The Canadian advantage

When small business people in northern Minnesota look across the border into Canada, they see their counterparts paying higher corporate taxes but not having to buy health insurance for their employees.

When Canadian business people look across the border, they see Minnesota entrepreneurs paying lower taxes while saddled with spiraling costs for health coverage for themselves and their employees.

The difference is great. Studies show U.S. health care costs are nearly twice as high as in Canada with its national health system – about $5,400 per person south of the border, about $2,900 on the Canadian side.

Another difference is in when these costs are paid. Americans pay for health coverage up front as a fixed business cost. Canadians pay through corporate and personal income taxes on the revenue entrepreneurs and employees generate from selling goods and services.

“No question: It is an advantage to own a business in Canada,” said Geof Gillon, economic development director for Fort Frances, Ont., across the Rainy River from International Falls, Minn.

The costs of health insurance and other workplace fringe benefits discourages prospective entrepreneurs from following their dreams and starting a business, said Julie Schumacker at the Small Business Development Center at Rainy River Community College in International Falls.

If a person with a business idea has a job paying $35,000 a year plus benefits, the center shows him or her that the actual compensation is $45,000 to $50,000 a year when employer contributions to health insurance, retirement savings, dental insurance and life insurance are totaled.

“It’s a wakeup call,” Schumacker said. “You better have income to pay those expenses for yourself and family even before you start planning to offer benefits to employees.”

This is a problem for American entrepreneurs everywhere, not just along the Canadian border. “We could just as well be in Worthington (southwest Minnesota) or on Lake Street (Minneapolis),” Schumacker said.

America’s high-cost, employer-based health care system is especially burdensome when it comes to foreign competition, said Roger Prestwich, director of international business programs at Metropolitan State University in the Twin Cities. “We send our business people into global markets with one arm tied behind their backs,” he said.

In northern Minnesota, proximity to Canada isn’t the reason why health care costs are such a problem. Canada is Minnesota’s and the United States’ largest trading partner, but border barriers discourage people from International Falls and Fort Frances from crossing over to shop for goods and services. Fluctuating currency exchange rates – the U.S. dollar, once 30 percent stronger than its Canadian cousin, now carries just a 7 percent premium — also complicate cross-border trade.

Both border cities are papermaking centers. International Falls has a population of 6,170, down 8 percent from the 2000 Census count of 6,703. Fort Frances is the larger city, with a population currently estimated at 8,315. But the Rainy River District, which includes Fort Frances and a large area of northwest Ontario, is also losing population.

Entrepreneurship and value-added processing of area resources are important economic generators on both sides of the border. And that is where quirky differences in the two countries’ health care systems slow down economic development in Minnesota and the rest of the United States.

Fort Frances’ Gillon said international accounting firms have studied the economic effects of U.S. workplace insurance. “It is clearly an advantage for our side,” he said.

How much of an advantage is uncertain, said Chris Hegg, vice president of finance for Hedstrom Lumber Company at Grand Marais, a family-owned sawmill operation northeast of Duluth. Factors such as government control and management of public forests also come into play when comparing Minnesota and Wisconsin forest industries with Ontario’s.

“There are so many variables that it makes comparisons difficult,” he said.

For instance, the government owns and markets timber supplies for about 90 percent of Canada’s forests. Here, it’s about 30 percent. That means a more competitive market exists for Minnesota forest resources.

A market exists in Canada, too, but it works differently. Fees for harvesting timber in Canada are based on the value of the end products. Therefore, the raw material might be priced differently if the buyer is making paper, oriented strand board or lumber, Hegg said. Through that complex pricing mechanism, the Canadian government assists its forest industries just as Minnesota subsidizes businesses with tax breaks for plant expansions and development.

Geography can be a problem for Hedstrom Lumber, located on the Gunflint Trail between Lake Superior and the Boundary Waters Canoe Area. “We’re in the middle of trees, but there are limits on what trees are accessible,” Hegg said.

At the same time, Hedstrom has a geographic advantage over some of its Minnesota forest products competitors. It is farther away from taconite operations that compete for workers in the same labor market. And offering health insurance helps Hedstrom recruit and retain employees in an area where tourism is strong. “Health benefits in tourism are hit and miss, at most, and it tends to be seasonal employment,” Hegg said.

The importance of offering competitive health benefits can hardly be overstated, said Wayne Brandt, executive vice president of the Minnesota Forest Industries trade group in Duluth. “If you are going to put a trained person on a half-million-dollar piece of machinery, you don’t want to lose that person because he’s shopping around for health benefits,” Brandt said.

While many businesses confront rising costs of health insurance, the problem hits small operators the hardest. The Minnesota Chamber of Commerce is now looking at ways to cope with health costs.

And in a new report, the Access Project, a multi-institutional project that studies health care costs and access, noted a growing number of American farm and ranch families depleting savings and going into debt because of health costs.

The survey, “Health Care Costs Imperil American Farm and Ranch Families,” involved researchers from several institutions, such as Brandeis University and the University of North Dakota School of Medicine’s Center for Rural Health. Participating in Minnesota research was the Minnesota Department of Public Health and the League of Rural Voters.

The survey of Minnesota, Iowa, Missouri, Montana, Nebraska, North Dakota and South Dakota found 26 percent of farm families bearing high out-of-pocket medical expenses despite having some health insurance coverage. One in five families went into debt to pay medical costs, including hospital bills, physician fees, dentistry costs and other medical services.

Perhaps more troubling for rural economic development planners, more than half (54 percent) of the families had a household member working off the farm to secure health benefits.

There is no reason to believe these findings substantially differ from what other small, rural business owners and their families are experiencing. It does point out the urgency, however, for Minnesota and other Midwest states to address the long-neglected problems of access and cost of health care.

Factories come to rural Minnesota to be close to raw materials, such as farm commodities, forest resources or minerals. They don’t come because of tax subsidies. More jobs, however, can be created by rural people starting diverse businesses if their dreams aren’t dashed by increasing health care costs.