Impact of 2013 Legislation on 2014 Rankings is Modest


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A pair of recent North Star articles demonstrated that Minnesota was fairly typical of other states in terms of the size of government. Total state and local government expenditures per $1,000 of personal income* in Minnesota were modestly below the national average, ranking 31st among the states (including the District of Columbia), while total revenues and general revenues were modestly above the national average, ranking 21st and 22nd respectively.

However, these findings were based on U.S. Census Bureau data for fiscal year (FY) 2013 and do not take into account the impact of tax and spending increases enacted during the 2013 legislative session, which will not be reflected in Census Bureau state and local government finance data until FY 2014. While Census Bureau FY 2014 data will not be available until later this year, it is possible to make an educated guess as to the impact of the 2013 legislative changes upon Minnesota’s FY 2014 position relative to other states in terms of total state and local government general revenue.

To accomplish this, Minnesota’s FY 2014 total state and local government general revenue will be projected based on the rate of growth in total state and local net revenue† from FY 2013 to FY 2014 as indicated in the most recent Price of Government (POG) Report from Minnesota Management & Budget. This should yield a reasonable estimate of FY 2014 general revenue, insofar as Minnesota net total revenue from the POG report tends to track closely with Minnesota general revenue as reported by the Census Bureau.

POG information is available only for Minnesota. For other states, FY 2014 general revenue will be projected based on the rate of inflation in state and local government purchases from FY 2013 to 2014 (about two percent) and each state’s growth in population from 2013 to 2014. In the absence of hard FY 2014 revenue data for other states, this is a reasonable way to approximate FY 2014 general revenues for the other 49 states and the District of Columbia. For all states (including Minnesota) and D.C., FY 2014 general revenue per $1,000 of personal income will be calculated using the FY 2014 general revenue projections described above and FY 2014 personal income amounts for each state from the U.S. Bureau of Economic Analysis.

Based on these methods, Minnesota’s state and local government revenue per $1,000 of personal income are projected to be $206 dollars per capita in FY 2014, while the national average is projected to be $193. As a result of these changes, Minnesota’s total general revenue is projected to go from 4.2 percent above the national average in FY 2013 to 6.7 percent above the national average in FY 2014. This will increase Minnesota’s ranking in terms of general revenue per $1,000 of personal income from 22nd highest in the nation in FY 2013 to a projected 19th highest in FY 2014. In other words, 17 states and the District of Columbia will have higher general revenue per $1,000 of personal income than Minnesota in FY 2014, while 32 states will have lower.

While it is possible to project Minnesota FY 2014 general revenues using POG data, it is more difficult to project total revenues and total expenditures. (The distinction between general revenue and total revenue was described in the preceding article in this series.) However, if we make the assumption that the change in Minnesota’s position relative to the national average from FY 2013 to FY 2014 is the same for total revenues and total expenditures as it was for general revenues, it becomes possible to approximate Minnesota’s rank and position relative to the national average in FY 2014.‡ The results of this analysis are shown below.

Projected 2014

From FY 2013 to FY 2014, it is projected that Minnesota’s rank among states will rise two places in terms of total state and local government revenue per $1,000 of personal income and five places in terms of total expenditures. Both total revenue and total spending are projected to increase approximately 2.5 percent relative to the national average. After this increase, Minnesota’s total revenue is projected to be 6.6 percent above the national average in FY 2014, while total expenditures are projected to remain slightly (0.3 percent) below the national average.

There can be little doubt that the projected increase in Minnesota revenues and expenditures relative to the national averages from 2013 to 2014 is driven largely by legislation passed during the 2013 session. However, even after these increases, Minnesota is projected to remain within the middle third of all states in state and local total expenditures, total revenue, and general revenue per $1,000 of personal income. In fact, FY 2014 total expenditures in Minnesota are projected to remain slightly below the national average. In short, in terms of revenue and spending per $1,000 of personal income, Minnesota will not be a “big government” state, even after the revenue and expenditure increases enacted in 2013.

Of course, the obsession with state revenue and expenditure rankings is somewhat misplaced. Far more important is whether a state is investing adequately in the public services and infrastructure that will grow the state’s economy and improve its quality of life. For example, the decision by state policymakers to raise taxes in 2013 to make all-day kindergarten available to all Minnesota kids may have contributed to a small bump in Minnesota’s revenue and expenditure rankings, but should be worth it in the long run in terms of its effect in helping to close Minnesota’s achievement gap, improving the quality of the state’s workforce, and increasing the earning potential of future workers. Furthermore, the decision to invest in pre-K education and other state assets should be evaluated based on their potential to make similar improvements to the state’s economy and quality of life, not upon their impact on esoteric rankings.

However, conservatives can be counted on to continue their fixation with revenue and expenditure rankings. This being the case, it is worth knowing that Minnesota is projected to remain near the middle of the pack in terms of total state and local government revenue and spending relative to personal income and relative to the size of the state’s economy, despite legislation enacted in 2013.

 

 

*For reasons explained in part one of this series, the analysis below will examine state and local government revenues and expenditures per $1,000 of personal income.

“Net revenue” refers to total state and local government revenue minus transfers between governments. This subtraction is necessary to avoid doubling counting of these transfers.

It should be noted that it is by no means certain that the change in Minnesota total revenue and total expenditures from FY 2013 to FY 2014 will be the same as the change in general revenues. In the absence of hard data on Minnesota total revenues and expenditures for FY 2014, this approach is used as a way of approximating these amounts. Because it is based on relatively hard data from the POG report, the FY 2014 Minnesota general revenue projections referenced in this article have a greater degree of reliability than the total revenue and total expenditure projections.