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While Minnesota ranks fairly high among states in terms of per capita own-source revenue, total revenue, and total spending, these per capita measures are not a reliable way to gauge the relative size of government among states. As noted in the preceding article, states with high per capita incomes almost always have higher per capita revenue and spending due to higher wages paid in these states and other factors. Based on a more appropriate metric for gauging the relative size of government—revenues and spending as a percent of personal income—Minnesota is fairly typical of other states.

Numerous sources—including the U.S. Census Bureau, the Minnesota Department of Revenue (MDOR), and even the conservative Tax Foundation—rank states based on state and local government revenue as a percent of income. Focusing on revenues as a percentage of income avoids some of the shortcomings of per capita rankings, which were described in the preceding article.

This analysis focuses specifically on own-source revenue, total general revenue, and total general expenditures* as a percent of personal income. Revenue and expenditure information used in this analysis is from U.S. Census Bureau government finance reports for fiscal year (FY) 2015—the most current year available. Personal income data is from the U.S. Bureau of Economic Analysis for the period corresponding to FY 2015.

Minnesota’s FY 2015 state and local government own-source revenue equals 16.3 percent of statewide personal income—the 14th highest in the nation† and modestly greater than the national average (14.9 percent). Minnesota ranks in the middle of the four adjacent states, with own-source revenue as a percent of personal income higher than in South Dakota and Wisconsin and lower than in Iowa and North Dakota.

As noted above, own-source revenue does not include federal dollars received by state and local governments. Minnesota’s total general revenue—which includes federal dollars—as a percent of personal income is 20.6 percent, the 18th highest in the nation. Relative to adjacent states, total general revenue as a percent of personal income in Minnesota is again greater than in South Dakota and Wisconsin and less than in Iowa and North Dakota.

Due to the timing of state and local government fiscal years, funding shifts, decisions to increase or spend down budget reserves, and borrowing patterns, state and local government revenue is often not spent within the fiscal year it is generated. As a result, general expenditures within a particular year often do not equal to general revenues generated within the same year. Consequently, state rankings based on total state and local government spending can differ from rankings based on state and local government revenue. Insofar as it is easier to accelerate or postpone the collections of revenue than it is to accelerate or postpone spending,‡ a case can be made that rankings based on expenditures provide a more consistent and useful gauge of the relative size of government than rankings based on revenue.

Minnesota’s total state and local government general spending as a percent of personal income is 19.2 percent—the 25th highest in the nation. Relative to adjacent states, Minnesota’s general spending is lower than in Iowa, North Dakota, and Wisconsin and higher than in Iowa.As noted in the preceding article, there was considerable angst among Minnesota conservatives regarding the state tax increases enacted in 2013. However, these increases did not produce a significant change in terms of Minnesota’s revenue and spending rankings relative to other states. For example, Minnesota’s ranking in own-source revenue as a percent of personal income was unchanged from FY 2013 (the year prior to the year in which the 2013 tax increases took effect) to FY 2015, while Minnesota general expenditure ranking increased by only two positions (from 27th to 25th). Despite Minnesota’s revenue and spending increase from FY 2013 to 2015, the state’s ranking changed little because (1) many states experienced a larger increase than Minnesota did (for example, 16 states experienced a larger revenue increase than Minnesota over these two years) and (2) Minnesota’s personal income increased more rapidly than that of most other states.

It is important to remember that state revenue and spending rankings are not a particularly meaningful or useful metric. What matters is not how much a state is taxing or spending relative to other states, but whether the public resources are being used responsibly and in a way that improves the quality of life. For example, for a state to be ranked number one in terms of state and local government spending is not necessarily a bad thing, provided that the expenditures are producing outcomes in terms of public safety, infrastructure, job growth, et cetera, commensurate with the level of spending. Revenue and spending rankings are at best an incomplete measure, since they focus exclusively on the resources consumed by government to the neglect of the outcomes produced by public investments.

However, insofar as political discussions emphasize revenue and spending rankings, it is important that such rankings at least be based on meaningful measures. Based on the most meaningful rankings—which focus on state and local government revenues and expenditures as a percent of personal income—Minnesota is much closer to the middle of the pack than to the top. Relative to other states, Minnesota cannot be plausibly characterized as a “big government” state.

 

*Own-source revenue refers to all taxes, charges, and fees raised at the state and local level, excluding utility, liquor store, and insurance trust fund revenue. Total general revenue equals own-source revenue plus federal funds. Total general expenditures include all state and local government spending, excluding utility, liquor store, and insurance trust fund expenditures. Utility, liquor store, and insurance trust fund revenues and expenditures are not considered part of state and local government general revenues and expenditures by the U.S. Census Bureau; the Minnesota Department of Revenue excludes these revenues when ranking states by the level of state and local government total revenue.

Rankings presented here are based on the fifty states and the District of Columbia.

In support of the argument that it is easier to accelerate or postpone revenues than it is to accelerate or postpone spending, consider the example of Minnesota’s school funding shifts. These shifts do not reduce the level of school spending, since the spending authorization of school districts is unaffected; rather, the shifts make up for a short-term shortage of state revenue by compelling districts to spend down reserves or borrow in order to maintain the authorized level of spending. To the extent that it is easier for policymakers to manipulate revenue than to actually cut public spending, a case can be made that expenditures are a more consistent measure of the true size of government.

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