On Our Way to Average: Ranking Minnesota's Economic Performance
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Since 2002, Minnesota's state and local government revenues and expenditures have declined significantly in comparison to other states. The corresponding decline in public investment has coincided with a decline in Minnesota's economic performance and quality of life. Once a national leader in areas such as education and employment, Minnesota is now lagging.
Minnesota leads the nation in terms of the decline in non-federal general revenue from 2002 to 2007, both on a real per capita basis and per $1,000 of personal income. In fact, on all categories of revenue and expenditures on both a per capita basis and per $1,000 of personal income, Minnesota ranks among the top ten states in terms of the decline (or least growth) from 2002 to 2007. This is true for no other state.
This report updates a 50 state analysis of revenue, expenditure, and performance trends published in June 2008. It looks at where Minnesota ranks nationally on 13 key wellness indicators ranging from job and income growth to road conditions. The report finds that to date, the economic experiment undertaken by the advocates of "less government" and "no new taxes" has been a failure.
The baseline year for this study is 2002. In that year, Minnesota implemented a series of changes in the state-local fiscal relationship, including a restructuring of the property tax system and a complete state takeover of general education funding; 2002 was also the last year prior to the implementation of a "no new tax" agenda in Minnesota.
Minnesota Leads the Nation in Revenue Decline
No state has cut government revenue and spending more than Minnesota since 2002. The following analysis focuses on state and local government revenue and expenditures per $1,000 of personal income.
On taxes and state and local general revenue (non-federal), also known as "own-source" revenue, Minnesota has dropped from approximately nine percent above the national average in 2002 to less than two percent above in 2007. The four broadest categories of government finances-general revenue, total revenue, general expenditures, and total expenditures-are better measures of the total size of government in Minnesota relative to other states. On each of these measures, Minnesota dropped below the national average, indicating that we are no longer an "above average" state.
Minnesota's rank among the 50 states in the various categories of state and local government finances per $1,000 of personal income has also fallen significantly from 2002 to 2007. Minnesota's rank on taxes per $1,000 of personal income fell from 6th in 2002 to 16th in 2007, while total general revenue (non-federal) fell from 12th to 22nd. On each of the four broadest categories of government finances, Minnesota's rank has dropped from eight to 15 places from 2002 to 2007; Minnesota's rank on each of the four broadest measures is 29th or below in 2007.
The Minnesota Department of Revenue concludes that taxes per capita are not particularly helpful in identifying high tax and low tax states because they do not account for the higher cost of labor and cost of living and the lower level of federal assistance in high personal income states. Nonetheless, because per capita rankings are frequently called for, they are included in this report. Even on a per capita basis, Minnesota is only modestly above the U.S. average based on 2007 data. For example, 2007 total revenue and spending per capita in Minnesota are just 2.3 and 2.5 percent respectively above the national average.
The decline in Minnesota revenue and spending versus the national average since 2002 is striking, both on a per capita basis and per $1,000 of personal income. In all instances, the decline is much larger (or the growth is much smaller) in Minnesota than in the nation as a whole.
A 2008 Revenue Department analysis concluded that Minnesota is "just about average" in terms of its combined state and local tax burden. The above analysis shows that this is true for other categories of revenues and expenditures as well. It is clear that "no new tax" leadership has reduced public investment in Minnesota to the point where we are not a high tax, "big government" state. The more important question, however, is how the shrinkage in government and decline in public investment has impacted Minnesota's economic performance and quality of life.
Minnesota Falls Behind on Key Economic Indicators
In the past, Minnesotans have demonstrated an ability to identify critical public investments and fund them in a way that promotes long-term prosperity. State Economist Tom Stinson observed that 50 years ago, far-sighted leaders invested in education and infrastructure and by doing so paved the way for a half century of prosperity during which Minnesota surged ahead the nation.
The principal objective of the "no new tax" policy is to freeze or shrink the level of public revenue. If this had been the agenda of state leaders a half-century ago, the progress cited by Stinson would not have occurred. The primary goal of state policymakers should not be 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 ideology that interferes with this objective must be abandoned.
The analysis of the 13 performance factors begins in 2002 and terminates in 2007, 2008, or 2009, depending on the most recent data available for that specific indicator. The period since 2002 corresponds with the time frame of the revenue and expenditure data examined in this report; it also corresponds with the ascendance of the "no new tax" agenda in Minnesota.
In general, Minnesota's performance relative to other states deteriorated since 2002. Some key findings:
- Minnesota's performance relative to the national average in terms of unemployment rates and employment growth (since 2001) has deteriorated.
- Somewhat smaller-but still significant-deterioration was observed on the three income and pay measures.
- On all three education indicators-pupil-teacher ratio, students at or above "basic" level in math and reading, and per capita state and local spending on education-Minnesota's performance declined relative to other states.
- Minnesota's position in terms of road miles in poor or mediocre condition fell sharply relative to the rest of the nation; the miles of roads in poor or mediocre condition in Minnesota more than doubled from 2002 to 2007.
- On the other four factors examined in this report (homeownership rates, health insurance coverage, bridge deficiency percentage, and poverty rates) there was no evidence of a statistically significant decline in Minnesota's performance relative to other states. Nor was there evidence of improvement.
The following graph shows Minnesota's ranking on each performance indicator in 2002 and the most recent year data were available. A ranking of "1" denotes the best performance among the 50 states.
On 12 of the 13 measures, Minnesota's ranking declined from 2002 to 2007, although in some instances the drop in ranking was slight. For the remaining factor, Minnesota's rank remained the same. In no instance did Minnesota's rank improve.
Minnesota is by no means an economic basket case; however, Minnesota's performance relative to other states is headed in the wrong direction. The decline in Minnesota's performance has coincided with a decline in public investment.
Of course, correlation does not equal causation. However, competing explanations do not explain the full extent to which Minnesota's economic performance has deteriorated since 2002. The trends highlighted in this report leave "no new tax" proponents with a difficult question to answer: why did the reduction in the size of government in Minnesota not produce the relative improvement in Minnesota's economic performance that was predicted? To this point, the economic experiment undertaken by the advocates of "less government" and "no new taxes" has been a failure.
Proponents of sustained public investment have long argued that the failure to maintain critical public investments would lead to deterioration in Minnesota's economic performance relative to the national average. This is precisely what has occurred.
Nothing in this report should be construed as an endorsement of untargeted and undisciplined public spending. The state's general fund budget deficit is projected to be $1.2 billion in the current biennium and $7.4 billion in the next. In addition, a recent district court ruling threatens to cancel Governor Pawlenty's July 2009 unallotment, potentially adding $2.7 billion to the deficit. Spending reductions and reforms will have to be part of the solution to the state's ongoing budget morass. However, in light of the substantial reduction in Minnesota public revenue since 2002, it is wrongheaded to insist that the budget solutions be restricted entirely to the expenditure side of the ledger.
The Consequences of Public Disinvestment
The shrinkage in government that has occurred in Minnesota since 2002 has jeopardized critical public investments. The state's roads have deteriorated and pupil-teacher ratios in public schools have increased. In addition, per pupil current spending in Minnesota elementary and secondary public schools has dropped below the national average.
Minnesota's continued strong economic performance relative to the rest of the nation is not predestined; Minnesota's position in comparison to other states can and has deteriorated. This deterioration corresponds with shrinkage in Minnesota's public investment. Minnesota's ability to restore a bright economic future lies not in a slavish devotion to cutting public revenue, but upon our ability to identify the state's long-term needs and fund them appropriately.