With all the talk from Minnesota’s far right about “government spending run amok” and “out of control taxes,” one might think that taxes in the Gopher State were sky high compared to the rest of the nation. In fact, state and local taxes in Minnesota remain average after taking into account the state’s relatively high per capita personal income.
In 2008, Minnesota 2020 reported on the work of Dr. Paul Wilson, Director of the Research Division of the Minnesota Department of Revenue, regarding the level of state and local taxes in Minnesota controlling for the effects of personal income. Dr. Wilson has observed that states with high per capita personal income generally have high per capita taxes because:
- High per capita income states tend to receive less federal assistance than low per capita income states. As a result, high per capita income states must tax themselves more in order to generate the same level of total per capita revenue.
- High per capita income states tend to have higher labor costs and a higher cost-of-living than low per capita income states.* Since labor is a major state expense, higher labor costs translate into a greater need for tax revenue.
- The demand for high quality public services–i.e., good schools, superior roads and infrastructure, etc.–tends to increase as per capita income increases. The demand for higher quality public services among high per capita income states creates the need for higher per capita taxes.
Dr. Wilson’s statistical analysis supported these observations. Based on 2006 state and local per capita tax amounts from the U.S. Census Bureau and per capita personal income amounts from the U.S. Bureau of Economic Analysis, Wilson found a strong correlation between personal income per capita and taxes per capita among the fifty states.†
Using the same 2006 data, Dr. Wilson developed a regression equation to predict each state’s per capita tax level based upon its per capita personal income. This equation enabled Wilson to compare the actual level of per capita taxes in each state to level predicted based on each state’s personal income. Based on this approach, Wilson determined that Minnesota’s per capita state and local taxes were “just about average.”
Minnesota 2020 has updated Wilson’s analysis of 2006 data based on 2008 tax and personal income data. FY 2008 is the most current year for which state and local tax data for all fifty states is available. Apart from using the more current 2008 data, the methods used in this analysis are the same as those used in the Revenue Department analysis from two years ago; consistent with the Revenue Department’s approach, Alaska and Wyoming are excluded from this analysis because they are statistical outliers due to their energy revenue.
Based on the 2008 data, the correlation between per capita personal income and per capita taxes was even stronger than it was using the 2006 data. Thus, we can safely conclude that per capita taxes still tend to be higher among high per capita income states.
The following graph shows each state’s actual per capita 2008 tax level (the blue line) to each state’s predicted level of per capita taxes based upon its per capita personal income (the red line). Some states–most notably New Mexico, Maine, Vermont, North Dakota, Hawaii, and New York–have per capita tax levels that are high given their level of per capita income. After controlling for personal income, these states would be considered high tax states.
Other states–including Tennessee, Oregon, South Dakota, Colorado, New Hampshire, and Virginia–have per capita tax levels that are low given their level of per capita income. These states would be considered low tax states.
Minnesota’s actual per capita tax level in 2008 is $4,700–approximately the same as that predicted by Minnesota’s level of per capita personal income. Given the lower level of federal assistance, higher labor costs, and demand for high quality public services associated with being a relatively high per capita income state, total state and local per capita taxes in Minnesota continue to be “just about average,” as they were in 2006.
Of course, the ultimate goal of state policymakers should not be to make Minnesota a high, low, or average tax state. Taxes are not an end in themselves, but a means of advancing the more important goal of creating a prosperous and sustainable economy. In pursuing this goal, the burden of taxation needs to be weighed against the public benefits derived from the investment of tax dollars.
The debate over the burden imposed by taxes versus the benefits of public investment should and will continue in Minnesota. However, in conducting this debate, policymakers should not be distracted by bogus claims that Minnesota is currently a high tax state. Relative to its personal income, taxes in Minnesota continue to be “just about average.”
*The correlation between state per capita personal income and annual mean wages for 12 common public sector occupations (e.g., school teachers, fire fighters, police and sheriff patrol officers, etc.) indicates a statistically significant relationship at the 0.01 level for each occupation. Furthermore, the relationship between state per capita personal income and state cost-of-living indices is statistically significant at the 0.01 level.
†The correlation between per capita income and per capita taxes was statistically significant at the 0.01 level.