No, it isn’t Minnesota’s high taxes that make our state great

Minnesota’s taxes are high. Are they too high? That was the question posed by Minn Post reporter Peter Callaghan recently. The case for ‘No’ was put by Sen. Melisa Franzen, DFL-Edina, who was quoted as saying

“When people and businesses come here, they’re not doing us a favor to pay their taxes. … They know what they’re getting in return with the investments that we make in our roads and bridges and education and workforce.”

As I wrote in a reply for Minn Post, this struck me as odd. For starters,

Franzen’s praise for Minnesota’s roads and bridges is rather surprising given that Gov. Tim Walz is proposing to raise the state’s gas tax by 20 cents a gallon – from 28th nationally to fourth – because, he says, “Minnesota’s crumbling infrastructure is putting our safety at risk.” Indeed, the American Society of Civil Engineers recently said that “Minnesota’s 140,000 miles of roads are in poor condition, earning a grade of a “D+.” In terms of “roads and bridges,” it isn’t clear what the “people and businesses” who come to Minnesota are getting for their high taxes.

To assess Sen. Franzen’s claims for education, I put together a scatterplot of all fifty state’s rankings for their Individual Income Taxes taken from the Tax Foundation and their rankings on scores from the National Assessment of Education Progress (NAEP). There is no correlation between how high a state’s tax burden is and how well its education system performs, as Figure 1 shows.

Figure 1 – State rankings for Individual Income Taxes and their scores on the National Assessment of Education Progress 

Source: National Assessment of Education Progress and the Tax Foundation

Incidentally, when you look at the state’s entire tax burden, taking in corporate taxes, individual income taxes, sales taxes, property taxes, and unemployment insurance taxes (again from the Tax Foundation), you see much the same story, as Figure 2 shows.

Figure 2 – State rankings for overall tax burden and their scores on the National Assessment of Education Progress 

Source: National Assessment of Education Progress and the Tax Foundation

Not so fast…

My analysis drew a reply on Minn Post from Robert W. Velez, a former resident of Minnesota, titled ‘Missing Minnesota — and the quality of life its taxes help support‘.

Mr. Velez concedes that I marshal “some understandable quantitative evidence to support [my] claim”. But, he asks, “how can Minnesota score so highly on the quality-of-life metric used by U.S. News & World Report, which listed the Land of 10,000 Lakes as No. 2 (behind North Dakota), if citizens get such a lousy deal from the high taxes they pay?”

This is a question I have dealt with before. Its Overall Best States Rankings

ranks Iowa top, Utah third, and North Dakota fourth. Of these, the recent Kiplinger state tax study ranks North Dakota among the ‘Most Tax-Friendly’, Iowa as ‘Mixed’, and Minnesota among ‘Least Tax-Friendly’. Very different tax policies but all in the top four ‘Best States’, according to U.S. News. The fact that Minnesota and two states bordering it score so well suggests that some factor related to geography might be more important.

On quality of life specifically, North Dakota and Wisconsin, the two states which sandwich Minnesota in the rankings, have Tax Foundation tax burden rankings of 17 and 32 respectively. Minnesota ranks 43rd. Fourth placed New Hampshire ranks 6th. Indeed, as Figure 3 shows, if there is a relationship between tax burdens and quality of life, it runs in the opposite direction to that which Mr. Velez claims.

Figure 3 – State rankings for overall tax burden and quality of life 

Source: U.S. News & World Report and the Tax Foundation

It is also worth nothing that, once you dig down into it, U.S. News is actually pretty scathing about Minnesota’s taxes. Indeed, they rank our state 44th on the measure ‘Low Tax Burden’.

Mr. Velez says that “Despite the anti-tax zealots time and again heaping scorn onto Minnesota’s high taxes, its core cities still attract businesses and new residents.”

He does not reveal which data he has consulted to reach this conclusion, but, as we showed in our report ‘The State of Minnesota’s Economy: 2018, between 2011 and 2016 Minnesota lost residents in every age group according to IRS data, as Figure 4 shows. And, as Figure 5 shows, Census Bureau data show that in 2000, new and young businesses as a share of all businesses were 41% in Minnesota and 43% nationally. By 2014, the most recent year for which we have data, that number had fallen nationally to 34% but in Minnesota to 30%.

Figure 4 – Net Flow of Taxpayers and Dependents to Minnesota by Age of Primary Taxpayer, 2011-2016

Source: Internal Revenue Service

Figure 5 – New and Young Businesses as a Share of All Businesses, 2000-2014

Source: Census Bureau

Mr Velez says “Again, as I tell my students, correlation doesn’t equal causation”. But he is the one implying that it does, after all, his piece is titled ‘Missing Minnesota — and the quality of life its taxes help support‘. But there is no correlation between quality of life and taxes, as the data shows.

“I’m not going to lay out an empirical case to show how Minnesota compares to low-tax Texas”, Mr Velez says. Instead, he gives us a bit of anecdotal evidence which isn’t actually related to the question initially posed; Minnesota’s taxes are high. Are they too high? The high-tax / pro-government mantra perpetuated by Mr. Velez isn’t supported by the evidence. And that is what we must base policy on.

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