have fewer than 100 employees.
Minnesota taxes are increasingly non-competitive with our neighbors.
Minnesota’s business tax environment has become increasingly uncompetitive with neighboring states. According to the nonpartisan Tax Foundation’s 2024 Business Tax Climate rankings, Minnesota remains among the least friendly states for business taxes.
While Minnesota’s position at the bottom has held steady over the past decade, our neighbors have made significant improvements to their business tax climate, which is based on components that impact individuals and consumers as well.
Four years ago, Iowa had the highest corporate tax rate in the country at 12 percent. Since then, the Hawkeye State has embarked on sweeping tax reform that will ultimately reduce their corporate rates to a flat 5.5 percent and individual rates to a flat 3.9 percent in 2026. Their Business Tax Climate ranking is likely to improve in coming years.
The Tax Foundation’s Business Tax Climate ranking measures corporate tax, individual income tax, sales tax, property tax, and unemployment insurance.
Minnesota is a high tax state by most measurements.
According to the Tax Foundation, Minnesota features the 12th highest average state and local tax burden in the country, by far the worst among our neighbors. In 2022, the average Minnesotan paid $7,763 in state and local taxes per year. By comparison, the average:
– Wisconsinite paid $6,231 (-$1,532 vs. MN)
– Iowan paid $6,086 (-$1,677 vs. MN)
– North Dakotan paid $5,403 (-$2,360 vs. MN)
– South Dakotan paid $5,196 (-$2,567 vs. MN)
These findings are echoed in a recent WalletHub survey, which found that Minnesota has the 8th highest combined property, income, and sales tax burden in the country.
What makes Minnesota a high tax state?
Individual Income Taxes: Minnesota has four individual income tax rates, ranging from 5.35 percent to 9.85 percent. Minnesota’s top rate is the 6th highest in the country, while the bottom rate is higher than the top rate in half the country (including seven states with no income tax).
Most small businesses are pass-through entities (70+ percent) that pay taxes based on individual income tax rates.
Corporate Income Taxes: Minnesota’s corporate income tax rate (9.8 percent) is the highest in the United States.
While “corporate” may conjure images of large multinational businesses, most corporations are small businesses. In Minnesota, 65 percent of corporations have fewer than 20 employees and 80 percent have fewer than 100 employees.
Sales Taxes: Minnesota has the 17th highest average state and local sales tax rate (7.52 percent), also highest among our neighboring states. This rank will worsen once the new, state-imposed 1 percent Metro Area Sales Tax hike is factored in.
Other Small Business Tax Outliers: Minnesota is also an outlier on the Death Tax (1 of 12 states with an estate tax; no federal conformity), Corporate Alternative Minimum tax (1 of 5 states), and its Statewide Business Property tax (highest state-levied business property tax in the country).
The 2023 Minnesota Legislature made the tax burden worse.
In 2023, the Minnesota Legislature raised taxes by nearly $10 billion over the next four years. Major tax hikes include:
- Vehicle Sales Tax: $234 million (effective 7/1/2023)
- Metro Area Sales Tax (1%): $2.8 billion (effective 10/1/2023)
- Vehicle Tabs: $788 million (effective 1/1/2024)
- Gas Tax Inflator: $420 million (effective 1/1/2024)
- Retail Delivery Tax: $189 million (effective 7/1/2024)
- PFML Payroll Tax: $3 billion (effective 1/1/2026)
Tax hike proposals defeated during the 2023 session included a new 5th tier income tax rate of 12.5% and a capital gains surtax of up to 4%.
Minnesota small businesses need tax reform.
NFIB Minnesota is calling on state lawmakers to create a tax system that reduces the burden on small business owners. Action at the state level is especially critical given the looming expiration of the federal Small Business Deduction in 2025.
“Minnesota lawmakers needs to give Main Street a break,” added Reynolds. “If legislators won’t reduce Minnesota’s exorbitant top tax rates, they can at least create a fair system that makes it easier for small businesses to grow, compete, and thrive in Minnesota.”
According to the Tax Foundation, fifteen states currently have progressive business income tax systems that tax certain business income levels at lower rates. Six states have no corporate income tax.
In the most recent NFIB Jobs and Small Business Economic Trends Reports, small business owners continue to report extremely high numbers of job openings they can’t fill (40%), labor quality remains the top small business operating problem (24%), and inflation is an ongoing problem for a significant number of small businesses (22% report as top problem).
