Recently, Governor Tim Pawlently has claimed the business climate in Minnesota to be “out of balance” and “eighth worst in the nation.” He seems to assume Minnesota businesses will relocate and entrepreneurs will avoid the state if corporate taxes are not lowered immediately. This theory holds true ceteris paribus (all other things held equal), but the statistical reality suggests other aspects of the Minnesota business climate make it attractive.
Minnesota has enjoyed economic prosperity relative to the other 49 states in the 21st century. The Bureau of Economic Analysis states the 2008 GDP per capita (total output divided by total population) was $42,772, good for tenth overall. Taking out the New England states, Minnesota is only behind Alaska and Wyoming, which were sheltered from the recession because of their supply of natural resources. Considering these facts, it is tough to argue the only thing influencing the business climate is corporate taxes as Governor Pawlenty implies.
Human capital and social capital are two important factors of production that Minnesota enjoys. Human capital is used to describe a population’s education and training. Despite a serious achievement gap, the education and job training systems of the state consistently rank high (World-class Schools, World-class Jobs). This means Minnesota’s human capital increases the attractiveness of the business climate, which conflicts with Governor Pawlenty’s recent statements.
Another component that contributes to the business climate is social capital. Social capital can be described as connections within and between social networks or “community-glue.” Voter participation rates, trade alliances, volunteering and bowling leagues are examples of how this concept is measured. For businesses, a high level of social capital corresponds to high level of collaboration. Minnesota also ranks high in this category as shown in the figure below (and here).
Considering all the factors that contribute to a state’s business climate, Governor Pawlenty’s recent comments are too dependent on corporate taxes. Looking at Minnesota’s supply of human and social capital gives reason to be optimistic about the state’s economic stability. It also undercuts Pawlenty’s tax and spending cut rationale to improve the state’s business climate.