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Minnesota #41 out of 50 on economic outlook

By current standards, Minnesota’s economy is among the best in the nation. But will it continue to be in the top tier?

Last year, the Bureau of Economic Analysis said that Minnesota ranked 13th in per capital personal income. The state’s average income of $42,843, was six percent higher than the national average. That’s pretty good, though I suspect it’s lower than most Minnesotans would have expected.

Yesterday, a new report, Rich States Poor States, 5th Edition, looked at each of the states, and gave Minnesota a very different evaluation: It put Minnesota at 41 out of 50 states, both for recent economic activity, and in expected performance going forward.

“Minnesota at 41? That’s crazy talk!” Let me explain.

The looking backward component examined growth in three variables: personal income, population, and non-farm employment. Growth is the important word here. To paraphrase Frank Sinatra, you can be riding high in April, and shot down in May. Some economies continue to grow, while others stagnate.

Between 2000 and 2009, Minnesota’s per capita income grew 33 percent. Good, but that gave the state a ranking of only 29 among 50 states. In that same time, non-farm employment fell slightly, putting the state at 28th among the 50. Minnesota also lost domestic population, putting it 39th in the country in “absolute domestic migration,” which measures, among other things, how people respond to the economic climate of a state. On three measures, Minnesota was below average. Weight these three variables equally, take an average, rank the states again, and you come up with a composite ranking: Minnesota dropped to 41 out of 50 states.

What about the future? Here, the authors take 15 different measurements that reflect state policy. These include rates for income taxes, property taxes, sales taxes, and also taxes as a percentage of personal income. Other measurements include the existence and quality of limits on taxation, the existence (or not) of a right-to-work law, and the number of public employees (both an asset and a liability) as a portion of the population. Once again, Minnesota came in with a ranking of 41 out of 50 states. So Minnesota is by absolute standards doing well. But in the department of “what have you done for me lately?,” the answer may be “not much.”

The report will bring back the classic chicken-and-egg debate: Does Minnesota enjoy a higher-than-average income due to its higher-than-average level of taxation and government spending, or does the state’s above-average income allow it to pay for a more-active-than-average public sector? While I admit that some public spending has economic benefits, I’d argue for the latter explanation. Once you get beyond a certain size and scope of spending, government ceases being a necessary good and starts being a luxury good. And I think it’s fair to say that Minnesotans have treated government as a luxury good: We can afford it, we’re smart enough to spend it wisely, and we like our extensive social safety net, bike trails, sports stadiums, arts facilities, etc. Need a little more money? Oh, just tax the rich; they like it here anyway.

But can we continue our habits? Looking at, say, the fact that spending on long-term care and health care will only go up, up, up, due to the Affordable Care Act (more subsidies!) and the aging of the baby boomers, I’d have to say no. Minnesota will have to spend less, tax more (and hope the people who pay the bills don’t leave), or do both.

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On a note of disclosure, I was involved in the creation of Rich States, Poor States as an editor. Another thing to note is that it was produced by the American Legislative Exchange Council (ALEC), a group that has in recent months been accused of everything from letting large companies buy legislation to providing the intellectual justification for the shooting of Trayvon Martin. Needless to say, I think ALEC has been maligned for political purposes.  If, on the other hand, you have some helpful criticism to suggest to the authors, drop me a line, courtesy of the Center, and I’ll pass it along.

Working until April 17 to pay for government

In 2012, Americans will work 8 hours a day, five days a week, from the beginning of the year until April 17 to pay for the spending incurred in their name by federal, state, and local governments. That’s one of the findings of the Tax Foundation’s latest calculation of “Tax Freedom Day.”

Tax Freedom Day (trademarked by the foundation) is one way to express the cost of government. According to this year’s version of the report, Americans spend 107 days out of 365 days in the year working for governments, to pay $6.2 trillion in taxes. The single largest category is the individual income tax (40 days worth of work), followed by payroll taxes (23 days), sales and excise taxes (15 days), property taxes (12 days), corporate income taxes (10 days), and miscellaneous taxes (7 days).

If you account for deficit spending, Tax Freedom Day comes on May 14. That is within one week of the record date of May 21, 1945–a time in World War II just after the U.S. had finished defeating Nazi Germany and was closing in on the Japanese homeland.

The report also calculates Tax Freedom Day on a state-by-state basis. As you might expect, it comes earlier in some states than in others. It comes the earliest in Tennessee (March 30) and the latest in Connecticut (May 5). Tennessee has no state income tax. Connecticut has a state income tax. More importantly, its residents have higher incomes than those of any other state, which means they get more heavily taxed by the so-called progressive structure of the federal income tax. In Minnesota, the day comes on April 22, later than all but seven other states.

Spending on goods and services is a necessary fact of life. We spend money on food, clothing, and housing, for example, though less on those combined than on taxes. Some spending on government is necessary. But the question is, “Are we getting our money’s worth?”  Governments get their money by taking money away from the non-governmental sector in ways that are obvious (hello, April 15!) and not so obvious (the opportunity costs of the taxes paid, interest on debt, inflation induced by monetizing the federal debt, etc.).

Like debt, government spending can be good or bad, wise or foolish. Incurring debt to buy something that will help you permanently increase your income by 30 percent is wise; incurring debt to buy a cache of drain cleaner, which you then pour on your breakfast cereal every day, is not.

So the concept of Tax Freedom Day doesn’t in itself tell us whether we spend too much or too little on government. To make that judgment, we need to look elsewhere. (What does it do to our incomes? Civil society?) But the fact that we spend 30 percent of the year working to pay for government should drive everyone to ask some hard questions of our public officials, and ourselves.

A Surplus Now, but the Deficit’s On the Way

Minnesota Management and Budget has forecast a tiny surplus in the state budget for the current biennium. Great. But as Commissioner Jim Schowalter observes, “we still have lots of IOU’s” to pay back–including the “school shift” of $2.7 billion.

The press release also shows another cloud on the horizon: “The forecast shows a projected deficit of $1.1 billion for fiscal years 2014-15.”

Uh-oh.

The state’s spending trajectory is still unsustainable.

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