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Minnesota's Slip Toward Mediocrity: Less Investment, Less Return

June 04, 2008 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

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Executive summary
Minnesota's national ranking on key performance indicators has declined in recent years at the same time that the state has decreased its public investment relative to other states.

Since 1995, state and local government revenues and expenditures in Minnesota have declined relative to the rest of the nation. This investment lag has been particularly dramatic since 2002, and it corresponds with significant declines in Minnesota's prosperity, educational achievement and quality of life compared with other states. While Minnesota is not an economic "basket case," we no longer shine with the luster we once did.

The falloff in Minnesota's investment in public services and infrastructure since 2002 is largely the result of a "no new tax" agenda implemented by a right-wing governor and an all-to-compliant Legislature in 2003, 2004 and 2005. While other states have increased their percentage of income devoted to public investments, Minnesota's public investment has shrunk, dipping below the national average.


There are many ways to compare the relative size of government in the 50 states, although not all comparisons are equally meaningful. While this report compares states based on several criteria, the most meaningful are based on (1) a broad measure of revenues or expenditures (as opposed to just "taxes"), (2) combined state and local government revenues or expenditures (not only state-level information) and (3) revenues or expenditures per $1,000 of personal income (rather than per capita). Examining revenues and spending as a percentage of personal income provides a common-sense way of adjusting for higher costs of labor and living in high personal income states.

Based on these criteria, Minnesota is not a big government state. Using the broadest categories of revenues and expenditures, Minnesota ranks from 29th to 31st among the 50 states in the total size of state and local government. In addition, Minnesota has fallen below the national average on each of these four major categories of revenues and expenditures.

Even on a per capita basis, Minnesota has fallen out of the top 10 states in each of the major categories of revenues and expenditures. In 2006, Minnesota's ranking in general revenue, total revenue, general expenditures and total expenditures per capita ranged from 3.3 percent to 5.8 percent above the national average. Although Minnesota's per-capita revenue and spending are modestly above the national average, consider that:

1. As a high income state, Minnesota has higher labor and living costs than the national average. Insofar as labor is a major component of government expenditures, these factors contribute to higher government costs in Minnesota relative to most other states.

2. As a northern state, Minnesota has greater weather-related expenses than most other states. For example, Minnesota's freeze-and-thaw cycles lead to higher road maintenance costs than in warmer states.
 
Rankings based on expenditures provide the most useful way of comparing changes in the relative size of government over time, since they are less influenced by erratic swings in volatile revenue sources than are measures of tax rates. Minnesota's rankings in state and local government general and total expenditures have fallen significantly since 1995.

Minnesota state and local government expenditures have also dropped dramatically relative to the national average from 1995 to 2006.
     
Most of Minnesota's decline in revenues and expenditures relative to the rest of the nation from 1995 to 2006 occurred over the last four years of this period (2002 to 2006). Over those four years, Minnesota's rankings on key measures of economic performance and quality of public services have also deteriorated, as illustrated below.

In general, Minnesota's performance relative to other states is still strong. On two of the 12 indicators, Minnesota has remained at or near the top of the 50 states. However, Minnesota's rank and position relative to the national average on the 10 others has deteriorated since 2002.  In the poverty and homeownership rates, Minnesota's decline relative to other states since 2002 has been small; the decline in other factors is somewhat more significant and disturbing. The two indicators in which Minnesota's relative performance has deteriorated the most since 2002 are the unemployment rate and employment growth. These trends indicate that all is not well in the Gopher State.

Simply because deterioration in Minnesota's economic performance relative to other states has corresponded with a relative decline in public investment does not prove that one caused the other. However, predictions from proponents of the "no new tax" agenda that shrinking the size of government would boost Minnesota's economic performance have certainly not come to pass. In fact, the opposite has occurred.

In the past, Minnesotans have demonstrated an ability to identify critical public investments and fund them accordingly. As State Economist Tom Stinson observed in MinnPost, "Minnesota's economic record over the last half-century is one most states envy. The reason that occurred was because farsighted public and private sector leaders figured out they were going to invest in the education of the Baby Boom generation. Now it seems like an obvious decision to have made, but if it was, other states would have done it too, and we wouldn't have done as well."

The principal objective of the "no new tax" policy is to freeze or shrink the level of public revenue. If this had been the ideology of state leaders a half-century ago, the progress cited by Stinson would not have occurred. The primary goal of state policymakers is not to fixate upon a particular level of public revenue, but to identify which public investments are in the long-term interest of the state and find a way to pay for them. Any dogma or political priority that interferes with this objective must be abandoned.

Minnesota's continued economic strength is by no means predestined; our position in comparison to other states can and has deteriorated. This deterioration has coincided with a relative shrinkage in Minnesota's public investment. Minnesota's hopes for a bright economic future depend on the ability of today's policymakers to address the state's investment needs with the same foresight shown by previous generations.

 

 



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