Minnesota is near average when it comes to taxes. Total state and local taxes in Minnesota were 11.2 percent of personal income in the state in FY 2008, according to U.S. Census and Bureau of Economic Analysis data. The national average is 10.9 percent. That ranks Minnesota 17th among all states. Minnesota’s ranking on this measure has been dropping since the mid-1990s. For instance, Minnesota ranked 4th in FY 1997.
While Minnesota is near average in tax revenues, we rank even lower when measuring all revenues of state and local governments. Add federal funds and non-tax revenue to state and local taxes, and Minnesota ranks 31st in the size of government as a share of income.
Why does Minnesota’s ranking fall further when federal and other revenues are included? States vary in the amount of federal aid they receive, with higher-income states such as Minnesota tending to receive less federal money. In FY 2008, Minnesota ranked 37th in the amount of federal revenues we received, measured as a share of the state’s personal income. That means Minnesota’s state and local governments have to raise more money locally to fund services.
When comparing states, it’s most meaningful to look at state and local government revenues combined. That takes into account the fact that some states, such as Minnesota, fund relatively more services at the state level and less at the local level.
It is also useful to measure government revenues or spending as a share of personal income in the state. Higher-income states such as Minnesota have higher labor costs, and that means it costs more to keep and maintain quality teachers, police and other public workers. Measuring as a share of income also accounts for income differences among states. A $500 tax bill is a bigger slice of the household budget in a state where median family income is $30,000 compared to a state where it is $60,000.
Minnesota ranks higher in some taxes and lower in others. For instance, Minnesota ranked 6th in personal income taxes as a share of income in FY 2008, 16th in corporate income taxes, 28th in property taxes and 35th in general sales tax revenue. State leaders have made a choice to rely more on progressive taxes such as the income tax and less so on more regressive taxes. This results in a tax system that is more based on ability to pay than in many other states.
A couple of cautionary notes on the rankings. First, tax rankings try to boil down complex tax and spending systems into a single number. Secondly, these FY 2008 rankings in particular reflect the period immediately preceding the recession. The economic downturn has cut into state and local revenue. The impact of the recession on revenues, and the decisions states have made to respond to the downturn, are not reflected in this data. And finally, in developing rankings, analysts have different ways to match fiscal year data with calendar year data, which explains why the rankings found in our analysis may differ slightly from those developed by other organizations looking at the same data set.
-Scott Russell
