Minnesota economy: It’s more than just tax rates

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Minnesota’s Governor Tim Pawlenty repeated his message that low taxes and limited government are the key to the economic success when he delivered his recent State of the State address, but recent state unemployment rates clearly demonstrate that economic development is more complicated than that.

The most recent state unemployment data, for December 2009, show higher unemployment rates in many states that have traditionally kept taxes low and government small — for example, Alabama (11.0 percent), Florida (11.8 percent), Kentucky (10.7 percent), Mississippi (10.6 percent), South Carolina (12.6 percent), and Tennessee (10.9 percent).

Minnesota’s December unemployment rate was 7.4 percent. Not bad by contrast, and, from a statistical standpoint, significantly below for the U.S. rate of 10.0 percent. 

What’s more, plenty of the states long considered to be ones with higher taxes and larger governments also had unemployment rates below the national mark — for example, Connecticut (8.9 percent), Maryland (7.5 percent), Massachusetts (9.4 percent), New York (9.0 percent), Pennsylvania (8.9 percent), and Wisconsin (8.7 percent).

Causality? Is it true that the recession has hit some states harder because they have lower taxes and smaller government? 

That’s not a reasonable argument, any more than it’s reasonable to argue the opposite — that states with higher taxes and more government have poor economies. Certainly there are example states that stand in contrast to the lists above, like Illinois, with a December unemployment rate of 11.1 percent, and Arkansas, with a rate of 7.7 percent.

State economic vitality and economic development tie back to a range of key important factors, including public-sector investments in education and infrastructure, the industrial base of the region, and the likelihood that its residents will innovate and start new businesses.

Silly, really, to try to boil it all down to taxes.