High taxes and more and better jobs

By and large our Minnesota policy case study has been well received. The facts are clear. It has the best economy of the Great Lakes states by far. And it also is the highest tax and spending state, with the most generous safety net, in the Great Lakes.

And this has been true for decades. High tax and spending policy has been associated with higher employment rates and higher per capita income in Minnesota for decades. And the gap between it and the rest of the Great Lakes states and the nation has been growing.

The one substantive critique we have received has been from anti-tax advocates that correlation does not equal causation. Pretty amazing that they would use that critique since it is the hallmark of the anti-tax movement. Claiming, without evidence, both that low tax states have the best economies and that by adopting low taxes Michigan would soar is what they have done for decades.

It is true that correlation does not equal causation. The fact is that Minnesota is a high tax and spending state and they have more and better jobs. But that does not mean that they have those results because of their tax and spending policies. We have always been skeptical about the impact of state policies on a state’s economic outcomes. In a 2009 post entitled The Limits of State Policy I wrote: “Turns out state and local economic policies are a weak lever at best.”

That said the reality is that the states with the highest per capita income and even more so those with the highest private sector employment earnings (wages and benefits) per capita tend to be high tax states. Minnesota fits the pattern among high prosperity, non energy-driven, states.

What I take away from the Minnesota report is that to the degree that state tax and spending policies matter to state economic outcomes that what you get from higher taxes is more important to the long term strength of the economy than the burden of higher taxes. That in an increasingly knowledge-driven economy the kind of public investments Minnesota has made over decades in education (from early childhood through higher education), infrastructure and placemaking (creating communities that are good places to live and work) trumps lower taxes.

Minnesota even more demonstrates that the conventional wisdom that we have been bombarded with for decades that high taxes and a generous safety net are the path to economic disaster is nonsense. Choosing to have better schools, roads, police, parks and other basic services and amenities and a more generous safety net does not mean fewer jobs and lower incomes. Minnesota and most of the high prosperity states have more of each than Michigan and they are doing better economically than us and the gap between us and them, since we adopted low tax/smaller spending policies, is growing, not shrinking.

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