Yes, the Minnesota Price of Government Has Declined

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A recent article in the Star Tribune has sparked a minor dustup regarding Minnesota’s “Price of Government” (PoG). The article, which focused on the budget legacy of Governor Mark Dayton and featured fiscal comparisons between the Pawlenty and Dayton administrations, significantly overstated the decline in the PoG. This led a conservative think tank to counter that the Minnesota Price of Government has not actually declined. In reality, the PoG has declined, but not by as much as noted in the Star Tribune article. Furthermore, conservative criticisms of the PoG as a measure of the level of state and local government revenues are off-base.

As North Star readers likely know by now, Minnesota’s PoG is compiled periodically by Minnesota Management & Budget (MMB) and is equal to total state and local government own-source revenue divided by statewide personal income. “Own-source revenue” equals all revenue collected by state and local governments including taxes, fees, and special assessments, but excluding revenue from the federal government. Annual PoG statistics extend back to fiscal year (FY) 1991. The most recent PoG report is based on information from the February 2017 state budget forecast and includes actual data through FY 2016 and projected data for FY 2017 through 2021. Minnesota’s business community has dubbed the PoG “an index of what taxpayers can afford.”

The Star Tribune article used outdated projections of Minnesota’s PoG, which understated the PoG for FY 2014 to FY 2017 (and overstated it for FY 2012) relative to the actual PoG percentages that are now available. Consequently, the chart that appeared in the print version of the Star Tribune article exaggerated the decline in the PoG. Over the long-term, however, Minnesota’s PoG was declining—just not a quickly as the Star Tribune chart indicated.

During the first decade for which PoG statistics are available (FY 1991 to 2000), the average PoG was 17.1 percent. This ten-year average was pulled down by a dramatic drop in the PoG from FY 1998 to 1999, attributable to a large sales tax rebate and robust personal income growth. Excluding FY 1999 and 2000, the average PoG for the decade would have been 17.4 percent.

The average PoG over the second decade of data (FY 2001 to 2010) was 15.5 percent, 1.6 percent less than during the first decade. In other words, average state and local government own-source revenue per dollar of personal income was nine percent less in the second decade than it was in the first. While the average PoG in the second decade is pulled down by an unusually low PoG in FY 2009 (due to depressed revenues during the depths of the Great Recession), even excluding that year the average PoG for the decade is 15.6 percent—still dramatically less than in the first decade.

The average PoG for the third decade, which is based on actual data for FY 2011 to 2016 and projections for FY 2017 to 2020, is 15.3 percent. While the decline in the average PoG from the second to third decades is small in comparison to the decline from the first to second, it is nonetheless noteworthy, especially in light of the fact that the PoG at the tail end of the current decade is expected to steadily plunge. As the fourth decade of PoG data begins (in FY 2021), the PoG is projected to be 14.4 percent. While the PoG chart in the Star Tribune article was out-of-date, its statement regarding the PoG was spot on:

Overall, the cost of funding state and local government as a percentage of Minnesotans’ personal income is declining. By 2021, it’s expected to be lower than in any year during the Pawlenty administration.

Not only is the projected FY 2021 PoG lower than at any point during the Pawlenty years—it is also lower than at any other point during the 31 year period of actual and projected PoG data. Furthermore, these PoG projections do not reflect the generous estate tax, business property tax, Social Security tax, and other tax reductions enacted during the recent special legislative session. The forthcoming end-of-session PoG projections will almost certainly reveal a decline in the PoG in future years greater than the decline indicated in the February 2017 forecast PoG data cited above.

In the face of a declining PoG, conservatives argue that the PoG is flawed as a measure of how expensive Minnesota state and local government is. The principal critique comes from the Minnesota Center for Fiscal Excellence (MCFE), which argues that the use of statewide personal income as the PoG denominator is inappropriate because growth in own-source revenue should not be measured relative to personal income, since “it includes a host of items that can’t be used to pay taxes or fees to government,” such as employer health care contributions and government transfers such as Medicare, Medicaid, and food stamps.

The availability of such benefits, however, certainly indirectly influences the ability of a household to pay taxes. For example, if the employer share of my health care premium increases by $1,000, this is $1,000 less that I will have to pay out of pocket, all other things being equal. Consequently, I will have $1,000 more to pay for all other household expenses—including taxes. The receipt of these sorts of benefits and transfers affects my overall economic well-being and therefore my ability to pay taxes and thus is appropriately included in the denominator of the POG measure.

This is not to say that personal income is beyond criticism as the denominator in the POG measure. For example, personal income does not include capital gains, which can be used as a source of income from which to pay taxes. The inclusion of capital gains income in the PoG denominator would have the effect of lowering the PoG. Critics of personal income as the PoG denominator, however, have yet to propose anything better. For example, the use of household income from the Minnesota Tax Incidence Study (MTIS) proposed as an alternative by the MCFE is flawed precisely because it does not include various benefits and transfers that indirectly affect the ability to pay taxes; in addition, the definition of household income used in the MTIS has changed over the years, thus making comparisons between it and own-source revenue over time problematic.

Conservative criticisms notwithstanding, the Price of Government provides a valid measure of total state and local taxes and other own-source revenue relative to overall economic activity. Minnesota’s PoG has declined over time—and that decline is projected to continue throughout the state’s current budget planning horizon.