Mark Haveman, Executive Director, Minnesota Center for Fiscal Excellence
A mixed Minnesota
scorecard on business attractiveness
Civic Caucus Focus on Competitiveness Interview June 7, 2013
Amir Gharbi, Paul Gilje (coordinator), Mark Haveman, Sallie Kemper, Ted
Kolderie, Dan Loritz (chair), Tim McDonald, Paul Ostrow, Dana Schroeder,
Clarence Shallbetter, Fred Zimmerman. By phone: Audrey Clay, Janis Clay,
According to Mark Haveman, executive director of the Minnesota Center for
Fiscal Excellence (MCFE), scholars say the economic competitiveness of a
state or region is comprised of two basic elements. The first is
foundational competitiveness, human capital, physical infrastructure,
quality of life and related factors, most of which have a strong public
goods orientation to them. The second is investment attractiveness, the
actual tax and cost climate. Both clearly matter, but he says much of the
current political debate surrounds which competitiveness element deserves
more of our attention. To provide some light on this debate, MCFE
conducted a review of 10 national competitiveness and business climate
studies to evaluate Minnesota's relative performance and national rankings
in each area compared to other states.
Haveman explains that Minnesota continues to
excel in the area of foundational competitiveness. It consistently ranks
in the top 10 states in the education, composition and deployment of its
labor force and maintains high rankings in innovation capacity,
information technology adoption and public goods, such as infrastructure.
One weak spot is higher education, where Minnesota is lagging on several
important measures. With respect to investment attractiveness, Minnesota
shows pockets of comparative advantage within a generally more challenging
business tax and cost climate.
As important as public goods and services are,
Haveman notes, their tax prices also matter. Because Minnesota is already
at more of a competitive disadvantage with respect to its general tax and
cost climate, future gains in foundational competitiveness should come
from prioritizing foundational competitiveness spending in the state
budget and aggressively pursuing redesign to obtain greater returns on
public spending and investments.
Mark Haveman is executive director of
the Minnesota Center for Fiscal Excellence (formerly known as the
Minnesota Taxpayers Association). He joined the organization in 2002 and
took over the organization's leadership role in 2008. He is the author of
numerous research and education publications on state and local tax policy
and government finance.
Haveman was a member of Governor Tim Pawlenty's
21st Century Tax Reform Commission, served four years on the
Board of Trustees of the Governmental Research Association and has served
on policy and project advisory boards for the Lincoln Institute of Land
Policy, U.S. Environmental Protection Agency, the National Institute for
Standards and Technology, as well as for several state agencies, academic
institutions and private foundations.
He received his B.A. from Calvin College in
Michigan and his MBA from the University of Michigan.
In Minnesota, two sides of the
competitiveness argument are in a heated political battle: "more
investment" vs. "lower taxes." Mark Haveman, executive director
of the Minnesota Center for Fiscal Excellence, said his organization set
out to study where Minnesota stands on both issues. The result of their
research, a report titled Finding Our Balance: Taxes, Spending and
Minnesota Competitiveness, came out in February 2013. For more
details on the state rankings and the findings, see the executive summary
and full report
Harvard Business School Professor Michael
Porter's work provided the analytical framework for examining
Porter is a leading authority on the
competitiveness and economic development of nations, states and regions.
He says there are two separate but highly related dimensions to
competitiveness: foundational competitiveness and investment
This is the
collection of public goods (such as skilled employees, specialized
infrastructure, technological knowledge, etc.) and related macro/micro
economic factors affecting workforce productivity. "It's the core
stuff any economy has to have to grow and thrive," Haveman said.
All else being equal,
companies will look to invest where there's a more attractive cost and
tax climate, given similar underlying foundational benefits.
MCFE selected 10 competitiveness studies: five
focused on foundational competitiveness issues and five focused on tax and
Minnesota continues to rank very high in nearly
all areas of foundational competitiveness.
It's consistently in the top 10 national rankings in
education, composition and deployment of its workforce.
It has equally superior rankings in state innovation
capacity (patents, venture capital, industry research and development,
Minnesota is among the national leaders in information
technology adoption across most sectors, including government.
Public goods-environmental outcomes, security and
The crack in the foundation, Haveman said, lies in higher
education, where Minnesota ranks 29th in affordability, 36th
in average college debt, 38th in non-industry research and
development (R&D) and 47th in higher education spending
efficiency, i.e., spending per degree conferred at the University of
Minnesota, the state's only public research university.
There is little evidence of slippage in Minnesota's
foundational competitiveness over the last 10 years. If the budget
cuts and fiscal restraint of the last decade has had a detrimental
impact on state foundational competitiveness, there is little evidence
of it to date.
"Minnesota is retaining a strong comparative
advantage in these areas over its regional competitors," Haveman said. He
defined regional competitors as Minnesota's border states.
In the area of investment attractiveness, Minnesota offers
pockets of competitive advantage, even with its more challenging business
tax and cost climate. "We do some things well," Haveman noted. For
example, he said, Minnesota's tax policy is quite supportive of high
value-added, capital-intensive manufacturing. Features like Minnesota's
exemption of tangible personal property from the business property tax and
research and development credits are reasons why Minnesota scores well on
some cost of new investment measures. "That's huge, he said. "It helps
manufacturing in the state." But Moody's ranks Minnesota's state and local
tax climate as 39th in the nation, likely due to its inclusion of
individual income taxation in business climate analysis.
Haveman noted business support and research
operations pay more in sales tax as a share of their total tax burden than
other types of facilities. They also have the highest tax rates on new
investment. At the same time, he noted that business services represent
the second largest source of job creation in Minnesota over the last
"Given all this," he said, "it's completely
understandable why there was such a major backlash against the new
business-to-business sales taxes the Governor originally proposed, then
dropped. That was a shot at the heart of the state economy."
The state's chief concern in the area of
investment attractiveness appears to be its labor costs relative to
foundational competitiveness. "Labor competitiveness is not cheap labor,"
he explained. "It's the cost of labor relative to expected productivity."
Of concern is that Minnesota's performance on the cost of labor relative
to workforce education and on the cost of labor relative to workforce
productivity has been declining.
There is a disconnect between Minnesota's
foundational strengths and private-sector actions and performance over the
last 10 years. This disconnect between what we have and the performance we
would expect appears consistent across the spectrum in measures of private
sector activity and performance.
The state ranks 13th in patents, 12th in venture capital
and sixth in industry R&D, but it ranks 44th in entrepreneurial
activity, 26th in initial public offerings (IPOs) and 29th in direct
Minnesota ranks 12th in STEM (Science, Technology,
Engineering and Math) job concentration, but 37th in STEM job growth.
It ranks third in level of workforce education and fourth
in higher education degree output, but 34th in long-term job growth.
Both academic and survey research says that a
more challenging business tax and cost climate can offset the benefits of
strong foundational competitiveness.
Haveman said foundational competitiveness issues clearly matter
in business decision-making, but their tax prices and costs also matter.
Site selection surveys have shown that collectively, sets of investment
attractiveness factors (such as labor costs, corporate tax rate,
occupancy/construction costs, state and local incentives, and energy
costs) have more influence on business decisions than the foundational
competitiveness factors (such as highway accessibility, availability of
skilled labor, low crime rate, health care facilities and ratings of
Haveman explained his interpretation of the
survey with an agricultural analogy: "Minnesota has an exceptionally
fertile field for growth, but if the economic return remains better
elsewhere, the field still might not be planted."
Minnesota may have a lower margin for error in
its tax and cost climate than other "high tax" peer states.
One of Harvard Professor Michael Porter's main areas of emphasis
is his concept of "traded cluster strength." It captures the idea that
networks of interrelated institutions, companies, and organizations spark
creative energy, innovation and knowledge and skill transfers that prompt
new business growth and economic activity.
He gave Silicon Valley in California as an
example of the power of cluster strength, noting a place where businesses
often locate and grow, regardless of how objectionable the general tax and
fiscal climate may be. "If you are in IT or the high-tech engineering
area, you sort of have to be there," he said. "The same thing is true of
the financial services industry in New York."
Haveman noted that Porter's measure of traded
cluster strength shows that, Minnesota ranks much lower in trade cluster
strength (39th and trending 44th in the nation). "Minnesota does not
appear to be a place where a business absolutely needs or wants to be in
spite of the tax and cost climate," he said.
The individual income tax is an increasingly
important competitiveness issue.
Haveman said some of the best rates of economic growth have occurred not
where labor is cheapest or smartest, but where compensation can go the
furthest. The Minneapolis metro area ranks 13th highest (at $116,518)
among the 50 largest cities in the nation in terms of 2011 wages needed to
provide an after-tax, cost-of-living-adjusted income of $100,000.
Minneapolis ranks 21 to 26 percent above its regional competitors.
"If we're going to have an income-tax
disadvantage of 21 to 26 percent above our regional competitors, we better
be able to deliver on the return to justify that extra tax burden,"
The study reached two conclusions/recommendations, one in
the area of spending and one in the area of tax reform:
Prioritize foundational competitiveness improvements and pursue
spending decisions from a value-received perspective. Haveman
explained that like tax revenue (income, sales and property), spending
is a three-legged stool: adequacy, priority and productivity. Too much
emphasis on tax adequacy will leave the stool unbalanced. "If Minnesota
expects businesses to continue to accept higher cost and tax burdens
than imposed elsewhere, they must receive a higher clear and tangible
return on that investment than can be achieved elsewhere," he said.
Approach tax reform as a long-term investment in state
competitiveness. He offered five action items:(1) Stop treating the
tax code as a stimulus mechanism; (2) Embrace a Hippocratic oath:
"first, do no harm;" (3) Don't turn our comparative disadvantages into
major tax-outlier problems; (4) Don't undercut the smart tax-policy
investments we have in place; and (5) Ensure business tax revenues
result in a high rate of return on investment.
In response to questions and comments from the
interviewers, Haveman made the following points:
There is no such thing as a best state business
"Different businesses place different emphases on different factors,"
Recently passed public subsidies for business
expansion at the Mayo Clinic, 3M, Mall of America, and others show that
Minnesota has embraced the "deal" in its economic development policy.
Minnesota has now invested more heavily in the "deal model" of
economic development policy: a less friendly general tax climate
pockmarked by the provision of special tax advantages, granted on
assurances of construction activity and job creation. "The benefits of
that strategy will be very visible," he said. "The problem is we won't
know, and can never know, the amount of entrepreneurial activity,
in-migration of talent, expansion interest, and business siting that never
materialized because our new tax and cost environment disqualified us from
An interviewer commented that deal-driven
development has lots of payoff for elected officials and that subsidies in
our tax code are another kind of deal making. Haveman noted that former
Federal Reserve Bank economist Art Rolnick and others have long argued
against highly incentive-laden tax and economic development policy.
Private and public organizations promoting
economic development in the Twin Cities and Minnesota do an excellent job
of preaching the strong foundational competitive advantages of Minnesota.
An interviewer countered that state government doesn't have the
economic development expertise to take advantage of Minnesota's good
The state's previous decade of relative
underperformance nationally appears to now be turning.
Some recent reports now rank us ahead of the class in several key
Some business tax expenditures are justified.
A strong case can be made that favorable treatment and tax breaks
should be given to R&D activity, because of its positive spillover
The structure of taxation matters and how
you spend matters as much as how much you spend.
"If we ask business to spend more, we must demonstrate they're getting
a sound value return on that investment," Haveman said. "This is where the
whole issue of redesign comes in. We need to provide better value and
better return for the tax dollars being raised."
Tax reform is not in our future.
"We are essentially paralyzed with respect to tax reform," he said,
"because the political support is simply not there to go to the area where
we still have some semblance of maneuverability: the sales tax." He added,
"Tax fairness has been such a powerful topic of discussion in this state,
but other principles also matter."
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David Broden, Janis Clay, Bill Frenzel, Paul Gilje,
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