News & Updates

Minnesota conservatives have complained loudly and repeatedly that tax increases in general—and the tax increases enacted in 2013 in particular—will ruin the state’s economy, as businesses flee in response to an “uncompetitive” business environment. However, a recent review of Gross Domestic Product (GDP) compiled by the U.S. Bureau of Economic Analysis (BEA) shows that economic growth in Minnesota has outpaced the national average since passage of the 2013 tax act.

According to Investopedia, GDP “is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period.” The BEA also calculates GDP for each of the fifty states. In the post-World War II era, GDP has been the principal way of measuring growth or contraction in an economy. GDP amounts cited here are based on BEA quarterly information released earlier this month. To adjust for inflation, GDP is presented in chained dollars as calculated by the BEA. This analysis includes only the private sector component of GDP (i.e., the government contribution to GDP is excluded).

The BEA publishes quarterly GDP information by state for the period from the first quarter of 2005 to the fourth quarter of 2015. From the beginning of this period to the passage of the 2013 tax act in the second quarter of 2013, Minnesota GDP grew by 5.7 percent—significantly below the 8.9 percent national growth rate. Minnesota’s economy as measured by GDP growth performed atypically poorly over these 34 quarters relatively to the standards of the preceding half century; since 1963, Minnesota’s GDP growth exceeded the national average.*

GDP

From the passage of the 2013 tax act in the second quarter of 2013 to the fourth quarter of 2015, Minnesota’s private sector GDP grew by 7.7 percent, modestly greater than the national average of 7.2 percent. Over this period, Minnesota’s superior performance relative to the rest of the U.S. was broad based, surpassing the national average in four of the five largest segments of the private economy.†

There is an old adage among statisticians that it is possible to prove any point you want, if you choose your time frame carefully. The time frame used in this analysis is based on the entirety of available quarterly data from the BEA, divided into two segments based on the enactment of the 2013 tax act. If we examine selected intervals during the 34 quarter period preceding the 2013 tax act, it is possible to identify periods where Minnesota GDP growth exceeded the national average, but these would be more than offset by other periods during which Minnesota GDP growth fell short of the U.S. average.

It would be a stretch to contend that Minnesota’s superior GDP growth since the second quarter of 2013 or the reversal of Minnesota’s trend of subpar performance relative to the national average over the preceding eight and a half years was the result of the 2013 tax act. After all, the performance of state and national economies over time is the product of numerous factors, of which tax policy is only one (and not the most important one at that). Furthermore, some of the benefits of the 2013 tax act—such as all-day kindergarten and increased investment in elementary, secondary, and higher education—will not bear full fruit until some point in the relatively distant future. It would be unrealistic to expect such long-term investments to provide a dramatic short-term dividend to the state’s economy.

Nonetheless, some burden of proof must lie with those who predicted that the 2013 tax act would ruin Minnesota’s economy. Based on the most common metric of economic performance—GDP growth—Minnesota’s economy has been outperforming the national average since enactment of the 2013 tax act. While it cannot be proven that the 2013 tax act caused the reversal in Minnesota’s economic fortunes, the above average rate of GDP growth over the last ten quarters contradicts the prophecies of doom from conservative naysayers.

 

 

*While quarterly state GDP data is only available from the first quarter of 2005, annual data from the North American Industrial Classification System (NAICS) is available back to 1997. During the period from 1997 to 2015, Minnesota’s chain-weighted private GDP grew by 53.0 percent, modestly greater than the national growth rate of 49.6 percent. Annual GDP data by state for the period from 1963 to 1996 is available from the now retired Standard Industrial Classification system (the predecessor to NAICS); chain-weighted data is not available for all years during this period, but nominal dollar (i.e., unadjusted for inflation) data is. During the period from 1963 to 1997, nominal private Minnesota GDP grew 14.5 fold, compared to 13.6 fold growth nationally.

†Based on the BEA classification, the five largest sectors of the private U.S. economy in the fourth quarter of 2015 were manufacturing, finance & insurance, real estate & rental & leasing, professional & scientific & technical services, and healthcare & social assistance; Minnesota GDP growth exceeded the national average in each of these areas except real estate & rental & leasing.

 

 

 

 

 

 

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