Lessons in Taxation
02/12/2006
Paul Munnis
David Strom, president of the Minnesota Taxpayers League asserts that State tax rates determine whether or not a corporation will elect to locate in Minnesota. With Minnesota placing fourth in State Tax rates he thus forecasts a demise of industry in Minnesota. His message: “Minnesota must cut its taxes or else suffer job loss.”
Even David would likely agree this is over simplification.
Many things go into such determinations today and here are just a few of the major items:
1. The cost of Manufacturing.
2. The fully burdened cost of Labor
3. The cost of shipping product from Manufacturing location to consumers
4. The quality output level of the workforce
5. The cost of operations of plant and facility
6. Relative safety from natural disasters.
7. Taxes
Note where taxes fall in this hierarchy: “dead last.”
What a State and Community does when it attempts to attract a manufacturer is to create a basket of offerings that biases selection to favor them over the competition.
Thus local property taxes and State corporate income taxes are often the first thing to be waived in order to attract the corporation to the State.
We can see that natural gas is a cheaper form of heating than fuel oil is. This gives a state with affordable natural gas a distinct advantage—just ask a Texan.
When electric is owned by the municipality rather than a utility corporation, it can be offered at a cheaper rate in order to bias the case for location. Electricity is a huge corporate cost.
Similarly the cost of water, sewage, and telephone service are factors.
Note that whenever the resource is owned by a municipality rather than a private owner the rates can be negotiated and the profit element waived in order to attract jobs. This is the opposite of the GOP argument for privitization of municipal services.
Also note that the profit derived from the sale of municipal owned urilities and services offsets the need for local property tax increases to residents who are the workers, thus keeping the cost of living lower. A lower cost of living translates into lower wages.
Again, these are some of the fallacies in GOP arguments against public ownership of municipal utilities.
One might conclude from this that Minneosta created a tactical error in permitting the distribution franchise for natural gas to go into the hands of private corporate owners because we now have to charge a company up to 30% more than if it were owned by the people of the commmunity where the profit element could be waived in the battle for corporate presence and jobs.
When a facility is located in the center of the nation, the cost of shipping tends to be evenly distributed on a distance basis thus not hurting any one customer geographic market by charging higher shipping costs.
The fully burdened cost of labor is another key factor in choosing to favor the lower cost work site. That is because the benefit package for workers, especially for health insurance is going out of sight. We have often argued that if Minnesota put in place a fully paid up worker health insurance benefit then companies would break a leg in the rush of getting located in Minnesota. Instead, they are choosing India. That fully burdened cost of workers is not just determined by wages either. The cost of workman’s compensation insurance for example can be a key factor. So can the cost of firing or laying-off workers be major factors.
The quality output of the workforce is a biggie. You know what product recalls can cost. They can easily wipe out a years’ worth of profits for a company. Product defects can force service costs, remanufacturing costs, and shipping costs for replacements right through the corporate roof. A workforce that is capable of producing products that are defect free can easily overcome both tax and wage disadvantages.
Other factors like airports, highways, transportation costs, worker cost of living, competition for workers, can also influence the decision.
So we think that David Strom would agree that simply pointing at taxes as the sole determinant of site selection is a red herring.
After all, 65% of America’s corporations today pay zero in taxes to Local, State and Federal government.
It’s the whole package that counts and the government role, both local and state, is to optimize the total package offering.
As you listen to candidates running for public office in MN during this election try to consider the consequences of their statements of the total offering for America in general and Minneosta in particular. Listen to how it presents to potential employers. You will then likely choose a Democrat because they raise the odds in favor of American and Minneosta employment just by their advocacy for public ownership and a well educated workforce—both are key to jobs. If a candidate promises to optimize a key employment competitive factor then they deserve your closer attention.