Michigan and Minnesota taxes

We are working on our next report. A case study of  Minnesota’s economic growth policies. With an emphasis on tax and spending policy. These, of course, are the policy levers widely considered to influence state economic outcomes the most.

In doing the work the question arose “how to measure tax burden?” The answer effects the comparison between the path Minnesota has chosen compared to Michigan. Two metrics are commonly used:  per capita and as a percent of personal income. We decided to use both in the report. (As we did in our 2005 A New Agenda for a New Michigan report).

Here is why. Percent of personal income is a measure of ability to pay for public goods and services. Per capita probably is the best metric of political will to pay for public goods and services. The fact that you have more income to pay for more public goods and services doesn’t mean that you will.  Taxes are a choice.

In 1992 when per capita income was close between the two states––Minnesota 15th and Michigan 20th––Minnesota state and local taxes combined were $357 (17%) per capita higher than Michigan ($2,488 to $2,131). So both states could “afford” about the same level of taxes but Minnesota chose to buy more public goods and services. Including in categories like education and infrastructure that we describe as public investments that we believe lead to future economic growth.

That preference for more public goods and services has continues for the past two decades. Growing from taxes higher by $357 per capita in 1992 to $1,363 ($5,018 to $3,655) in 2011 (latest available). (As we will detail in the report the difference between the two states is in state taxes. Local tax burden is about the same in the two states.)

Contrary to today’s conventional wisdom their economy did better than ours, by far, the last two decades. Minnesota went from 15th in per capita income in 1992 to 11th in 2011. Michigan went from 20th to 36th. Of course, the will to pay higher taxes and make public investments are only a part of the reason why. But one clearly can make a stronger case that that will helped Minnesota get to where they are today than the one we are told constantly that higher taxes leads to worse economic outcomes.

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