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Taxes are the price Minnesotans pay for prosperity

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Taxes are the price Minnesotans pay for prosperity

Mar 30, 2023 | 7:00 am ET
By Thomas Legg
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Taxes are the price Minnesotans pay for prosperity
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The Minnesota State Capitol rotunda chandelier is illuminated for Statehood Day in St. Paul, Minnesota. Photo by Tony Webster.

The Minnesota Legislature is in session, and it’s a budget year, so state and local taxes are a big part of the deliberations. 

Republicans are pointing to taxes in other states, which are lower than those in Minnesota, and arguing that we should lower our taxes to achieve the sort of prosperity surrounding states enjoy. 

So are Minnesota taxes really significantly higher than those in surrounding states? Are Minnesotans more or less prosperous than the folks in surrounding states? To what can we attribute the differences in prosperity? Let me try to shed light on these questions. 

Are Minnesota taxes significantly higher? 

As shown in Table 1, state and local taxes in Minnesota are indeed higher than those in surrounding states. The tax burdens include state income taxes, local and state property taxes, sales taxes, business taxes, and others like cigarette and gasoline taxes. 

Suppose a household paying the average tax burden on $80,000 of annual income. A Minnesota family would pay about $3,500 more than a family with the same income in the Dakotas. That same Minnesota family would pay about $800 more each year than a family living in Iowa or Wisconsin. 

Have Minnesota taxes always been higher than those of the other states? Prior to 2010, Wisconsin residents had a higher tax burden than Minnesotans. (More on this later.) Residents of the other states have consistently faced lower tax burdens than Minnesotans. 

Are there differences in prosperity across the five states?

Table 2 compares 2021 annual median household incomes in the five states. Middle income Minnesota households clearly have higher incomes than those in surrounding states. 

Wisconsin compares most favorably to Minnesota. The Minnesota median household has over 15% higher income than Wisconsin’s median household. 

Maybe surprisingly, all of the states bordering Minnesota have lower median income than that of the median family in the United States. Minnesota’s median exceeds the U.S. median by 11%. 

These incomes are all pretax, so Minnesota’s higher income is offset by Minnesota’s higher tax burden. For example, our hypothetical median South Dakota household would have about 17.5% less income ($11,577) than the Minnesota household, offset by tax savings of about 3.7% of that income ($2,500), for a net difference of roughly 13.8% (about $9,000). 

Is Minnesota’s Prosperity a result of the higher taxes? 

First, consider the possibility that the income comparison above is simply an oddity of the post pandemic economy. Table 3 shows the relationship of Minnesota median income to surrounding states’ incomes and the national median for two years prior to the pandemic. 1999 and 2012. Though not reported here, data for years 1984 to 2021 is also available from the Census Bureau. 

Minnesota’s median income has exceeded that in all surrounding states and the US in all three reported years, and in fact consistently since 2000. While the relative numbers change from year to year, incomes in surrounding states are not converging to incomes in Minnesota.

Comparisons with North Dakota and Wisconsin deserve attention. North Dakota had very low income relative to Minnesota and its other neighbors in 1999, but not in 2012 and 2021. That relatively low income in 1999 was consistent with North Dakota in other years around 1999. The increased income after 2000 is likely to reflect development of the oil fields in North Dakota. 

In 1999, Wisconsin income was essentially the same as Minnesota’s. That was true prior to 2000. For example, in 1995, median income in Wisconsin was higher than that of Minnesota. As noted earlier, the tax burden in Wisconsin was higher than Minnesota’s until the early 2000s. 

At least since the early years of this century, Minnesota’s middle income households had higher incomes than surrounding states. Minnesota is the only state among them with higher median income than the U.S. as a whole. 

Finally, can we relate the higher taxes to the higher income and possibly other positive social characteristics? Table 4 considers some indicators of poverty, health care, education, and crime that would seem to reflect relative public investments and residents’ opportunities to generate higher incomes. 

Minnesota and our surrounding states all have overall and youth (under 18) poverty rates lower than the U.S. rates. Minnesota has the lowest overall rate of the five. Our youth poverty rate is less than all but North Dakota’s. The differences here are significant. If Minnesota had Wisconsin’s overall poverty rate, about 85,000 more Minnesotans would live in poverty. If Minnesota had South Dakota’s overall poverty rate, about 170,000 more Minnesotans would live in poverty. That is twice the population of Duluth.

Minnesota’s health care coverage is only slightly higher than that of Iowa and Wisconsin. The Dakotas fell short of the other three, but still roughly matched the rest of the country. 

Minnesotans complete high school at rates similar to surrounding states. A significantly higher proportion of Minnesotans have gone on to complete bachelor’s degrees than folks who live in the other states. Minnesota’ higher incomes reflect past educational opportunities and attainments. The higher incomes now improve current Minnesota students’ access to higher education. The quality of Minnesota’s K-12 education has provided another advantage: Minnesota students have the third highest college entrance exam scores in the country. 

Finally, Minnesota’s 2020 violent crime rate compares favorably to those in surrounding states and the country as a whole. South Dakota was the only state with a higher violent crime rate than the U.S. as a whole. 

Conclusions

In summary, Minnesotans pay higher taxes than folks in surrounding states. The higher income of the Minnesota median household covers the extra taxes several times over. There is no indication that the incomes in states with lower taxes are catching up to Minnesota. Wisconsin, the only state to see a substantial income decline relative to both Minnesota and the U.S. has reduced its tax burden over the same period. 

Minnesota has lower poverty, a slightly higher proportion of its population with health coverage, much higher education outcomes, and lower violent crime rates. These achievements are all expensive. It is hard to conclude that our higher taxes did not make these achievements possible. 

These results reflected a limited effort to compare Minnesota taxes and incomes with those of surrounding states. The motivation was ongoing claims that our taxes are higher than those around us, making us unable to compete with surrounding states. The first claim is true. The second is not. In fact, the extra taxes appear to be a net benefit to Minnesotans overall. 

That Minnesota as a whole compares favorably with other states should not lead any of us to complacency. Significant segments of our Minnesota BIPOC and rural communities have low incomes, high poverty, poor educational opportunities, and face high crime. The results here do indicate that Minnesota puts its taxes to good use and could productively invest more in improving outcomes for every Minnesotan.