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The best state for business? High-tax, union-friendly Minnesota.

Minnesota is the first union-friendly state with high wages and high taxes to reach the top of CNBC's annual ranking. The North Star state ranks so well in areas such as education and quality of life that the disadvantages of a high cost of living and doing business are balanced out. 

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    Senate Majority Leader Tom Bakk listens to Gov. Mark. Dayton talk about obstacles to finalizing a budget deal, Thursday, June 11, 2015, at the governor's residence, in St. Paul, Minn.
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This year, the North Star state topped the chart of CNBC’s annual ranking of the top states for business.

Every year since 2007, the finance-focused news channel has ranked all 50 states in more than 60 metrics in 10 categories of competitiveness, and this year Minnesota came out on top. But unlike the winners of previous years, which focused heavily on lowering the cost of doing business, the state stands out for its high corporate tax rates, pushed through by Mark Dayton, the first Democratic governor in two decades. This variation marks an important change in the debate around tax rates and how they impact a state’s competitiveness, says the ranking’s author.

“There is a shift in the debate now about what the appropriate rate of taxes is, but we’re on the cusp of that now and we don’t know exactly how it is going to play out,” says Scott Cohn, CNBC’s Special Correspondent.

“States are overwhelmingly talking about their workforce, and that’s because businesses are talking a lot about a skills gap. We made workforce the heaviest weighted category in our study this year because it’s becoming increasingly important to have a quality, skilled workforce.”

Since the ranking’s inception, Minnesota is the first union-friendly state with high wages and high taxes to reach the top. But the North Star state ranks so well in areas such as education and quality of life, that the disadvantages of a high cost of living and doing business are mitigated, CNBC’s report notes.

The state ranked second in education and boasts of some of the best-performing K-12 students in the country. And with low crime rates, clean air, and an excellent healthcare system, the state came in third for quality of life. Meanwhile, Minnesota’s robust economy, heavy focus on technology and innovation, and strong infrastructure also helped catapult it to the top of the ranking. These perks attract both businesses and workers looking for a place to relocate, Mr. Cohn says.

“If we have solid finances we can invest in infrastructure and education, which makes it an attractive place to live,” he notes.  

“It helps for the state to have strong finances for businesses who want to set up shop and have some stability.”

Still, the road that led to Minnesota’s success was controversial. After coming to office in 2011, Governor Dayton set out to tackle the state’s $6.2 billion budget gap by pushing through a $2.1 billion tax increase in 2013 that targeted Minnesota’s wealthiest residents. The move caused uproar among local Republicans and even led to a three-week government shutdown. Nevertheless, today the state has a $2 billion budget surplus and the lowest rate of unemployment in the country. The tax rate for high earners, at 9.85 percent, remains the highest in the nation.

High taxes for high earners has succeeded in balancing the state’s budget, but the governor still supports tax breaks for middle-income earners and business and has championed subsidies for local companies. Around $250 million in state aid has been earmarked to help the Mall of America in Bloomington build new roads and parking facilities over the next 20 years, and a tax increment financing district was set up in 2013 to help the St. Paul-based multinational conglomerate 3M build a $150 million research facility.

Nevertheless, Republican opponents continue to push for tax cuts, and this year the Minnesota chamber of commerce said that "back-to-back billion-dollar surpluses show that the level of taxes on individuals and business owners is too high.”

Meanwhile, Texas, which followed a much more traditional model, came in second place this year, lagging just 4 points behind Minnesota. The very different paths to success demonstrate that there is no silver bullet model for producing a healthy business environment, Cohn says.

“There is no single path to be competitive. Every state will accentuate its strength and downplay its weaknesses. But it’s not mutually exclusive anymore to have high taxes and be competitive,” he says.

The CNBC ranking looked at workforce, cost of doing business, infrastructure, economy, quality of life, technology and innovation, education, business friendliness, cost of living, and access to capital. 

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