The Minnesota Economy: It's more than just tax rates

Minnesota's Governor Tim Pawlenty repeated his message that low taxes and limited government are the key to the economic success when he delivered his State of the State address this week, but recent state unemployment rates clearly demonstrate that economic development is more complicated than that.

The most recent state unemployment data, for December 2009, show higher unemployment rates in many states that have traditionally kept taxes low and government small — for example, Alabama (11.0 percent), Florida (11.8 percent), Kentucky (10.7 percent), Mississippi (10.6 percent), South Carolina (12.6 percent), and Tennessee (10.9 percent).

Minnesota's December unemployment rate was 7.4 percent. Not bad by contrast, and, from a statistical standpoint, significantly below the U.S. rate of 10.0 percent. 

What's more, plenty of the states with higher taxes and larger governments also had unemployment rates below the national mark — for example, Connecticut (8.9 percent), Maryland (7.5 percent), Massachusetts (9.4 percent), New York (9.0 percent), Pennsylvania (8.9 percent), and Wisconsin (8.7 percent).

Causality? Is it true that the recession has hit some states harder because they have lower taxes and smaller government? 

That's not a reasonable argument, any more than it's reasonable to argue the opposite — that states with higher taxes and more government have poor economies. Certainly there are examples of  states that stand in contrast to the lists above, like Illinois, with a December unemployment rate of 11.1 percent, and Arkansas, with a rate of 7.7 percent.

State economic vitality and economic development are linked to a complex range of  factors, including public-sector investments in education and infrastructure, the historical rise and fall of various industries, and the degree to which esidents will innovate and start new businesses.

Silly, really, to try to boil it all down to taxes.

— Matt Kane

Comments

[Craig Westover]

Some food for thought: Here are the 2010 estimates for per capita debit for the states Matt has selected:

Alabama 116
Tennessee 161
South Carolina 162
Mississippi 163
Kentucky 192
Florida 316

Maryland 337
Pennsylvania 386
Wisconsin 569
Minnesota 613
Massachusetts 769
New York 918
Conecticut 1,171

Source:Center on Budget and Policy

I looked at other rankings and actual data for previous years (per capita debt was generally higher) and all the rankings were about the same -- in all cases low tax states had lower debt than high tax states.

High tax/high service states have become high tax/declining service/high deficit states.

Unemployment is the natural consequence of a sluggish economy; high deficits are man-made problems that result from high-tax make work projects that produce no wealth.

[Charlie Quimby]

Craig doesn't link to his data source, so I'll just accept his numbers for the states. It's not as easy to accept his conclusion, however, because he uses debt per capita instead of debt per dollar of income as his yardstick with which to beat higher tax states.

We go around and around with this on taxes all the time. But the distinction between per-capita debt and debt-to-income ratio should be clear — and why the distinction matters should be obvious.

While I agree that increased indebtedness is not a healthy direction for state finances, Craig's comparison overlooks this fact: well-paid people tend to owe more dollars than poor people, and this is not just a feature of government. They buy more and have more capacity to repay, so lenders extend more credit.

In general, the high-debt states are all higher-income states and the low-debt states have lower average incomes.

[Craig Westover]

Charlie --

sorry for being sloppy; I was in a hurry. Here is the link to the data table I referenced.

http://manyeyes.alphaworks.ibm.com/manyeyes/datasets/317749485f6311deaf0b000255111976/versions/1

The absolute value of these numbers is not as important as the rank, which was relatively consistent across a number of data sets.

The per-capita debt I am referring to is the per-capita state budget deficit. In other words, in Minnesota to pay off the estimated 2010 budget deficit would cost each taxpayer in Minnesota $613. In Florida, a low tax state (which has a higher total deficit but larger tax base), the per capita deficit is $316.

I see where you might be confused, and I apologize. The fault is mine for not being more precise. given that, nonetheless my correlation has as validity.