Tax, Revenue, Spending Rankings in Perspective

Americans love rankings. We rank everything from Division 1 college football teams to states with the worst winters. (Without much trouble, you can probably guess which one Minnesota leads the nation in!) Policy nerds (like me) and politicians often talk about tax rankings. Less frequently discussed—but as or perhaps more important—are rankings of states based on total revenues and expenditures. Not all such rankings are created equal and Minnesota’s position relative to other states can vary significantly depending on what is being measured.

The analysis in this and  a subsequent article will rely on annual state and local government finance information compiled by the U.S. Census Bureau. The most current data from this source is for fiscal year (FY) 2015. Because states differ in the extent to which public services are funded at the state versus local level, it is necessary to examine the combined level of state and local government revenue and spending in order to get a meaningful comparison of the relative size of government between states.

Rather than focusing just on tax rankings, this article will also examine three additional measures:

  • The broader and arguably more relevant category of own-source revenue. This is equal to all taxes, charges, and fees raised at the state and local level, excluding utility, liquor store, and insurance trust fund revenue.*
  • Total revenue, which is equal to own-source revenue plus federal funds.
  • Total expenditures, which includes all state and local government spending, excluding utility, liquor store, and insurance trust fund expenditures.

In terms of state and local government taxes, own-source revenue, total revenue, and total spending per capita (i.e., per state resident, calculated by dividing total taxes, revenue, or spending by the state’s population), Minnesota does rank fairly high relative to other states.† For example, in 2015 Minnesota’s taxes per capita were the ninth highest in the nation and own-source revenue per capita was the eleventh highest. In terms of total revenue and total expenditures per capita, Minnesota ranked twelfth and fourteenth highest, respectively.

It should be noted that the 2013 state tax increases—a source of no small amount of angst among Minnesota conservatives—had no discernible impact on Minnesota’s revenue and spending ranking relative to other states. While Minnesota moved up one notch in terms of taxes per capita from FY 2013 (the last year before the 2013 tax increases took effect) to FY 2015 (from tenth to ninth), it fell one place in own-source revenue per capita (tenth to eleventh), stayed the same in terms of total revenue per capita (twelfth in both years), and fell two notches in total expenditures per capita (twelfth to fourteenth).

Anti-tax zealots have used Minnesota’s relatively high per capita tax and own-source revenue ranking to vehemently—and incorrectly—argue that government in Minnesota is bloated relative to other states. High per capita income states—such as Minnesota—generally have higher tax and other own-source revenue per capita than low per capita income states. As noted by the Minnesota Department of Revenue (MDOR):

In FY 2014, differences in per capita income explain 70 percent of the variation in tax revenue per capita (excluding D.C. and energy-dependent states Alaska, North Dakota, and Wyoming). On average, each $1,000 increase in per capita income is associated with a $141 increase in taxes per capita. It is no surprise, then, if a high-income state also ranks high in per capita state and local tax collections. When total state and local tax burdens are measured as a percent of income, high-income states have roughly the same average tax burden as low-income states.

In other words, states with low levels of personal income per capita tend to have low state and local taxes per capita, while states with high levels of income per capita tend to have high state and local taxes per capita. An update of the MDOR analysis based on FY 2015 data reveals the same strong relationship between per capita personal income and per capita taxes. Furthermore, extension of the analysis to the relationship between per capita personal income and (1) per capita own-source revenue, (2) per capita total general revenue, and (3) per capita general expenditures also reveals a strong relationship.

Based on FY 2015 data, over two-thirds of the variation among states in terms of per capita taxes and own-source revenue and over half of the variation in terms of per capita total revenue and expenditures can be explained in terms of variation in per capita personal income. In other words, states with high per capita personal income not only have high taxes per capita, but they also have relatively high total revenues and expenditures per capita.

According to the Minnesota Department of Revenue, there are three generally accepted  reasons as to why high per capita personal income states tend to have higher per capita taxes and other own-source revenue than low per capita income states.

  • High per capita income states tend to receive less assistance from the federal government and thus must rely more heavily on taxes and other own-source revenues.
  • Wages are typically higher in high per capita income states; thus, these states must generate and spend more per worker, all other things being equal.
  • Residents of high per capita income states tend to demand higher quality public services and infrastructure than residents of low per capita income states.

The second and third reasons cited above also explain why high per capita income states also tend to have higher per capita total revenues and expenditures than low per capita income states.

Because high per capita income states—like Minnesota—must generate more tax and other own-source revenue to provide the same level of services and because they face greater spending pressures than low per capita income states, it is not surprising that they generally collect and spend more per capita. In light of this, taxes and own-source revenue per capita are not a particularly meaningful measure when attempting to gauge the relative size of government among states.

As an alternative, MDOR concludes that “Rankings of total state and local tax burden measured as a percent of income are better able to identify the states commonly perceived to be low-tax or high-tax states.” The  second installment in this series will examine own-source revenue (including taxes), total revenue, and total expenditures as a percent of personal income in Minnesota and other states.

*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 also excludes these revenues from its comparisons of interstate state and local government total revenues.

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