Guest Column

Minnesota: A case study of prosperity

July 18, 2014
| By Lou Glazer |
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Michigan Future –– the think tank I lead –– has just released its latest report: “State Policies Matter: How Minnesota’s Tax, Spending and Social Policies Help It Achieve the Best Economy Among Great Lakes States.”

The report is a major departure for Michigan Future. To date, our research has focused almost exclusively around economic and demographic data. This report is about state policy. We are moving into policy research largely in response to questions we get from those who read our reports and/or hear presentations on that work.

The most frequent question is: “What are the most prosperous states and regions doing differently than us?”

Rather than developing a policy agenda, we have chosen to approach policy through case studies of economic growth-related policies in the most prosperous states and regions.

We chose Minnesota for our first policy case study because it has the best economy in the Great Lakes, highest per capita income and lowest unemployment rate. In 2013, its per capita income was $47,856, which is $8,641 more than Michigan, and its unemployment rate was 5.1 percent, well under Michigan’s rate of 9.1 percent.

The report, of course, focuses mainly on the tax and spending policies of Minnesota compared to Michigan. These are the policy levers widely considered to influence state economic outcomes the most. It also tackles two additional topics.

1. Regionalism. The difference in economic outcomes between Minnesota and Michigan can largely be explained by the superior performance of metro Minneapolis compared to metro Detroit and metro Grand Rapids. For years, Minneapolis’ approach to regionalism — particularly tax base sharing — has been viewed as a major ingredient in that region’s economic success.

2. Welcoming. As we explored in a previous Business Journal post, Michigan Future has identified being welcoming to all as a core component of prosperous regions.

But the headlines from the report are clearly the starkly different path Minnesota has taken on state taxes and spending. For decades, Minnesota, under Democratic, Republican and Independent governors, has rejected the idea that low taxes are the key to a prosperous economy. Its alternative has been to focus on making investments to educate citizens and create a welcoming place to live and work.

To make its investments, Minnesota has far higher tax rates than Michigan:

  • Income taxes: Minnesota’s lowest income tax rate is 5.35 percent; its top rate is 9.85 percent for those making more than $250,000 per year. Michigan’s flat rate is 4.25 percent.
  • Business taxes: Minnesota’s corporate income tax is 9.8 percent; Michigan’s is 6 percent.
  • Sales taxes: Minnesota’s sales tax rate is 6.875 percent and local communities can add up to an additional 1 percent; Michigan’s sales tax rate is 6 percent.
  • Gasoline taxes: Minnesota’s gasoline tax is 28.6 cents per gallon; Michigan’s is 19 cents per gallon.

As a result, per capita state taxes in Minnesota in 2013 were $3,880 –– $1,345 higher than in Michigan. State taxes in 2013 took 8.3 percent of personal income in Minnesota; 6.6 percent in Michigan.

If Michiganders had the same state taxes per capita as Minnesotans, they would have paid $13.4 billion more in 2013. If Michiganders had the same state taxes as a percent of personal income as Minnesotans, they would have paid $6.5 billion more in 2013.

Those higher taxes bought more government investment in 2013 in key services on a per-resident basis:

  • Higher education: $232/person in Minnesota, $172/person in Michigan.
  • K-12 education: $2,067/person in Minnesota; $1,447/person in Michigan.
  • Transportation: $502/person in Minnesota, $223/person in Michigan.
  • Local government aid: $465/person in Minnesota; $119/person in Michigan.
  • Health and human services: $1,134/person in Minnesota; $617 in Michigan.

Our hope is the report will expand the conversation in Michigan and its regions about what economic policy should be to return Michigan to prosperity in an economy being transformed by globalization and technology.

Minnesota has taken a different path to prosperity. At the very least, we hope Michiganders are open to exploring whether that path might work for us, as well.

Lou Glazer is president of Michigan Future Inc.

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