The Numbers: Benchmarking Minnesota’s Competitiveness

Several years ago, MCFE published a report entitled “Finding Our Balance: Taxes, Spending and Minnesota Competitiveness” which reviewed and summarized the results from a number of national performance and ranking studies on state competitiveness and state business climate.  Given the significant changes which have occurred over the state and federal policy landscape in recent years -- and to provide additional grist for our annual meeting discussion -- we revisited these studies and their findings to see where Minnesota’s relative performance stands today and how the state is trending.

The accompanying table presents how our review is organized.  It is decision-input oriented rather than economic performance oriented.  While we recognize that “success can breed success” and having a robust, growing economy can by itself be a business attractor, our analysis emphasizes the type of business siting factors and considerations highlighted by our annual meeting keynote speaker.

A few caveats in presenting and interpreting the findings below merit recognition.  First, state level findings will feature aggregation effects, meaning state findings can be very different from local / regional realities.  In many cases metropolitan area measurements and comparisons are more likely to do a better job of presenting a more accurate understanding of competitive position.[1]  We also recognize the existence of potentially better measures for these competitiveness issues and the availability of more recent information.  For trend evaluation we relied heavily on revisiting the studies we examined in our previous report, but recognize that competitiveness “dashboard” and benchmarking efforts are increasing in both number and sophistication.  Other studies may well shed greater light and accuracy on the issues and factors we examine.  Finally, there are other important competitiveness issues (e.g. regulatory environment) that are important to business decision making but do not readily lend themselves to quantitative comparisons.  We focus on indicators that can be quantified and compared to national averages.

The following is a preview and short summary of our findings - we will be publishing our full report early next year in advance of the 2020 legislative session.

Workforce Quality -- Minnesota’s reputation for having a high-quality workforce is backed by the numbers, and our relative performance compared to national averages over the past few years has actually improved in several important areas.  Minnesota’s population share with high school degrees and with associate degrees or higher both rank in the top 5 in the nation, a full standard deviation above national averages.  The educational attainment of both foreign immigrants into the state and immigrants from other states are both above national averages (7% and 6% respectively) and Minnesota’s managerial, professional, and technical share of private sector employment has moved into the top five in the nation.  However, one potential issue to keep an eye on is the relative decline of the share of students enrolled in degree granting institutions.  Minnesota has gone from 28% above the national average to 1% below the national average on this measure in a few short years.  A recent article offers one perspective on what might be contributing to this trend.[2]

Physical Infrastructure – For all the concerns expressed about the state of our transportation and communication infrastructure and associated unmet needs, Minnesota can apparently take some perverse satisfaction in knowing a lot of states are more challenged than we are.  Share of deficient roads and bridges are 28% and 36% below national averages respectively.  While broadband access is modestly 2% above the national average, population access to highest speeds is 40% above national average.  And flight access has gone from 2% below to 11% above national average in a few years’ time placing the state 14^th in the nation.

Innovation Infrastructure -- Minnesota’s intellectual and research foundation for innovation remains strong.  Both company and independent patent performance rank in the top ten in the nation as does industry investment in research and development – 20%-70% above national averages.  Non-industry research and development has remained 43% below the national average but is likely influenced by the lack of federal research presence in the state.  Employment levels in “traded industry clusters,” which academic research has found to promote innovation and productivity growth, continue to be significantly below national averages.  However, our innovation capacity does not seem to be negatively affected, perhaps for the reasons discussed by Phil Schneider in his keynote address.

Affordability – From a state-level perspective the cost of living in Minnesota is 7% below the national average, but regional comparisons offer a much more useful viewpoint.  The Minneapolis/St. Paul MSA is 2.2% above the national average while Minnesota’s seven other metropolitan statistical areas offer a cost of living 7-10% below the national average and 9-13% below the Minneapolis/St. Paul MSA.  Looking more closely at a couple of higher profile affordability concerns, Minnesota employees benefit from having some of the lowest health insurance costs in the nation (22% below the national average) although the ranking has slipped a bit from 3^rd to 6^th in the nation.  On the other hand, concerns over child care costs in the state have support from state benchmarking findings – 10% above the national average.

Quality of Life – Unsurprisingly, public school quality as measured by test scores rank high in the nation but come with a huge asterisk.  Aggregated math and reading scores are well above national average -- in one case at nearly two standard deviations above average -- but when performance is disaggregated by grade, subject area, and ethnicity, Minnesota’s ranking plummets to 33^rd in the nation.  Performance in other areas such as air quality, commute times and public safety score above national averages, albeit the performance advantage relative to national averages has decreased somewhat.

Supportive Demographics -- Relative performance in population growth, whether defined in total by resident (net birth/death) or by state to state migration, has improved over the past several years.  Prime workforce share of the population (25-44) is right at the national average as it has been for several years.  One potential area of concern in Minnesota’s “dependency ratio” (0-14 and 65+ per 100 workers) has swung from 4% below the national average to 2% above the national average over the last several years suggesting that state general fund competition for productivity-related spending and investment may be growing relative to other states.

State Fiscal Condition -- Ratio analysis from state consolidated annual financial reports measuring various dimensions of state solvency were prepared for us by the University of Minnesota Humphrey School.  They confirm Minnesota’s above average fiscal health relative to other states.  Minnesota is also above average in minimizing risk and exposure to the supply of federal funds in supporting government operations.  However, Minnesota’s “off balance sheet” performance with respect to public pension liabilities indicates potential future competitive concerns.  Public pension dependency on investment returns is 11^th highest in the nation while at the same time our adequacy of contributions ranks 45^th.

Taxes – Minnesota’s consistently above-average performance on foundational competitiveness measures needs to be paid for, so it should not be too surprising that tax competitiveness is an area where the state lags.  Total state and local taxes as a percent of money income is now 14% above the national average versus 9% several years ago.  Business taxes paid per private sector employee ranks 25^th, actually 7% below the national average (although business severance taxes to some extent distort the numbers and perspective this provides).  Looking more closely at specific types of business operations and comparing them to findings from our previous report,[3] Minnesota continues to offer a tax-advantaged business climate for both capital and labor intensive manufacturing operations and research and development facilities.  On the other hand, call centers, distribution facilities, retail establishments and headquarters operations are tax disadvantaged in Minnesota.  Notably, unlike other states, Minnesota offers comparatively few offerings/little reliance on statutory incentives.  As a result, whereas other states’ effective tax rates for these types of facilities often swing wildly between new and established operations, Minnesota’s are relatively consistent.   A longer-term perspective on taxes frequently improves Minnesota’s competitive position at least to some extent.

Other Business Costs – The states reluctance to raise the gas tax in recent years has reduced gas tax disparity from 18% to 4% above the national average, although it should be noted that some states also apply sales taxes to gas purchases and Minnesota does not.  At the same time electricity prices have increased from 8% below the national average to 3% above the national average.  The cost of providing health to private sector employees has remained essentially steady now at 3% below the national average.

In short, our findings from the past generally hold true today.  Minnesota’s foundational competitiveness remains strong with little evidence of state slippage (although some demographic issues present challenges.)  But we do pay more for the level and quality of these services.

Three critical questions surround the competitive implications of Minnesota’s historic higher tax/higher service model going forward.  First, does federal tax reform -- especially the limit on state income tax deductibility -- affect the sustainability of the current approach to our high tax/high service model (and if so, what are the implications for state tax design)?  Second, how do we preserve and protect our foundational advantages from demographic-driven budget competition, especially from health and economic support spending?  And finally, does the value proposition to business of Minnesota’s higher levels of taxation remain intact and – even more importantly --- how do we improve on it?