True North

Arthur Laffer and Stephen Moore have issued a study through the American Legislative Exchange Council on which states are rich or poor. Minnesota ranks 26th for 50 states for economic performance and 35th for economic outlook. Performance is a combination of income and employment growth plus net domestic migration. Outlook is a "forward-looking forecast based on the state’s standing (equal-weighted average) in the 16 important state policy variables." The study runs through 2006. Minnesota fares worst in corporate tax rates (45th of 50), rising tax burdens (43rd), and marginal personal income tax rates (39th). So far, it doesn't appear those numbers have been changed so perhaps backsliding in other states will improve Minnesota's score for 2007.

The report emphasizes that progressive personal income taxes exacerbate the cyclicality of state revenues. During booms, the states spend too much:

The analysis and case studies discussed in this chapter have shown that states often find themselves in fiscal trouble because they spend far too much during economic expansions. They are like the scorpion that is carried on the back of the frog across the river that then stings the frog causing them both to drown. “Why,” asks the frog in his dying breaths. “I couldn’t help myself,” responds the scorpion. “It’s in my nature.” It seems that overspending when the coffers are flush is in the nature of state legislators.

The most advisable path to avoid future fiscal crises is to keep spending and tax receipts at a manageable and justifi able rate, usually population growth plus inflation.

Minnesota's population grew faster than the national average between 1992-2000 (10% vs. 8.8% nationally). The additional families created demand for government services but also more revenue. Their analysis suggests the state received a windfall of $701 in revenue per person, above and beyond the revenue needed to keep real per capita tax revenues constant. Only three states had higher "excess" revenue taken from taxpayers: Michigan, Vermont and California. For the country as a whole, state tax revenues above inflation and population growth rose $108 billion between 1992 and 2000.

As Governor Pawlenty and the Legislature both look at tax reform, these trends should be considered. Laffer and Moore are fans of the Colorado tax limitation amendment (TABOR) which may not fly here. But weaning government off its addiction to income tax revenues does provide a more stable tax revenue stream. Now would be a good time to start.

Cross-posted at SCSU Scholars. Comments welcome.