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Economic Growth Outpaces Tax Increases

February 19, 2014 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

Despite the increase in state revenue anticipated in the November 2013 forecast, Minnesota’s “Price of Government” is projected to decline over the next four years. At the same time, Minnesota conservatives contend that taxes are increasing faster than the state’s economy.* How do we reconcile these two claims? Simple. The former claim is true, while the latter is false.

The “Price of Government” is equal to total Minnesota state and local government own-source revenue† as a percentage of statewide personal income. As directed by state law, Minnesota Management & Budget (MMB) calculates the Price of Government (POG) based on actual and projected revenues from the February and November forecasts. Even with the tax increase in the 2013 tax act and the $1 billion improvement in state revenue projected in the November 2013 forecast, Minnesota’s FY 2017 POG is projected to be 14.8 percent—0.5 percent less than it was in FY 2013, the last year under the austere budget pushed through by anti-tax legislators as a pre-condition for ending the 2011 state government shutdown.

In order for Minnesota’s POG to decline, statewide personal income must grow more rapidly than total state and local government own-source revenue. Total state and local revenue is projected to increase from FY 2013 to FY 2017. However, this growth lags behind the projected growth in Minnesota personal income, thereby resulting in the decline in Minnesota’s POG.

This brings us to the conservative claim that growth in Minnesota government revenue is outpacing growth in the state’s economy. Given that growth in personal income closely coincides with growth in Gross Domestic Product (GDP), it is unlikely that the state and local government revenue could be growing less rapidly than personal income at the same time that it is growing more rapidly than the state’s economy as measured by GDP. In fact, state and local own-source revenue is projected to grow less rapidly than both personal income and GDP. Projected U.S. GDP is shown in the graph below because Minnesota GDP projections through 2017 are not available; according to MMB staff, Minnesota GDP is expected to match or surpass U.S. GDP growth over this period.

After growing slightly more rapidly than personal income and GDP in 2014, the state and local government own-source revenue growth rate flattens in 2015, the second year of the current state biennium. From 2013 to 2017, growth in state and local own-source revenue lags 3.9 percent behind personal income growth in 5.4 percent behind growth in the economy as measured by GDP.

The lower rate of growth in own-source revenue vis-à-vis personal income and GDP is not restricted to any one level of government, but extends to all levels of state and local government. From 2013 to 2017, state, school, county, city, town, and special tax district own-source revenues are each projected to grow less rapidly than personal income and GDP, as illustrated below.

There is no doubt that total state and local government revenues in Minnesota will increase over the next four years, both as a result of the 2013 tax act and improvements in projected revenues indicated in the November forecast. However, this increase is necessary to compensate for the significant drop in state revenue over the course of the last decade. Even after revenue increases projected through the FY 2016-17 biennium, real (i.e., inflation-adjusted) per capita state general fund revenue is still projected to be nearly six percent less than it was during the FY 2004-05 peak.

Furthermore, MMB projections of state and local government revenue from the November forecast and the Price of Government report assume no reductions in public revenue below current law levels. However, Governor Dayton has already proposed over $400 million of revenue reductions during the current biennium, which will reduce state own-source revenues.

Conservative handwringing about the growth in public revenue is unwarranted. The growth in revenue projected to occur is restoring state investments in education, infrastructure, work force training, healthcare, and other public assets that have been neglected for too long. Even with the revenue increases enacted in 2013 and the improvement in revenue collections indicated in the November forecast, Minnesota’s Price of Government is falling and total state and local government revenue is projected to grow less rapidly than the state’s economy for the foreseeable future.

 

*For example, a recent MPR story quoted former U.S. Senator Norm Coleman as saying, “Spending and taxes have shot up between 8 and 9 percent while GDP shot up 3 percent.” During debate over the tax and budget bills passed during the 2013 session, a Star Tribune blog quoted Minnesota Business Partnership Executive Director Charlie Weaver as saying “How can legislators justify a 7 percent spending increase when the economy is only growing by 2 percent?”

†”Own-source revenue” includes all revenue generated by a unit of government, excluding transfers from other levels of government. For example, total state and local government own-source revenue includes all revenue generated by Minnesota state and local governments excluding transfers from the federal government.

‡State and local government own-source revenue data and personal income data are from the November 2013 POG report, corresponding to CY 2012/FY 2013 to CY 2016/FY 2017. (Calendar year and fiscal year data are merged in the POG report because counties, cities, and towns operate on a calendar year basis and the state and school districts operate under a fiscal year that begins on July 1.) U.S. GDP is based on calendar year data as reported in the November 2013 forecast.

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5 Comments:

  • Mike Downing says:

    February 24, 2014 at 8:53 am

    Jeff, do you believe all projections? Let me remind you that the ACA was projected to reduce health care insurance by $2500/ family, it was “projected” that you could keep your doctor, it was “projected” that you could keep your insurance, etc.

    Do states act differently than federal governments? High tax countries in Europe historically have very low growth. Do you believe in actual performance or “projections”?

    • Jeff Van Wychen says:

      February 24, 2014 at 11:27 am

      The projections in this article were compiled by non-partisan experts at MMB and are relied upon by policymakers of all political stripes for budgeting purposes.  In short, they are the best and most objective projections that we have.  While there is a 50% chance that these projections overstate state and local revenue growth relative to GDP and personal income, there is also a 50% chance that they are understating it.

      I do indeed have faith in actual performance.  For the last half century, Minnesota has invested more heavily in education, infrastructure, and other public assets and as a result our performance has surpassed that of most other states.  The only extended period when this was not the case was during the “no new tax” era of 2002-2010.  As far as projections go, I believe in using the most credible and impartial information available, which is what I’ve done in this article.

    • tony says:

      February 24, 2014 at 1:15 pm

      Mike is tight. Obama said the ACA would save me $2500. My new rate w/the ACA dropped my insurance from $1200/month to $469/month. With the same company(I’m keeping my insurance?). With the same doctor(keeping my doctor?), and dropping my deductible from $2500/year to $1000/year. Darn that Obama, always UNDER-promising…

    • Dan Conner says:

      February 24, 2014 at 7:00 pm

      I don’t know what unsubstantiated remark Mr.Downing is making, but the cost of the ACA has greatly reduced the cost of health care in the US.  In fact, the program costs have been greatly overstated, while the savings greatly understated.  So, I guess it $2500 was alleged at the beginning, it turned out to be greater.  He was right you could keep your doctor.  However in the instances where your health insurance was in such a sad shape to be substandard in offering poor coverage, you would need to enroll in new insurance to meet the minimal standards of coverage, being no lifetime maximums, no pre-existing conditions, and coverage of children on parent’s accounts until Age 26.  Meanwhile, Mr. Downing misrepresents the enormous advantages of the ACA to the American public.  Mr. Downing is not a,patriot and lies to people to save his taxes.  However, he can’t recognize a good deal for people out of his childish fear of taxes.  People benefit for ObamaCare.  Tough for Mr. downing.  He’s selfish anyway.  He would short change anyone, if it would mean more for himself.

  • tony says:

    February 24, 2014 at 1:18 pm

    Sorry: meant “mike is right”. blew my whole joke…