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America’s Top State for Business – Cost of Doing Business

9/24/2015 10:14:43 AM

When choosing where to do business, cost is a major consideration. Calculating it requires weighing many factors - from tax rates and utilities to labor costs and other expenses.

CNBC named Minnesota America's Top State for Business, but expressed some surprise that Minnesota made it to the top of their rankings despite a reputation for being "a high-tax, high-wage, union-friendly state."

In the business network's cost of doing business category, Minnesota finished 35th (up from 38th in 2014), earning 152 out of a possible 350 points. Meanwhile, Indiana finished first in this category with 272 points, followed by Kentucky and Mississippi.

CNBC concluded: "Minnesota does so well in so many other areas - like education and quality of life - that its cost disadvantages fade away."

While the state's tax rates can spark a political debate, there's no question that Minnesota offers businesses many advantages. As Governor Mark Dayton said in an interview with CNBC: "We're not a low tax state, but we're a high value state."

Minnesota finished among the top states in six of CNBC's 10 categories: education (2nd), quality of life (3rd), economy (5th), technology and innovation (6th), infrastructure (9th) and workforce (13th).

These elements all factor into the total cost of doing business. But, for this category, CNBC focused on measures such as tax climate, utility costs, wages and state-sponsored incentives that can lower business costs.

Minnesota's business taxes are the 22nd lowest in the nation, according to a report by Ernst and Young and the Council on State Taxation. At first glance, Minnesota appears to have high business taxes because its corporate income tax rate of 9.8 percent is higher than quite a few other states.

However, other favorable tax provisions produce competitive tax advantages for Minnesota businesses. For many companies, income taxes are greatly reduced by Minnesota's single sales apportionment formula and lack of a throwback clause. Exemptions on personal property, inventory and most materials used in manufacturing can lead to significantly lower property and sales taxes.

In fact, Minnesota ranks the second lowest in the nation in taxes for mature capital-intensive manufacturing firms, with an effective tax rate of 4.0 percent, according to a recent study by the Tax Foundation and KPMG. The state also ranks ninth lowest in taxes for new capital-intensive manufacturing firms, with an effective tax rate of 4.6 percent.

When it comes to utility costs, Minnesota's electric and natural gas services are dependable and provide a competitive edge to businesses.

Minnesota's natural gas rates are among the 10 lowest in the country for industrial and commercial users, according to 2013 figures from the U.S. Energy Administration. This is, in part, because of the state's proximity to some of North America's leading petroleum production areas.

Meanwhile, Minnesota's electricity rate for commercial users is 11 percent lower than the national average rate. The state also exempts energy used in the manufacturing process from sales tax.

A broad range of state and local financing and incentive programs can further lower costs for businesses in Minnesota. These include loans, grants and tax credits. (See DEED Developments' blog on Access to Capital for examples.)

The hourly median wage in Minnesota for all occupations combined ($18.30) is a little over a dollar higher than the hourly median wage for the United States ($17.09). But the state also ranks well above average in terms of the quality and availability of skilled workers. Minnesota's workforce is highly educated, and the state offers unique worker-training programs to meet changing workplace demands.

"The CNBC ranking underscores Minnesota's ability to offer the complete package to businesses with an emphasis on a talented, educated workforce that is encouraging growth throughout the state," said Commissioner Katie Clark Sieben, Minnesota Department of Employment and Economic Development (DEED).

This is the last in the DEED Developments blog series looking at each of the 10 categories CNBC used when it named Minnesota as America's Top State for Business this year.

Here are links to our previous blog posts about each of the categories: education, quality of life, economy, technology and innovation, infrastructure, workforce, business friendliness, access to capital, and cost of living.

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