The Minneapolis Star Tribune reports that Minnesota now has a $1.9 billion state budget surplus. This comes after the state in 2013 raised its top income tax rate to 9.85 percent from 7.85 percent for families with incomes over $250,000. At the time of the tax increase the state had a budget deficit of $2.1 billion.
The tax increase generated lots of predictions of economic doom. Consistent with the prevailing conventional wisdom that low tax states––particularly those with low or no income tax––have the best economies. Think again!
As we detailed in our latest report, State Policies Matter: How Minnesota’s tax, spending and social policies help it achieve the best economy among the Great Lakes states, Minnesota is both the highest tax state in the Great Lakes and the state with the best economic outcomes, by far, in the Great Lakes region.
They have achieved the economic outcomes we all want––low unemployment, higher wages and high per capita income––in part through decades of public investments in the real drivers of economic growth: education, infrastructure and creating communities where people want to live and work.
Minnesota’s Governor Mark Dayton, the Star Tribune reports, wants to use the budget surplus to make even more investments in education and transportation. They write:
Gov. Mark Dayton told reporters that the surplus, which he credited to the state’s well-performing economy, should be used to invest in education and transportation, his two main priorities. Though he’s not opposed to offering tax cuts as Republicans are putting forth, he said spending on schools and the state’s infrastructure would be a way to spur future economic development.
“Inevitably, there will be another national economic slowdown or downturn, and Minnesota’s economy will be affected like everyone else’s,” he said. “Our budget surplus will disappear, so I propose that we invest our collective good fortune in our collective better future.”
If Michigan is serious about the more and better jobs goal Governor Snyder has set, Minnesota provides the playbook for achieving that goal.
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Minnesota really seems like they are in a sweet spot, already providing a high level of services, especially in education and infrastructure. Apparently the higher level of taxation is worth it to provide these services. I do think that higher taxes can lead to better services and economic growth, but we also have to be careful. I see at least two things that could go wrong and therefore we have to watch out for them when raising taxes to provide services. First, there is always a chance that the state government could be irresponsible or incompetent, squandering or wasting the additional tax dollars. Minnesota seems to be doing a good job at managing its higher tax revenue, but some other state may not do as well. Second, economists often talk about marginal returns on investments. This means that the benefit of each additional dollar amount of investment will eventually yield less returns. Minnesota has proven that their marginal income tax rate of 9.85% is not yet too high. But at some point it could get too high, so Minnesota, Michigan or any other state has to monitor the benefits vs the cost of tax increases. Minnesota has a surplus, so they can increase services without a further tax increase at this time. In Michigan, we do not have a significant surplus, so we probably will need to raise taxes somewhere if we want better schools and roads. I would prefer a higher gasoline tax to repair roads, but that does not seem to be an option right now. I also do not see any possibility or raising the state income tax right now, so I plan to vote in favor of the sales tax increase. I think more infrastructure funding is needed which will probably require some revenue increase.
Here’s a good guide to the likelihood of that scenario: http://fivethirtyeight.com/datalab/ranking-the-states-from-most-to-least-corrupt/
Michigan could definitely raise income taxes; Minnesota collects more than $2 billion more despite having a little more than half of Michigan’s population.
Thanks for the 538 link. Hadn’t seen those ratings before. Not sure there is much evidence that Michigan has had corrupt spending in transportation and education, even revenue sharing that are important to future economic growth. What we have had for two decades is a belief that lower taxes mattered more than those kind of investments to growing the economy. Minnesota took––and is still taking––the opposite path. The results are pretty clear who has and is doing better. Despite all the predictions of a Minnesota collapse.
Agreed. What is most noteworthy about Minnesota is not their recent tax increase. But that for the last two decades while nearly every other state has been cutting taxes supposedly to grow the economy they didn’t cut taxes. Somehow they have kept a bipartisan commitment to making public investments rather than giving away their tax base. That over the long run has served the people of Minnesota very well.