Start-Up Minnesota

Perhaps the most-cited statistic in Minnesota is that the state is home to 19 Fortune 500 corporations, the 2^nd most, per capita, behind Connecticut.  Minnesota rightly takes pride in its place within the corporate pantheon.   Despite high profile departures, like Northwest Airlines, the number has remained around 19 (plus or minus one or two) for the past decade.

However, every time I hear about the 19, I get a little more uneasy.  Scanning the horizon, it’s tough to see where the next 3M or Medtronic is coming from.  Perusing the Fortune 500 list, you see companies that have been around for decades, some more than a century.

In a 2013 study produced by the Praxis Strategy Group for the U.S. Chamber of Commerce, Minnesota ranks very high in some measures, including Bridge Quality (No. 1), Educational Attainment (No. 2), and Median Family Income (No. 3). 

Minnesota performs rather less well on other measures including Business Birthrate (No. 30), Growth in Self-Employed (No. 36), State and Local Tax Burden (No. 44) and Business Climate (No. 45).  It’s hard not to think that the latter two measures have something to do with the former two measures.

Say you are a bright, 20-something looking to start the next Google or Microsoft.  You could try your luck in California’s Silicon Valley, but you would have just as much opportunity in Seattle or Austin, Texas, both located in states with no personal income tax.  Minnesota would not be on your radar.

Minnesota does itself no favors by offering the third-highest corporate income tax rate, the fourth-highest top-tier personal tax rats, and by taxing dividends and capital gains at personal income rates.

As they say, you get less of whatever you tax.  We may think that the Minnesota economy of 2014 is doing fine, but it feels like we are eating the seed corn.  There is little in the pipeline in the way of new companies and growth industries.  Our tax policy all but ensures that trend will continue.

The Zero Percent Solution

It doesn’t have to be that way.  Today’s political climate means we have just about no chance of becoming America’s 8^th state with no personal income tax.

But how about forgoing income taxes on new startups for, say, the first 10 years?  By definition, these companies do not yet exist, so the state treasury will not be deprived of any revenue it currently receives.

Here’s my proposal:  any companies newly formed by Minnesota residents will not be subject to the state corporate income tax (or personal income taxes for LLC’s or S Corps), dividend or capital gains taxes for the first 10 years they exist.  New startups will be producing additional tax revenue from sales, property, and taxes on wages.  The tax holiday would last as long as the company remained a stand-alone entity.

After 10 years, the usual tax rates would apply.  But in the meantime, Minnesota can become the entrepreneurial capital of America.