The Connection Between Public Policy and Prosperity

Since the end of the Great Recession, Minnesota has comfortably surpassed Wisconsin in terms of GDP and income growth, and job creation. Based on newly released 2016 data from the American Community Survey, median household income in the Gopher State is 15.5 percent ($8,800) greater than in America’s Dairyland. Caution is in order when drawing a causal relationship between a state’s public policy and economic performance, although—in light of conservative allegations of the deleterious effects of Minnesota’s “blue state policies”—a probing of the policy differences between the two states that might have contributed to superior outcomes in the North Star State is in order.

Over the last several years, Wisconsin has aggressively pursued a conservative path, emphasizing regressive tax cuts, spending reductions, and anti-labor policies. Minnesota has taken the opposite approach, focusing on progressive state tax increases, greater investment in education, increased funding for local governments, affordable housing and health care, and bolstering the ability of workers to collectively bargain for better wages and benefits. While it would be rash to attribute Minnesota’s superior economic performance relative to Wisconsin entirely to their divergent policies, a case can be made that Minnesota’s progressive approach was a contributing factor.

One of the clear areas of differences between Minnesota and Wisconsin in recent years has been taxes. Based on U.S. Census Bureau data adjusted for inflation, Minnesota state and local government per capita tax and other own-source revenue increased by 5.4 percent from fiscal year (FY) 2010 to 2014, while in Wisconsin they declined by 4.1 percent.* As important as the different directions that taxes were going in the two states is the manner in which the tax changes were implemented.

Over the last five years, Wisconsin reduced its income tax rate across all brackets. Meanwhile, Minnesota created a new top tier income tax rate that affected only high-income households; for example, for tax year 2013 the new higher rate (9.85 percent) affected only that portion of married joint filer income greater than $250,000.† (Because these brackets are adjusted annually for inflation, the new rate affects only married joint filer income greater than $261,510 in tax year 2017.)

Reductions in the progressive income tax—such as those implemented in Wisconsin—tend to make the overall state and local tax system more regressive, while income tax increases tend to make the system less regressive. By focusing the rate increase entirely on high-income households, Minnesota’s income tax increase was especially progressive. Several other changes to Minnesota’s tax system in recent years—including an expansion of the homeowners’ and renters’ property tax refunds, increases in aid to school districts and other local governments that further reduced regressive property taxes, and an expansion of the Working Family Credit—helped to make Minnesota’s tax system significantly less regressive, even after factoring in the impact of regressive changes, such as the 2013 cigarette tax increase.

The different directions that Minnesota and Wisconsin took in regard to tax policy are reflected in changes in their respective state and local Suits indexes. The Suits index is a measure of tax regressivity or progressivity; the smaller the index value (i.e., the further below zero), the greater the degree of tax regressivity. Suits indexes calculated using data from the Institute on Taxation & Economic Policy and published in Minnesota Tax Incidence Studies show that in 2012, Wisconsin’s state and local tax system was slightly less regressive than Minnesota’s. By 2015, Wisconsin’s tax regressivity had increased, while Minnesota’s fell dramatically, to the point where Minnesota’s tax system was significantly less regressive than Wisconsin’s. Tax policy changes no doubt played a major role in this reversal.

While Minnesota generated substantial new revenue through the tax increases enacted in 2013 and 2014, those increases were not evenly distributed across all income groups, but—as previously mentioned—fell heavily on high-income households. A close analysis of tax incidence data from the Minnesota Department of Revenue indicates that—as a result of the property tax reductions and several other features enacted in 2013 and 2014—combined state and local taxes of most Minnesota households actually stayed flat or declined.‡

Minnesota’s decision to increase taxes and Wisconsin’s decision to cut them had serious fiscal ramifications in both states. As of January 2017, Minnesota was one of nineteen states enjoying a balanced budget or a surplus, while Wisconsin was among the 31 states with a revenue shortfall, according MultiState Associates. MultiState observed that:

Wisconsin will face significant fiscal difficulties as it crafts its upcoming budget. Economic reports indicate that the state is facing a $693 million shortfall for the current fiscal year, a $1 billion gap in the state transportation budget, and a predicted $900 million deficit by the end of the next biennium.

The budgetary situations of both states have had serious implications for the funding of public services, with Minnesota’s surplus allowing for increased investment in, or at least restoration of funding for, items that had been cut in previous years; meanwhile, Wisconsin’s revenue shortfall has resulted in funding reductions. This topic will be explored in the second part of this series.

 

Health Care Fellow Pat Benner co-authored this article.

 

*Inflation adjustments in this article are based on the Implicit Price Deflator for State & Local Government Purchases, which—for reasons noted in a 2016 North Star article—is the appropriate index to use when adjusting state and local government revenues and expenditures for the effects of inflation.

In tax year 2013, the income threshold above which the new top tier tax rate applied was $125,000 for married separate filers, $200,000 for heads of households, and $150,000 for single filers. Because income tax brackets are adjusted for inflation, these thresholds for tax year 2017 are $130,760 for married separate filers, $209,200 for heads of households, and $156,900 for single filers.

This conclusion is based on an analysis of Minnesota Department of Revenue publications regarding the incidence of the tax acts enacted during the 2013 and 2014 legislative session. Close scrutiny of the MDOR findings reveals that the total state and local taxes paid by most Minnesota households likely declined as a result of the 2013 and 2014 tax acts, holding all other factors constant.