Minnesota and Michigan

Not good news for Michigan. The unemployment rate is going up again. Up to 9.0% in August from a post recession low of 8.4% in both April and May 2013.

This turn for the worse, comes with the huge Snyder business tax cuts in effect. You know the ones that were supposed to drive Michigan’s economic comeback from the depths of the Great Recession. Think again!

Turns out the business tax cuts did get us higher ratings in the Tax Foundation’s  2013 Business Tax Climate Index. Where Michigan is now ranked 7th in business taxes. Which the Snyder Administration (and many others) celebrates as a major accomplishment. But as we have explored previously doing well in business climate ratings has little to do with what really matters: whether Michiganders have more and better jobs.

Minnesota on the other hand has an unemployment rate that is falling. 5.1% in August, their post Great Recession low. The number of unemployed in Minnesota is down ten percent over the past year compared to less than two percent in Michigan. Minnesota’s Tax Foundation business tax ranking is 44th. So much for low business taxes driving more and better jobs!

I’m not a big fan of the unemployment rate as a measure of economic well being. Particularly the monthly unemployment rate. But it is what everyone else uses as the basic measure of how well a state’s economy is performing. In this case the unemployment rate comparison is aligned with all the economic measures that matter more. The employment to population ratio, per capita income, private sector employment earning per capita, poverty rate, on and on and on. On each Minnesota has the best performance in the Great Lakes. Far better than Michigan. And with Michigan the gap is growing larger. (You can find a Minnesota economy overview here.)

So in two huge business tax cuts we have given away more than $2 billion a year in state and local taxes. For what? Certainly not a lot of new jobs. And because of those tax cuts (and many others the past 15 years or so) we have been forced to slash the public investments that matter to long term economic prosperity: education, infrastructure and quality of place.

Minnesota has done the opposite. Starting with higher taxes and just raising them again to protect their ability to make important public investments.

I don’t know whether Michigan’s unemployment rate over the next several months is going to go up or down. But it is almost certain that for the foreseeable future Minnesotans are going to enjoy better economic outcomes (both employment and income) than Michiganders. Because Minnesota has both the concentration of knowledge based employers and college educated adults that are the main drivers of more and better jobs.

And to the degree that state, regional and local policy matters, the evidence strongly suggests that their public investment driven policies work far better than our tax cut driven policies in building the assets that matter most.


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Lou Glazer

Lou Glazer is President and co-founder of Michigan Future, Inc., a non-partisan, non-profit organization. Michigan Future’s mission is to be a source of new ideas on how Michigan can succeed as a world class community in a knowledge-driven economy. Its work is funded by Michigan foundations.

This Post Has 6 Comments

  1. I enjoy your analysis, but find myself wondering what those on the other side of the aisle would say. Perhaps posting in a point-counterpoint style in the future would lend added credibility to your points, and drive the conversation we’re having as a state through a more rapidly moving and dialectic process.

    1. I feel like I am responding to a lot of public conversation on the other side. Seems like they have no difficulty in getting their ideas out. But I would enjoy comments to the blog that don’t agree with my analysis so we can have a conversation here.

  2. Mr. Glazer,
    Your article was well written but does not consider the fact the the tax increases have increased the number of well to do Minnesotans exiting the state. If you fast forward 5 years it will be Minnesota on the wrong side of the unemployment.

    1. Thanks for the kind words. That is the debate. Do high taxes drive more and better jobs or as we see it talent which requires public investments both in education and creating places where mobile talent wants to live and work? Minnesota has been the high tax state (along with Illinois) in the Great Lakes for decades and has outperformed us and all the other lower tax Great Lakes States on all the economic measures that matter to people (jobs and income). We believe even with their latest tax increase that will be true in the future just as it has been in the past. There is more exploration coming from us on why Minnesota has been doing so much better than Michigan. Look forward to your reaction to that work as well.

  3. I think tax increases can have a positive or negative impact. It is sort of a balancing act. As Dudley Ryan points out, tax increases can cause people to make decisions to move. A moderate increase may cause a few people to move, but a very large or excessive increase may cause a large number to move and have a negative affect. The problem we all struggle with is where is the “sweet spot” where the benefits outweigh the cost. Continuously cutting taxes to attract new business will result in a “race to the bottom.” But irresponsible tax increases without adequate controls could result in the scenario Dudley Ryan mentions. I think Lou is talking about moderate tax increases with the proceeds directed toward education and infrastructure. This is what I think is the best, but we have to monitor what happens and keep fine tuning as appropriate.

    1. Exactly. What you get for higher taxes matters. What is interesting though is Minnesota’s tax are quite a bit higher than ours. And the revenue higher taxes produce allows Minnesota to make more of the public investments that matter to economic growth/prosperity. We are doing a case study of Minnesota’s tax and spending policies. I think folks will be surprised at how much higher their income, business, sales and gas taxes are than ours.

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