Last week, the conservative Tax Foundation and the Minnesota Chamber of Commerce released a report entitled, Minnesota Illustrated: A Visual Guide to Taxes & the Economy. Much of the information in the report is presented in such a way so as to give the impression that Minnesota is facing looming economic peril because it is a high tax, big government state. However, this critique does not hold up well under a more complete analysis of the data. The following provides additional context regarding some of the economic claims presented in the first part of the report.
On one point, there is no disagreement. Over a period spanning nearly nine decades, Minnesota’s per capita personal income has grown from significantly below to modestly above U.S. per capita income. Minnesota’s income growth trend line is a bit difficult to track in the chart presented in Minnesota Illustrated due to the multiplicity of states included. The graph below simplifies the graph from Minnesota Illustrated by showing only U.S., Minnesota, and Wisconsin per capita personal income as a percent of U.S. per capita income during the period from 1929 to 2015. Wisconsin is shown for comparison purposes, since it is perhaps the state most like Minnesota in terms of economy, demography, and climate.
In 1929, Minnesota’s per capita personal income was 15 percent below U.S. per capita income. Minnesota’s per capita income steadily rose over the decades, ultimately surpassing Wisconsin (which had higher per capita income than Minnesota in 1929) and U.S. per capita income. The Tax Foundation and the Chamber note this trend, but are silent as to possible causes. For an explanation of the surge in Minnesota’s per capita income in recent decades, we turn to former State Economist Tom Stinson, who observed:
We’ve grown substantially faster in per capita personal income, in per capita gross state product, and in employment compared to the U.S. averages… Minnesota’s economic record over the last half-century is one most states envy. The reason that occurred was because far-sighted public and private sector leaders figured out they were going to invest in the education of the baby boom generation. Now it seems like an obvious decision to have made, but if it was, other states would have done it too and we wouldn’t have done as well.
When Stinson made these observations in 2007, Minnesota’s investment in E-12 and higher education had begun to wane. In recent years, inflation-adjusted per student public investments in education have rebounded somewhat, but remain below the levels obtained in the early years of the 21st century. It remains to be seen how Minnesota’s disinvestment and the subsequent reinvestment in education will affect personal income trends and overall economic health in the state in future years.
Interestingly, per capita state and local spending in Minnesota were 6.9 percent above the U.S. average in 1957—the earliest year for which U.S. Census of Governments information is available. Over the course of the next 57 years, Minnesota went from 6.9 percent above the national average in per capita spending to 10.9 percent above. Over the same period, Minnesota’s per capita income went from 8.9 percent below the national average to 6.4 percent above. This does not prove that the increased level of public investment caused the growth in Minnesota income relative to the rest of the nation, although Stinson’s observation would suggest that it had something to do with it. What this does indicate is that the conservative dogma, that higher levels of public spending are necessarily ruinous to a state’s economy, is bogus.
The Tax Foundation and the Chamber note that Minnesota has a relatively high cost of living relative to some “peer states” (which the report defines as Illinois, Indiana, Iowa, South Dakota, Texas, and Wisconsin); however, Minnesota’s cost of living (as measured by the Bureau of Economic Analysis’ Regional Price Parities index or RPP) is below the national average, which is somewhat unusual given that high per capita income states (such as Minnesota) tend to have a higher cost of living than low per capita income states. In fact, Minnesota is a member of a small yet fortunate group of six states that have above average per capita income, but below average cost of living.
After making a cost of living adjustment (COLA) to the per capita personal income of Minnesota and all other states based on the RPP, Minnesota’s per capita income rank among states improves from 13th to 9th.
Minnesota’s per capita personal income goes from 6.4 percent above U.S. per capita income before the COLA to 9.0 percent above after the adjustment. Furthermore, after the COLA, per capita income in Minnesota remains comfortably above the average among its “peer states.” The attempt to spin Minnesota as a state that is disadvantaged by a high cost of living is a stretch.
Minnesota Illustrated also contends that Minnesota’s pace of job growth has slowed since the turn of the century. The question is, though, slowed relative to what? It is true that the rate of job growth in Minnesota has dipped below the national average, but only slightly. Total U.S. non-farm employment grew by 10.9 percent from January 2000 to December 2016, compared to 10.0 percent in Minnesota, based on Bureau of Labor Statistic Current Employment Statistics. However, because of its low unemployment rate and high labor participation rate, Minnesota has a smaller pool of workers available to fuel employment growth; thus, it is not surprising that Minnesota’s rate of 21st century job growth is slightly less than the national average.
Midwest states* in general—including low tax states such as Indiana and Kansas—have underperformed the national average in terms of job growth since 2000, for a variety of demographically and economically driven reasons. Minnesota, however, has largely bucked this trend. Minnesota’s 10.0 percent rate of job growth since January 2000 is five times greater than the Midwest job growth rate of 1.9 percent. Even if we exclude Michigan and Ohio (large states with faltering economies and net job losses since 2000) from the Midwest average, the remaining states in the region still have a job growth rate of just 4.6 percent—less than half Minnesota’s growth rate. Minnesota’s job growth rate is also more than double that of Wisconsin’s (4.3 percent).
Curiously, Minnesota Illustrated omits the “peer states” comparison when examining Minnesota’s job growth trends. Minnesota has outperformed four of its six “peer states” in terms of employment growth since January 2000. Contrary to the impression which the Tax Foundation and the Chamber attempt to portray, Minnesota’s job growth during the 21st century has not been lackluster—and is even quite strong relative to the regional average.
Minnesota Illustrated makes a variety of other claims regarding Minnesota’s economy and tax climate. The next article in this series will address assertions regarding out-migration from Minnesota.
*Based on the U.S. Census Bureau definition of Midwest states, which include Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin.