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Where does Minnesota Stand?

The Minnesota Legislative session is less than a month away.  With the DFL in control of the House, Senate, and Governor’s office for the first time since 1990 we can expect that, at the very least, everything will operate differently than it has in a long time.  This is a good time to look around and back to a complete understanding of the state of the state budget.  The most contentious parts have always been taxes, so we should start with them.

As noted before, there is a structural deficit of $1B per year that is hidden by some awful gimmicks.  Fixing that gap will likely be easy, but it begs for more fundamental reform that Governor Dayton is eager to implement.  Before we get too far into it, two obvious questions stand out – where does Minnesota government income stand in relation to other states as well as where we have been historically?

OlsonThere are many ways to represent the state of our state.  I have always found that the most fair way is to look at all state and local government combined.  Local government is constrained by state law in how it can raise revenue and in many of the services it has to provide.  It is best to look at the overall system as a kind of “bottom line”.  When looking at income, the entire state plus local picture is the most complete overall.

Similarly, since we do tax nearly everything, the Gross State Product (GSP) is the broadest and best measure of the state to compare our government’s income to.  GSP includes household income, business income, and every aspect of Minnesota’s economy.  It is also useful for adjusting other states’ data for comparative purposes.

The most complete data comes from the Census Bureau, but the most recent data present on state and local governments is from 2010.  It allows a comparison across all the states by adjusting for GSP uniformly.

There are three main sources of income for state and local government.  Money comes in from the Federal Government, from taxes of all kinds, and from various fees for services.  The last category includes all the tuition, bills paid at county hospitals, and so on from every kind of fee you can imagine.  Ranking all the states’ incomes from these categories as a share of GSP in 2010, we find some interesting results – show here just for Minnesota and neighbors:

From Feds Taxes Other Total
US Avg 4.3% 8.8% 4.2% 17.4%
Minnesota 4.0% 9.0% 4.1% 17.1%
Wisconsin 4.4% 9.9% 4.2% 18.5%
Iowa 5.1% 8.5% 5.0% 18.5%
North Dakota 5.3% 9.8% 4.5% 19.5%
South Dakota 5.1% 6.8% 3.8% 15.7%

Compared to other states, Minnesota is low on money from the Federal Government (34th in rank), rather average on taxes (21st) and low on fees for services (32nd).  Overall, the total size of state and local government is on the low end of average (30th).  Compared to our neighbors, Minnesota’s government is smaller than any except the parsimonious South Dakota.

This may surprise many people who are used to complaints about the size of Minnesota’s government.  That case has always been greatly exaggerated for political purposes, but it is also true that taxes have shrunk somewhat over the last decade of largely Republican control.  The following chart has data going back to 1998, a good benchmark because it was towards the end of the period when the classic DFL last had much influence – when Arne Carlson was the moderate Republican Governor.  It shows how the mix of incomes for the combined state and local system has changed – but just a little bit:

mychart

Taxes were 10% of GSP in 1998, but fell to as low as 8.6% of the state’s economy during the brief boomtimes in 2004.  They have since settled in to a range of 9.0% – 9.3% consistently.  Input from the Federal government went up dramatically when Obama became President, and fees bounced around from 3.8% – 4.3%.  The overall trend has been that government was 17.0% of GSP in 1998, dropped to 15.5% in 2004, but is now back up to 17.1% of the state’s economy overall.

What does this tell us?  In terms of taxes and overall size of government, Minnesota is a very average state.  Its government has not changed significantly in size through the upheaval of changing the political parties in control, either.

One last note – these data also allow us to compare overall debt as a share of each state’s economy, and on that score Minnesota is also rather average but in relatively good shape:

Debt/GSP
US Average 19.6%
Minnesota 16.8%
Wisconsin 17.5%
Iowa 10.6%
North Dakota 12.5%
South Dakota 14.3%

If we were to introduce an economic stimulus bill up to the amount that would give us an average debt load, we could spend an astounding $7.7B on things like roads, schools, transit, and so on.  I’m not advocating that, but it shows there is “headspace” for a major stimulus if we so desired.

There is a lot more data than this, so if you have any questions please ask!  Spending information will be in a later post.

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16 thoughts on “Where does Minnesota Stand?

  1. Good to know, thank you. So were the Republicans lying to us when they said we had the whatever-highest taxes in the US?
    Also I am curious about what the highest and lowest states are for government if you did all of them, which I would guess you would have to in order to get the rankings.

    • Big questions! The first answer is that you can figure this stuff in more narrow ways to get the answer you want. What was always said is that Minnesota has a high income tax per capita. They knew that people would remember “high tax”, and they did. The truth is that we are a relatively wealthy state (high GSP/capita) and we rely on income tax more than property taxes when compared to other states. Ta-Da!
      As for the states with the largest state + local government, you are right that it is hilarious for the hypocrisy. Sarah Palin’s Alaska gets the title “Land of the Midnight Socialism” for it’s whopping 29.4% of the state dependent on government, but some other deep red states are very close behind:
      1) Alaska (29.4%)
      2) Mississippi (25.3%)
      3) Vermont (24.3%)
      4) West Virginia (23.6%)
      5) New Mexico (23.0%)
      6) Wyoming (22.6%)
      7) Montana (22.1%)
      I’ll make the whole sheet available once I format it a bit, but the links to the raw data are given above. It’s hilarious (except when it’s depressing).

  2. I for one feel like I have been lied to. If this is all right and we are about average and have been all along that is a different story than what was portrayed in the MSM.
    It seems that what distinguishes Minnesota the most is less Federal aid. There may be many reasons for that but we do have a fairly healthy economy. Perhaps there is less welfare coming in?
    Again I wonder about the use of Gross State Product. It seems like the most fair way to compare overall but are there some things excluded from it?

    • We were “spun”. 🙂 See above for the explanation. We’ve always been around average – on the high side in 1998, on the low side now, but not very different.
      Yes, you are right about less Federal money coming in. And it is because we are relatively wealthy. Keep in mind that we pay more in per capita than average, so our return on the Federal dollar has always been one of the lowest in the nation – around 75 cents on every dollar.
      GSP excludes very little. It does not count government, excepting salaries which are about a third. That is about the only thing excluded and it is fairly uniform all around. Our GSP would be about 11% higher if all of government was included, and I can look at how much that varies from state to state. I doubt it’s a lot, but seeing how some states have much higher state and local government per GSP it may be as high as 20% excluded in Alaska, for example.

  3. I don’t know about you but 17% of the state’s economy being government does not sit well with me. It’s not excessive but it is large. We may be able to live with that and that’s great but I would oppose any major increase and that is what I fear as these “health exchanges” from Obamacare are created. We are already on the edge.
    The share from the feds is probably something we can’t count on in the future especially if it went way up recently. I have never heard of this being on the table when they talk about the fiscal cliff but it should be.

    • Well, how big is too big? This figure includes a lot of things like tuition and bills paid at a county hospital – aren’t fees to a government institution a reasonable thing to have?
      To me, knowing that taxes are only about 9% is still one Hell of a bargain. The Federal part, I agree, is difficult to count on in the future (and I think it is on the table, yes). But it’s the 9% that I think we should focus on as the important number – and that seems very small to me.

  4. I think this illustrates clearly how we got into the budget mess we are in and why there is room for more taxes to not just close the gap but start taking care of the needy. Maybe the Republicans under Pawlenty didn’t change the budget much but the cuts they put in place were the most hurtful. They did that on purpose and we should restore funding to health programs and the homeless that were brutally cut.

    • There is some room to expand, but it is best to be careful. I agree with Jim that the Fed portion is not something we should count on too heavily, for example – and making that up quickly would be a big burden.

  5. In 2016 and 2017, MN’s projected revenue exceeds projected spending.

    This tells me that there may be no structural deficit. The ’14 and ’15 budget problem is probably confined to those 2 years. The solution would be to cut spending to be in line with revenue.

  6. I don’t see an ongoing structural problem.

    In structural balance you look at current projected revenue vs. current projected spending. In other words you don’t include any negative or positive balance forward amounts.

    Labor agreements are budget for in expenses. No extra inflation is needed.

    Minn. has a spending problem for ’14 and ’15. As a conserative I would argue for adjusting policy so that spending fits revenue. Revenue increases could be considered if poor or needy people would be hurt by the policy changes and spending cuts.

  7. On page 72 of the forecast, FY ’14/15 spending is projected to be 4.7% above the FY ’12/13 spending.

    I want to emphasize to the conservative readers out there that in FY 16/17 revenues are projected to be $38.7 billion and expenditure are projected to be $38.4 billion. The state has no structural imbalance per se.

    Now there may be education payments that need to be made, but any backlog would be one time spending. For one time spending you would just need a temporaty tax increase, not a permanent one.

    So conservative, be aware of what Erik’s analysis will be leading to…tax increase advocacy.

  8. The inflation issue is important. Do any legislators want to change the law to include inflation. Perhaps Rep. Mariani or Sen. Pappas. How about Rep. Phylis Kahn. She might sponsor it.

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