Minnesota’s Falling Price of Government

Dubbed as “an index of what taxpayers can afford” by the business community, Minnesota’s “price of government” is projected to reach an all-time low before the end of the state’s current budget planning horizon, according to non-partisan staff at Minnesota Management & Budget (MMB). This projection is based on current law; if some of the tax reduction proposals being considered during the 2017 legislative session are adopted, the projected price of government will drop even lower.

Minnesota’s “price of government” (or POG) is equal to total state and local government own-source revenue as determined by MMB divided by statewide personal income as reported by the U.S. Bureau of Economic Analysis (BEA). “Own-source revenue” equals all revenue collected by state and local governments including taxes, fees, and special assessments, but excluding dollars received from the federal government. Annual POG statistics extend back to fiscal year (FY) 1991. The most recent POG report, which is based on information from the February 2017 state budget forecast, contains actual data through FY 2016 and projected data for FY 2017 through 2021.

Minnesota’s POG was highest during the early years of the POG period. From FY 1991 to FY 1998, the POG was consistently above 16.5 percent—a level not experienced since then. The POG fell abruptly from FY 1998 to FY 1999, partly as a result of tax cuts (Minnesota’s largest ever sales tax rebate occurred in that year) and a sharp jump in Minnesota personal income (Minnesota’s 9.2 percent jump in personal income from 1998 to 1999 was the largest in POG history). Minnesota’s POG dipped during and in the aftermath of the first recession of the twenty-first century and hit a new low (14.7 percent) in FY 2009, during the Great Recession; however, the state and local budget situation in FY 2009 was not as dire as the low POG might indicate, as public finances were buoyed by federal dollars from the American Recovery and Reinvestment Act.

Since the Great Recession, the POG has fluctuated, but remains below the long-term average of 15.9 percent, calculated using data from the entire 31 year span of the POG report, including the five years of projected data (FY 2017 to 2021). Minnesota’s POG for the current fiscal year (FY 2017) is projected to be 15.4 percent—the sixth lowest since FY 1991.

Minnesota’s POG is expected to continue dropping for the foreseeable future. By FY 2021, the POG is projected to reach an all-time low of 14.4 percent—1.5 percent below the 31-year average, 1.0 percent below the projected current fiscal year level, and 3.5 percent below the peak level reached in FY 1994. In other words, by FY 2021, total state and local government own-source revenue per dollar of personal income is projected to be 9.3 percent below the 31-year average, 6.1 percent less than the FY 2017 level, and 19.4 percent less than in FY 1994.

This analysis does not take into account any of the tax and revenue changes currently being debated at the State Capitol. It is difficult to say precisely how competing plans would impact the POG, since increases or reductions in state taxes will interact with local taxes in ways that cannot easily be foreseen.* Under the Governor’s proposal, Minnesota’s projected POG would likely continue to fall in future years, although the rate of decline would be slowed somewhat relative to current law. Meanwhile, the House and Senate plans would likely cause the projected POG to drop even faster than under current law, to a point even further below the all-time low already projected for FY 2021.

It would be helpful to have a comparative context in which to examine Minnesota’s POG decline in recent decades. Unfortunately, MMB’s POG report focuses exclusively on Minnesota, but by using own-source revenue and personal income data from the U.S. Census Bureau and the U.S. BEA, it is possible compile alternative “price of government” measures for Minnesota and all fifty states that are comparable over time.

From FY 1992 to FY 2014,† Minnesota’s state and local own-source revenue per dollar of personal income declined by 9.0 percent, compared to a 2.5 percent decline nationally. While Minnesota’s state and local own-source revenue per dollar of personal income is still 8.1 percent above the national average, it is not uncommon for high per capita income states—such as Minnesota—to have above average own-source revenue, since they tend to receive less assistance from the federal government and thus must rely more heavily on own sources.

Minnesota’s price of government—the index of what taxpayers can afford—has not only declined relative to the national average (based on national own-source revenue and personal income data), but is also well below its historical average and is projected to drop to all-time lows, assuming no changes to current law.

 

*For example, while the Senate plan reduces state taxes—which would have the effect of reducing the POG—it also cuts city Local Government Aid in ways that could result in higher property taxes—which would have effect of increasing the POG.

The period from FY 1992 to FY 2014 was chosen for this analysis because it is the time frame which most closely corresponds to the time frame of available POG data (FY 1991 to FY 2016 with projections through FY 2021). State and local finance data from the U.S. Census Bureau is not available for FY 1991, so FY 1992 was chosen as the baseline year for this analysis. The most current year for which Census Bureau state and local government finance data for all fifty states is available is FY 2014.