Dakotas are wooing Minnesota workers, companies

North and South Dakota want Minnesotans and their businesses to go west, and they're making brazen overtures.

The states are appealing directly to workers and businesses in Minnesota, asking them to head for the border. This spring, when Minnesota lawmakers hiked the cigarette tax, created a higher top-tier individual income tax and expanded the sales tax to a handful of industries, a fresh round of interstate wooing ensued.

South Dakota's governor hawked Sioux Falls and Brookings on a May afternoon at the Mall of America. North Dakota's chamber threw up a yellow-and-black "open for business" billboard on Interstate 94 just east of Fergus Falls, and may put another in the Twin Cities.

"Companies are coming [to North Dakota] because of a tax, legal and regulatory environment that is superior to Minnesota's," said Andy Peterson, president of the Greater North Dakota Chamber. "I will tell you this: that if you look at the North Dakota side of the Minnesota-North Dakota border, it's been happening for years."

The Dakotas both have tight labor markets, with unemployment at 3.3 percent in North Dakota and 4.1 percent in South Dakota, compared with 5.3 percent in Minnesota and 7.6 percent nationally. Per capita income growth in the Dakotas has surpassed Minnesota in the past five years. And while South Dakota has one of the slowest-growing economies in America, oil-rich North Dakota has the nation's fastest-growing.

Yet Minnesota has something the Dakotas need: a big, skilled workforce. And the states are making their pitch to Minnesotans, with an argument that is mostly about lower taxes.

"We think we have a business operational, competitive advantage," said David Owen, president of the statewide chamber of commerce in South Dakota. "We're having trouble finding people, which isn't rare in this part of the country."

South Dakota is trying all sorts of things. It launched Dakota Roots — a website designed to connect South Dakota expatriates with in-state jobs — in October 2006. About 3,000 Minnesotans have registered and 534 found jobs and relocated their families to South Dakota.

In 2012 the state hired ManpowerGroup Inc. to bring in 1,000 new people over two years. Recently, Gov. Dennis Daugaard paid a visit to the Mall of America, shook hands and chatted people up on a swing through the Twin Cities.

His state has the second-lowest per capita taxation in America. It has no corporate income tax, no personal income tax (compared with the new 9.85 percent rate for couples making more than $250,000 in Minnesota), a lower cost of unemployment insurance than Minnesota, a lower cost of living, lower health care costs and cheaper energy.

Despite all this, South Dakota has had little success luring Minnesotans. Net migration in 2011 was 37 people, according to the latest census data.

Rodessa Padua, the 21-year-old manager of a hat shop near where Daugaard was standing, wasn't terribly impressed with the idea of relocating. "I like the Twin Cities a lot," she said. "They have Mount Rushmore. That's all I really know."

North Dakota has had more success. With the oil boom, the state's economy — which is still just one-fourteenth the size of Minnesota's — is growing four times as fast. Job growth has been 30 percent over the past 10 years, compared with 3.2 percent in Minnesota.

That's translating into some cross-border migration. Minnesota lost 4,740 people to North Dakota in 2011, and over the past 10 years, the flow of people commuting west across the Red River has grown a little faster than the flow eastward.

This isn't all because of the oil boom, said Peterson. "Oil is a very thick frosting on the cake, but it's not the cake."

Companies including Marvin Windows, Caterpillar, John Deere and Digi-Key have expanded, and probably will continue to expand along the I-29 corridor in eastern North Dakota.

Mark Larson, the president of Digi-Key, which employs 2,600 people in Thief River Falls, said Minnesota income taxes prompted the company to open a facility in Fargo. At first it was just going to be a storage facility, but after the legislative session's tax hike for top earners, the plans for Fargo grew.

"We're in a situation where it becomes very convenient to increase the number of people there, and it's going to go up over a period of the next few months," Larson said in May.

Since Digi-Key, like Marvin, is what is called a subchapter S corporation, its earnings must be reported on the personal income statements of the shareholders. Larson and Digi-Key owner Ron Stordahl unsuccessfully lobbied Gov. Mark Dayton more than a year ago not to raise the top income tax rate, and got no assurances that a proposed 4 percent surtax on the rich won't eventually happen.

"We could have over 100 people walk in the door today and we'd hire them, but now we're saying, yeah, that's fine, but do we want to hire them here?" Larson said.

Peterson at the North Dakota chamber argues that the west bank of the Red River is outperforming the east bank, and there's some evidence he's right. North Dakota counties on the border with Minnesota posted 18 percent job gains over the past decade, while neighboring Minnesota counties grew 1.7 percent.

That's mostly because Fargo is trouncing its sister city, Moorhead. Fargo's Cass County has added 21,424 jobs in the past 10 years, while Moorhead's Clay County has added 912. That's 25.2 percent growth compared to 5.4 percent.

Along the South Dakota border, job growth on the west side has been a more modest 7.1 percent over the past 10 years, while neighboring Minnesota counties have lost jobs at a rate of 1.3 percent.

Marvin Windows now employs about 500 people each at factories in Fargo and Grafton, N.D., where the company started new lines of business that have since grown.

"Do the tax decisions impact our decision on where we expand?" said Vice President of Operations Brian Johnson. "I think possibly in the long term it's a contributor, but it's not evident in any of our short-term decisions. It's one of many things we consider."

Minnesota's economy doesn't hinge on its rural western counties, said Ann Markusen, a regional economist and former professor in the University of Minnesota's Humphrey School of Public Affairs.

The Twin Cities has a big, diverse economy with well-developed advertising, publishing, financial, food, retail, shipping and high-tech manufacturing industries. These companies draw smart young people from the Dakotas, not the other way around.

"These are things that no place in North and South Dakota have," Markusen said. "I always think our competitors nationally are Seattle, Portland to a lesser extent, and Denver."

The reason for Minnesota's economic strength is the quality of its workforce, the very thing its neighbors covet, said Art Rolnick, a former economist at the Federal Reserve Bank of Minneapolis who is now at the Humphrey School.

Minnesota doesn't bill itself as a low-tax state, as businesses like Digi-Key are painfully aware, yet its economy grew by 3.5 percent last year.

That doesn't match North Dakota's 13.4 percent, but it's still fifth-fastest in the nation. Minnesota's per capita income remains in the top 10, and unemployment is two points below the national average.

"We've won," Rolnick said. "Look at our economy — it's one of the best in the country."

Adam Belz • 612-673-4405 Twitter: @adambelz