Minnesota’s Border Battles: How state policy affects economies at the margin

Supreme Court Justice Louis Brandeis famously described the states of the union as “laboratories of democracy” where a “state may, if its citizens choose…try novel social and economic experiments without risk to the rest of the country.” State governments have done just that as tax rates and regulatory burdens differ greatly across the United States.

The “natural experiments” that such variations create allow us to assess the impacts of particular economic policies on economic performance. But there are numerous factors that can drive a state’s economic performance—such as natural resource endowments or historic development—that are not the result of state government policy. Comparing states’ economic outcomes to assess state policies with- out accounting for these factors will distort the results.

In our new report, Minnesota’s Border Battles: How state policy affects economies at the margin, we go some way toward excluding these factors from our analysis by comparing the economic performances of neighboring counties in different states from 2010 to 2018. We do this for the Minnesota counties that border Wisconsin, Iowa, South Dakota, and North Dakota. We can assume that factors driving economic performance besides policy exert a similar effect on, say, Washington County in Minnesota and St. Croix County on the other side of the I-94 bridge in Wisconsin.

Minnesota and its neighboring states represent a broad range of economic policies. Minnesota levies one of the highest top rates of income tax in the United States, South Dakota doesn’t levy one at all. Likewise, South Dakota levies no state corporate income tax, while Iowa’s rate is one of the highest in the United States.

In terms of outcomes, Minnesota compares most favorably with Wisconsin, although this comparison is distorted by the presence of significant geographic barriers and the Twin Cities. Only on business growth and poverty reduction does Wisconsin beat Minnesota between 2010 and 2018.

Minnesota fares less well against its other neighbors. Against Iowa, Minnesota only wins on population growth and in seeing the median age of its population fall. Against South Dakota, Minnesota comes off even worse. Here, only on per capita Personal Income does our state score a win, but even here much of Minnesota’s growth was driven by increased transfer payments. Against North Dakota, Minnesota loses in every category except median age and the share of its population with bachelor’s degrees.

These results suggest a reasonably strong effect of state economic policy on economic outcomes, and in particular, they support the consistent research finding that high taxes have significant negative effects on economic growth.

John Phelan is an economist at the Center of the American Experiment.