Minnesota’s economy is in the spotlight as Walz readies for the DNC

Minneapolis (CNN) — When Vice President Kamala Harris selected Minnesota Gov. Tim Walz as her running mate, the national spotlight fell on the North Star State.

Upper Midwest culture and cuisine turned into lighthearted talking points for the talking heads: the long-winded “Minnesota Goodbyes”; the duality of “Minnesota Nice”; and the prevalence of pop, tater tot hotdishes and Ju(i)cy Lucys (that’s soda, casseroles, and variantly spelled cheese-filled burgers for those who have yet to visit).

Heck, even Sweet Martha’s overflowing pail of cookies (a State Fair staple) got a shout-out on “The Daily Show.”

All the Minnesota niceties aside, Walz’s elevation means his state’s economic performance is now front and center in an election where the cost of living and the stability of the job market are getting heavy play.

Here’s a snapshot of the Minnesota economy and its future trajectory:

Economic growth has been sluggish

In 2023, the state’s real gross domestic product — the broadest measure of economic activity — increased just 1.2%, placing it 45th among all states (only Georgia, Mississippi, New York, Wisconsin and Delaware fared worse), Commerce Department data shows. The US grew at more than double Minnesota’s rate.

To kick off 2024, the situation wasn’t much better: Economic growth slowed across the US in the first quarter to 1.4%, and GDP growth turned negative in Minnesota by 0.8%.

Minnesota wasn’t alone in its contraction. Several surrounding states — including both Dakotas, Illinois and Iowa — also saw their economic growth turn negative.

“Minnesota is interesting because a lot of its growth trends that you hear about are affected by larger regional aspects,” said Tyler Schipper, assistant professor of economics and data analysis at the University of St. Thomas in St. Paul, Minnesota. “It’s because of aging populations and less immigration, and (Midwest states) don’t have access to export markets on the coasts.”

Population changes

The recent population change trends in Minnesota have less to do with deaths (they’ve been well outpaced by births from 2020 to 2023) and more to do with migration, specifically domestic migration, Schipper noted.

More Minnesota residents have left the state in recent years than people who came in from out of state, Census data shows. In 2022, Minnesota’s net domestic migration was -28,893. Only eight other states had deeper outflows.

The situation improved in 2023 as that net domestic loss narrowed in 2023 to -4,686.

In recent years, Minnesota — which since the early 1990s has been a significant community for Somalis (both refugees and non-refugees) — also has seen strong international immigration, which not only helped to blunt the domestic migration losses but also brought its overall net migration tally positive for last year.

“Yes, people are moving out of Minnesota, but it’s not necessarily a mass exodus,” Schipper said.

Still, migration data could show how people are “voting with their feet,” said Christopher Phelan, an economics professor at the University of Minnesota.

“The companies leaving California aren’t moving to Minnesota, they’re moving to Florida or Texas,” he said. “When rich people are leaving other states, they’re not moving to Minnesota, they’re moving to Florida, Texas or Idaho.”

Taxes as a bogeyman

As to what’s potentially driving people away, the winters sure don’t do Minnesota any favors. But one of the biggest bogeymen blamed has been taxes.

At 9.8%, Minnesota has the highest corporate income tax rate among all states. It achieved that ranking at the start of this year after a surcharge expired in New Jersey, bringing the Garden State’s corporate tax rate down to 9%.

Minnesota’s 9.8% rate is not new, by any means. It’s been on the books for at least 15 years, long before Walz took office in 2019.

However, critics of higher taxation note that the Walz administration oversaw an increase in some personal income taxes and elimination of some deductions for high earners, as well as an expanded scope of the corporate income tax to capture some international business income.

“While other states have cut taxes and their regulatory burdens, Minnesota has chosen to double down on adding more burdens and more taxes to Minnesotans, and that makes Minnesota a less affordable place to live and build a business,” said Doug Loon, president and chief executive officer of the Minnesota Chamber of Commerce. “As we continue to layer on new taxes and fees on not just businesses, but the consuming public, our costs go up — and that puts us at a competitive disadvantage compared to other states.”

Low unemployment, diverse economy

The Mighty Mississippi birthed a rich industry base in Minnesota — starting with sawmills and flour mills — that since has exploded into a heavily diverse economy that has helped the Twin Cities of Minneapolis and St. Paul and the state as a whole weather challenging times, Loon said.

The diverse economy “has been one of our strengths going back a century,” Loon said. “We have an innovative, hard-working population that’s highly skilled at the same time. It’s really the secret sauce of our success, and it’s one of the reasons that Minnesota has been an attractant, historically, of highly educated and skilled workers from around the globe and the country.”

Minnesota ranks third in the nation for number of Fortune 500 companies per capita, with United Health, General Mills, Target, Best Buy, 3M, CHS and Land O’ Lakes on that list.

Health care is the biggest industry in the state, which is also home to the Mayo Clinic in Rochester. Advanced manufacturing, agriculture, retail, education and clean energy closely follow.

“We’re not seeing headquarters and offices move out of [Minnesota] the way we have seen [elsewhere],” said Adam Kamins, senior director and regional economist at Moody’s Analytics. “Taxes are higher in Minnesota than they are in some other places, but one thing I think offets that is you have a really healthy dynamic for these firms.”

The state’s labor market took longer than most to recover the jobs shed at the outset of the pandemic, he said.

“Minneapolis and St. Paul, like a lot of other big cities, were hit hard by the switch to remote work and the increased flexibility that people have,” he said, referencing some of the migration losses.

Still, the inherent demand within Minnesota’s labor market was on full display during the economic recovery as its unemployment rate was among the lowest in the country — and at one point, fell to the lowest ever recorded for a US state. The cost of living fared better as well, with the Minneapolis metro area showing a steeper slowdown in inflation than others.

“We need to make sure that we have a growing population to meet the needs of the economy,” Loon said.

Minneapolis’ role

A key part of that future economy will be Minneapolis, Kamins noted.

“Minneapolis has not done as well as it did historically,” Kamins said. “Growth has been a little bit better in some smaller metro areas, some rural parts of the state. And we’ve seen a lot of growth actually driven by Rochester and by the Mayo Clinic in particular. That’s been the single most important driver of growth in the state over the last five to 10 years, and probably an even longer period than that.”

The protest and civil unrest that followed the murder of George Floyd by former Minneapolis police officer Derek Chauvin in 2020 “certainly put Minneapolis on the map in a way that it did not want to be,” Kamins said.

“Maybe there’s a marginal impact, reputationally, in terms of attracting movers or driving people to leave and look more at the suburbs,” Kamins said. “But I think it was very marginal, and it’s fairly temporary.”

The rebuilding and surge of economic investment continues to this day with Minneapolis’ Lake Street and the area around George Floyd Square continuing to show a transformation.

More broadly, Minneapolis also has focused heavily in affordable housing, including making land use changes to encourage an increase in residential supply and investing in a program to help close racial wealth gaps and spur homeownership for Black families.

Opening doors for future growth

Walz’s first term was colored by the pandemic, the aftermath of Floyd’s death and a divided government. When he took office for a second term, however, he declared “the era of gridlock” had come to an end.

With the Democratic Party in control of both state houses, the Walz administration was able to leverage a $17 billion state surplus and ferry through a heavily progressive agenda that included free college tuition for lower-earning families, free school breakfasts and lunches for every kid, a child tax credit, protection for abortion access, support for gender-affirming care, investments in affordable housing and a paid family and medical leave law.

The Harris-Walz campaign hailed those and other policies in a statement provided to CNN.

“Gov. Walz led Minnesota back with strong leadership, competent management, and smart policies — cutting taxes for working families and reaching the lowest state unemployment rate in recorded history,” according to the statement. “That’s why CNBC ranked Minnesota the best state in the country for business outside of the South.”

The vast majority of the laws and programs passed during Walz’s second term are either too nascent to have a measurable economic impact just yet or are not yet operational (the paid leave program launches in 2026, for example), economists told CNN.

However, they help set the stage for the future, said Matt Varilek, commissioner at the Minnesota Department of Employment and Economic Development

“A priority of the administration is a more inclusive economy both on the workforce side and trying to open doors for folks who have been historically overlooked,” Varilek said. “A lot more work needs to be done, and we’re proud to have made progress.”

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