The Governor and the Legislature raised taxes…and you won't believe what happened next!

The news about medical device giant Medtronic participating in a merger of sorts rocked the Twin Cities over the weekend.  All protestations by the company and the Dayton administration to the contrary, their corporate move to Dublin, Ireland, which will doubtless have an impact on their giant footprint in the twin cities and will also mean the loss of corporate tax revenue.  The statements about Medtronic “making investments” in technology over the next 10 years should be taken for what they are, attempts to paper over what is going to be a period of transition while Medtronic consolidates a new, more international identity.   Suddenly the tax policies of one state don’t matter except to the politicians who were counting on the revenues.

This should not come as a surprise to anyone following the news over the last few weeks despite the Star Tribune’s attempts to obscure, then soft pedal what is really bad news for our local economy.   On June 5, buried deep in the business section, there was a Bloomberg news story about the proposed merger but you have to read down to the second to last paragraph to learn this:

 “The transaction would probably be structured as a tax inversion, with Medtronic using Smith & Nephew’s corporate shell to move its legal residence to the U.K., the people said. The gap between the 35 percent federal tax rate and much lower levies in some European countries is spurring such deals — including Pfizer Inc.’s now-shelved effort to acquire AstraZeneca PLC. The U.K. has a 21 percent corporate income tax rate.”

 As late as the Sunday paper there was a considerably more detailed local story but the emphasis was still on downplaying the impact as one analyst purred followed by the Star Tribune’s summary quote:

“’It’s positioning them well internationally, and it is restructuring their corporate structure and how they’re headquartering,’’ he said. “But I don’t know at the end of the day if it changes a lot of what is happening in ­Minneapolis and St. Paul.”’

It’s unclear to what extent Medtronic’s management might relocate from Minnesota to Ireland in the event of a deal.”

There is an important lesson here; our tax policies are not just in competition with Wisconsin and South Dakota but with countries all over the world. 

 And lest anyone try to spin this as only one company’s decision, responding to its unique market or industry circumstances as is becoming a familiar refrain from the pro-tax flacks in the Dayton administration ponder this:  the Kaufmann index, a measure of entrepreneurial activity is down, way down since current administration policies began to have an effect. The Kaufmann index measures the percentage of the adult; non-business-owner population that starts a business each month is measured using data from the Current Population Survey (CPS). The Index captures all types of business activity and is based on nationally representative sample sizes of more than a half-million observations each year.  Minnesota’s 2013 rank is 48th in what is essentially a measure of new business creation.  We don’t expect it to fare much better in 2014.

The next time a politician introduces yet another attempt to control business behavior with another tax policy, remember that the bigger the business, the easier it is for them to make the financial decision to simply walk away.  Once that decision has been made, even if it is over a 10 year period like Medtronic is proposing, it means that what once was a contributor to growth in the local economy, in jobs and yes, even to tax revenues will no longer be.  That growth will still happen, but now it will happen somewhere else.