Jill Clardy, Adobe Stock
April 28, 2023

Minnesota’s Omnibus Tax Bill Would Undermine the State Economy

Key Findings

  • If Minnesota’s omnibus tax bill, HF 1938, becomes law, then the state will have the 4th highest individual income tax rate in the country, behind only California, Hawaii, New York, and New Jersey.

  • The literature on income taxation reveals that higher income tax rates are correlated with increased outmigration and a decrease in in-state employment mobility, gross state product, investment, and patent formation.

  • Minnesota residents have several regional options to avoid the tax increase, as all of its neighbors have lower top marginal rates or no individual income tax at all.

  • Mandatory worldwide combined reporting would dramatically increase the complexity and compliance costs for corporations engaging in business in Minnesota.

  • No other state or country mandates all-industry worldwide combined reporting.

  • Estimates for what combined reporting will generate have often failed to materialize. When Minnesota adopted combined reporting, the bill analysis gave an estimate of $23 to $103 million in additional revenue—an extremely broad range indicative of great uncertainty. Subsequent analysis indicates that the shift to combined reporting may not have increased revenue at all.

  • Every change to a state’s tax system affects its business tax climate, making it more or less attractive compared to other states. The evidence from states’ experiences and the academic literature supports the conclusion that tax competitiveness matters not just to businesses but to human flourishing.


With the release of its omnibus tax bill, HF 1938, the Minnesota House is poised to approve provisions that would add a fifth individual income tax bracket and implement worldwide combined reporting for corporations with nexus with the state.[1] Before embracing these changes, the Minnesota legislature should reflect on the history of these policies in other states. More specifically, policymakers should consider Massachusetts’ recent decision to increase its individual income tax rate to 9 percent for taxpayers earning over $1 million and why no other state or country mandates worldwide combined reporting. Doing so will better inform the policy debate in St. Paul and could help lawmakers avoid making economically detrimental decisions in the North Star State.

Another Individual Income Tax Increase

The proposed addition of a fifth individual income tax bracket in Minnesota would raise the top rate to 10.85 percent above $600,000 for single filers ($1 million for joint filers). The new rate would be retroactive to the beginning of the year. The last time Minnesota increased its top marginal rate was in 2014 when it added a fourth bracket to raise the top rate from 7.85 percent on taxable income greater than $79,730 for single filers to 9.85 percent on taxable income greater than $152,540. Were HF 1938 to become law, Minnesota would have the 4th highest rate behind only California, Hawaii, New York, and New Jersey.

Advocates of the increase to the individual income tax rate assert that high-income earners can afford to pay more in taxes. This appears motivated by the assumption that taxpayers do not adjust their behavior in the face of increased tax burdens. But the literature on income taxation reveals that higher income tax rates are correlated with increased outmigration and a decrease in in-state employment mobility, gross state product, investment, and patent formation.[2] One need only look to Massachusetts to find a case study of a major income tax change playing out in real time.

Last November, Massachusetts voters narrowly approved a constitutional amendment that transitioned the Commonwealth from a flat-rate individual income tax to a graduated income tax. Known locally as the Millionaire Tax, the change effectively imposes a new top marginal rate of 9 percent on income over $1 million. In an analysis last fall, Tax Foundation warned that the amendment would likely have an adverse effect on the Bay State’s tax competitiveness.[3] In economic terms, the change was expected to contract the Massachusetts economy by $6 billion by the end of 2025. Additional analysis suggests that at least 1,760 millionaires could leave Massachusetts as a result of the tax increase.[4] While official data lags one to two years, early reports from Massachusetts indicate taxpayers, especially high-income earners, are retreating and withdrawing in the face of increased tax burdens, as economic theory and previous studies of tax changes anticipated.

Massachusetts and Minnesota bear many similarities to each other in terms of tax structure, but while it would have been difficult to confuse Massachusetts for a low-tax state on the eve of its tax change, the state still ranked 34th in terms of overall tax competitiveness. Minnesota, on the other hand, enters the latest debate over tax increases already well entrenched as the 46th most competitive tax structure nationally. In the face of another tax increase, there is no reason to believe Minnesota’s millionaires will respond differently than Massachusetts’.

Minnesota residents have several regional options to avoid the tax increase. While Florida remains an option, as it is for many Bay Staters, South Dakota also has no individual income tax, North Dakota’s top rate is 2.9 percent and likely to decrease, and Iowa is transitioning to a flat rate of 3.9 percent by 2026. Even Wisconsin’s top rate is more than 2 percentage points lower than Minnesota’s (7.65 percent) and could soon be 3 percentage points lower should Minnesota raise its top rate. The advent of remote work makes it even less important for Minnesota taxpayers to continue to live in Minnesota under an uncompetitive top rate.

The argument sometimes made in Minnesota, that higher taxes are necessary because the cumulative $17.5 billion budget surplus (which does include some unspent federal relief funds) is one-time money, is ultimately unconvincing. Like Massachusetts last fall, Minnesota is considering an income tax increase in the face of multi-year, multi-billion-dollar surpluses. Minnesota budget officials announced earlier this year that the state was on track to end the current biennium with a $5.6 billion budget surplus.[5] They went on to project a larger $6.3 billion surplus for the 2024-2025 biennium. Under these conditions, a tax increase like the one proposed is effectively an experiment in determining Minnesota residents’ tolerance for taxes before they curtail productivity or leave the state entirely.

It is not necessary to believe that current revenues are permanent; they are well in excess of budgeted expenditures. Even if revenues receded substantially from these high points, the state would still be running a surplus.

In Massachusetts, where higher taxes were adopted despite surpluses, some policymakers are beginning to waver. Many who voted to put the income tax amendment on the ballot are now scrambling to find quick tax fixes that might lessen the marginal impact on taxpayers and mitigate the damage to the state’s tax competitiveness. Minnesota need not go down that path.

Mandatory Worldwide Combined Reporting

Another major component of HF 1938 is the transition to mandatory worldwide combined reporting for corporations. Combined reporting involves the filing of a unified tax return which accounts for the aggregate income of a corporate parent and all subsidiary corporations regardless of their individual nexus with the state. Presently, Minnesota mandates combined reporting, but the unitary reporting requirement extends only to the water’s edge (i.e., within the U.S.). Only the U.S.-based corporate relations of a firm with a Minnesota corporate income tax filing requirement are required to be party to that return. Any internationally based affiliate firms are excluded from the combined reporting requirement. Under a worldwide combined reporting structure, the aggregate income of every subsidiary or parent firm of any corporation with a Minnesota filing requirement, regardless of global location, would be required to be party to the Minnesota corporate income tax return.

Worldwide combined reporting was relatively common in the 1970s and 1980s. About a dozen states imposed the requirement at the peak of the policy’s popularity, but after threats of tit-for-tat taxation of U.S. firms by foreign governments, they decided to repeal the mandatory requirement. California, Connecticut, Idaho, Indiana, Massachusetts, Montana, New Jersey, New Mexico, North Dakota, Utah, and West Virginia still allow corporations to elect to file worldwide combined returns, but no states mandate it for all corporations. Under HF 1938, Minnesota would stand alone in that regard. Indeed, even the Organisation for Economic Co-operation and Development (OECD) refused to impose this structure when they sought a solution to combat overseas profit shifting.

Some suggest that combined reporting is not that burdensome for corporations, because as a single sales factor state, only the income attributable to Minnesota sales is liable to the high, 9.8 percent corporate income tax rate. While that is likely the main reason Minnesota has been able to retain as many Fortune 500 company headquarters as it has, mandatory worldwide combined reporting would add new levels of complexity and compliance costs that no other jurisdiction imposes.

To comply with the proposed mandatory worldwide combined reporting provision, foreign income would be tracked in the local currency, converted to the parent corporation’s home currency, then converted into U.S. dollars for reporting to the state. If that was not complicated enough, to avoid noncompliance charges, international corporate affiliates would likely need to engage in a byzantine, time-consuming process of adjudicating what business activity may have qualified as a sale into Minnesota. For multinational corporations with extensive overseas operations, this process soon becomes a liability.

Supporters of worldwide combined reporting often cite fairness concerns as a reason to enact the provision. The allegations usually involve a parent company setting up a subsidiary as a holding company to shelter income from intellectual property or otherwise shifting profit to avoid taxation in ways smaller companies cannot. But to the extent that is a problem, this prescription is worse than the disease.

First, the worldwide combined reporting provision in HF 1938 does not deal with the real risk of double taxation. It is possible that a corporation has already paid tax to a foreign government on the income that is now being bundled and taxed again in Minnesota, but no credit is allowed for these prior payments.

Second, there is no attempt to distinguish corporations that operate in completely unrelated industries from those that may have interdependent business dealings. It is one thing to suggest that a corporation is benefiting from effectively paying itself for trademark royalties held in a subsidiary company, but it is another to suggest that a corporation that makes and sells airplane engines in France is covering up the profits of a corporation that makes and sells cars in the United States. The markets, manufacturing processes, and business models are different. Aggregating income without considering where it was earned, the additional compliance burden, or the taxes already paid to foreign governments does not make the system fairer.

The proposal to adopt worldwide combined reporting is also taking place under the mistaken assumption that corporations bear the full burden of the corporate income tax. As with any tax, the price elasticities of demand and supply are what actually determine who bears the burden of a tax. In the case of the corporate income tax, it is often assumed that capital owners (those who own shares of the business) bear the tax. In reality, the burden is split between labor (workers) and capital. Workers bear the burden of the corporate income tax when corporations shift the cost of the tax through lower wages, fewer employment opportunities, or increasing the cost of finished goods.

As with the proposed individual income tax increase, there is no compelling economic reason for Minnesota to expose itself to the deadweight loss that comes from imposing worldwide combined reporting.

It is important to understand, moreover, what is at issue. If a foreign business sells into Minnesota—regardless of whether it is an affiliate of a domestic corporation—it owes corporate income tax to the state. Worldwide combined reporting aggregates the income of foreign subsidiaries that have no sales into Minnesota with the income of a domestic business with nexus in Minnesota, and then apportions all of this income based on the share of sales into Minnesota.

The following hypothetical is not realistic but may be instructive. Imagine a company with $1 billion in U.S. sales, 10 percent of which are in Minnesota, and a foreign subsidiary with $1 billion in sales in Europe and none in Minnesota. Under the current water’s-edge combined reporting regime, Minnesota can tax 10 percent of the domestic income (on $1 billion in sales), while with worldwide combined reporting, they can tax 5 percent of worldwide income (on $2 billion in sales). This may seem like it’s saying the same thing, but it’s not. Imagine that the company earned a 10 percent profit in Europe ($100 million) but only a 5 percent profit in the U.S. ($50 million). Worldwide combined reporting would, in this instance, generate additional revenue by aggregating more profitable activity abroad. (Of course, it’s also possible for the change to cut the other way.)

Estimates for what combined reporting will generate have often failed to pan out. When Minnesota adopted combined reporting, the bill analysis gave an estimate of $23 to $103 million in additional revenue—an extremely broad range indicative of great uncertainty. Subsequent analysis indicates that the shift to combined reporting may not have increased revenue at all.[6] Estimates of worldwide combined reporting should be regarded as similarly uncertain, and lawmakers should approach the $717 million estimate (based on data extrapolated from a single report by the Institute on Taxation and Economic Policy) skeptically.[7] What we can know is that they will dramatically increase compliance costs and may generate uniquely high burdens for certain firms.

Possible GILTI Taxation

Lastly, while not currently in the omnibus, there is a possibility that a Global Intangible Low-Taxed Income (GILTI) addback to Minnesota taxable income will be considered in the future. Introduced in the current session as HF 3139, this policy change would have the effect of imposing higher taxes on certain multinational businesses operating in Minnesota for reasons having nothing to do with their operations in Minnesota.[8] Most recently, Kansas[9] joined 26 other states that do not include GILTI in the corporate tax base or do not impose a corporate income tax.[10] Enacting such a policy in Minnesota, especially in combination with the other proposals discussed here, would put the state at a conspicuous competitive disadvantage compared to its peers.


Early feedback from Massachusetts’ decision to increase the top individual income tax rate reinforces three important points. First, residents’ and businesses’ tolerances for taxation can be relatively elastic, but eventually they reach a breaking point. Second, as tax burdens increase, taxpayers enhance their tax avoidance strategies. What begins as a shift in consumption or production behavior can end in wholesale relocation to a less burdensome tax jurisdiction. Third, attempting to find the line beyond which taxpayers turn into tax avoiders introduces unnecessary economic risk to a state, especially during periods of recurring multi-billion-dollar budget surpluses.

The proposals analyzed here fail to encourage new investment, economic growth, or human flourishing. Instead, policymakers should set conditions for capital to flow into the state. They should expand the carryforward of net operating losses from the current 15 years to at least the federal standard of 20 years. They should allow businesses to immediately deduct the full cost of qualifying capital investment from taxable income in the year the investment is made, as Mississippi[11] and Oklahoma have done.[12] Doing so would boost long-run productivity, economic output, and incomes primarily because investments that were not profitable under long-term depreciation rules become profitable under full expensing. They should also phase out and repeal the estate tax. Only 12 states still have an estate tax. Most have realized they are burdensome, disincentivize business investment, and can drive high-net-worth individuals out of state. Massachusetts, for instance, is in the process of raising its estate tax threshold in an effort to prevent capital from leaving the state.[13]

As policymakers in St. Paul finalize this year’s tax bill, they should avoid policies that incentivize the diversion or relocation of capital. Importantly, states do not institute tax policy in a vacuum. Every change to a state’s tax system affects its business tax climate, making it more or less attractive compared to other states. The evidence from states’ experiences and the academic literature supports the conclusion that tax competitiveness matters not just to businesses but to human flourishing.

[1] HF 1938, 93rd Leg., Reg. Sess. (Minn., 2023), https://www.revisor.mn.gov/bills/bill.php?f=HF1938&b=house&y=2023&ssn=0.

[2] Timothy Vermeer, “The Impact of Individual Income Tax Changes on Economic Growth,” Tax Foundation, Jun. 14, 2022, https://www.taxfoundation.org/income-taxes-affect-economy/.

[3] Timothy Vermeer, “Massachusetts’ Graduated Income Tax Amendment Threatens the Commonwealth’s Economic Transformation,” Tax Foundation, Sep. 13, 2022, https://www.taxfoundation.org/massachusetts-graduated-income-tax-amendment/.

[4] Timothy Vermeer, “What to Expect in a Post-Flat Tax Massachusetts,” Tax Foundation, Nov. 22, 2022, https://www.taxfoundation.org/question-1-massachusetts-millionaires-tax/.

[5] Rob Hubbard, “State’s Projected Budget Surplus Swells to $9.25 Billion,” Minnesota House of Representatives, Feb. 28, 2022, https://www.house.mn.gov/sessiondaily/Story/17164.

[6] Robert Cline, “Combined Reporting: Understanding the Revenue and Competitive Effects of Combined Reporting,” Ernst and Young LLP, May 2008, https://cost.org/globalassets/cost/policy-toolkits/mandatory-unitary-combined-reporting-policy-toolkit/understanding-the-revenue-and-competitive-effects-of-combined-reporting.pdf.

[7] Katherine Schill and Cynthia Templin, “HF 1938: Omnibus Tax Bill,” House Fiscal Analysis, Apr. 17, 2023, https://www.house.mn.gov/comm/docs/73bxWvM4Zk2Zl0UdltPpJw.pdf.

[8] HF 3139, 93rd Leg., Reg. Sess. (Minn., 2023), https://www.revisor.mn.gov/bills/text.php?number=HF3139&type=bill&version=0&session=ls93&session_year=2023&session_number=0.

[9] Katherine Loughead, “Outlier No More: Kansas Adopts Tax Reform with Wayfair Safe Harbor, GILTI Exclusion,” Tax Foundation, May 4, 2021, https://taxfoundation.org/kansas-tax-override/.

[10] Jared Walczak, “Kansas, Nebraska, and Utah Lawmakers Pursue “Not GILTI” Verdicts,” Tax Foundation, Feb. 14, 2020, https://taxfoundation.org/kansas-gilti-nebraska-gilti-utah-gilti/.

[11] Timothy Vermeer, “Mississippi’s Capital Improvement Plan Leads in the South and Nationwide,” Tax Foundation, Mar. 28, 2023, https://taxfoundation.org/mississippi-capital-improvement-plan/.

[12] Janelle Fritts, “Oklahoma Becomes First State in Nation to Make Full Expensing Permanent,” Tax Foundation, Jul. 6, 2022, https://taxfoundation.org/section-179-expensing-state-tax/.

[13] Timothy Vermeer, “Positive Tax Reforms in Massachusetts Budget Proposal Have Broader Implications,” Tax Foundation, Mar. 13, 2023, https://taxfoundation.org/massachusetts-budget-tax-healey/.

Banner image attribution: Jill Clardy, Adobe Stock

A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.

Profit shifting is when multinational companies reduce their tax burden by moving the location of their profits from high-tax countries to low-tax jurisdictions and tax havens.

A tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat.

An individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S.

Double taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income.

A corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax.

Taxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income.