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Minnesota Leads the Nation in Declining Revenue

July 26, 2010 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis
Conservatives' complaints about the size of Minnesota government "literally doubling" are easy to find in media reports.  However, the dispassionate facts from the U.S. Census Bureau say otherwise.  Recently released Census information shows that total real per capita state and local government revenue in Minnesota once again declined in 2008.  Minnesota continues to lead the nation in the decline of non-federal general revenue during the "no new tax" era.

Non-federal general revenue includes all dollars collected by state and local government through taxes, fees, special assessments, and all other miscellaneous charges, excluding dollars received from the federal government.  Census publications refer to this as "own-source" revenue.

From 2007 to 2008, real (i.e., inflation-adjusted)* per capita own-source revenue in Minnesota declined by 2.1 percent.  Combined with declines in previous years, Minnesota real per capita own-source revenue fell by a total of 5.3 percent from 2002 to 2008.  Over this six year period, national state and local real per capita own-source revenue grew by 4.4 percent.  Relative to the national average, Minnesota own-source revenue has steadily declined since 2002.

While own-source revenue per capita in Minnesota was still 6.5 percent above the national average in 2008, experts at the Minnesota Department of Revenue have argued that revenue per capita is not necessarily the best way to measure the relative size of government from state to state.

The Minnesota Department of Revenue's research division director, Dr. Paul Wilson, has demonstrated that high per capita income states generally have higher per capita taxes than low per capita income states.  Higher wage levels and higher cost of living in high per capita income states-combined with lower levels of federal assistance-mean that high per capita income states must generate more own-source revenue in order to provide the same level of public services as in low per capita income states.

Based on this finding, Wilson concludes that per capita tax levels are not particularly helpful in identifying high tax and low tax states.  A Revenue Department publication concludes that "Rankings of total state and local tax burden measured as a percent of income are better able to identify the states commonly perceived to be low-tax or high-tax states."

Minnesota state and local government revenue and spending per $1,000 of personal income has gone from nine percent above the national average in 2002 to virtually equal to the national average in 2008.

From 2002 to 2008, Minnesota has been a national leader in terms of the reduction in own-source revenue.  Minnesota alone among the 50 states ranks among the top five states in the nation in terms of the decline in both own-source revenue per capita and own-source revenue per $1,000 of personal income.

In light of these facts, Minnesotans should be justifiably confused regarding all of the hot air from the right regarding out of control growth in government.  In fact, "no new tax" proponents should be claiming victory. Since 2002, they have succeeded in shrinking the own-source revenue of Minnesota state and local governments more than any other state in the nation.

And to the victors goes the accountability.  "No new tax" proponents also need to accept some responsibility for the state's dismal financial situation.  Even before the economic collapse of 2008, real per capita state and local government own-source revenue was in decline.  The promise of Laffer economics--that lower tax rates would produce increased public revenue--has failed to materialize in Minnesota, just as it has in about every other place that's tried it.

They also need to take responsibility for Minnesota's deteriorating economic performance relative to the rest of the nation.  During Minnesota's "no new tax" era, job, income, and GDP growth has lagged behind the U.S. average.  Road conditions have deteriorated.  Public investment in K-12 education has dropped below the national average while pupil teacher ratios have risen above the national average.  The extent to which "no new tax" proponents can blame extenuating circumstances for Minnesota's slide relative to other states is limited.  The "no new tax" agenda has not delivered the prosperity it promised; in fact, the overarching trend is in the wrong direction.

With the state facing a $6.8 billion budget deficit, the need for reform and reprioritization of public spending is inevitable.  Equally inevitable is the need for an increase in public resources, especially in light of the sharp decline in real per capita own-source revenue since 2002.  A balanced approach that involves both spending reductions and revenue increases offers the only hope of balancing the state's budget while adequately funding public education and infrastructure --investments that are critical to Minnesota's long-term prosperity.

*All inflation adjustments in this analysis are based on the implicit price deflator for state and local government purchases, which is the appropriate measure of inflation for state and local governments.

?A 2008 Minnesota 2020 article discussed Dr. Wilson's research on this topic in more detail.

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