Over the past decade, an often-heated debate has raged about the balance of public investment and taxation in Minnesota. A new report from the Minnesota Center for Fiscal Excellence — “Finding Our Balance: Taxes, Spending and Minnesota Competitiveness” — attempts to shed new light on this question. The center is to be congratulated on the quality of its effort.
Using scholar Michael Porter’s work, the report reviews Minnesota on “foundational competitiveness” and “investment attractiveness.”
Foundational competitiveness is “the expected level of worker productivity given the overall quality of the location as a place to do business.” Think quality of life as it affects workers’ capabilities.
The report reviews five national studies on foundational competitiveness and finds Minnesota to be “fundamentally strong.” This state leads others in knowledge jobs, technology, innovation, infrastructure, human resources, security, environment, labor mobilization, prosperity, income and education.
Investment attractiveness is defined as “business costs and the cost of factor inputs relative to a state’s foundational competitiveness.” Think taxes and other costs of doing business.
Five national studies on investment attractiveness reveal that “Minnesota is an above-average business cost state.”
Neither finding is surprising. What is surprising and useful is where we rank as an outlier compared with other states.
On foundational competitiveness, Minnesota is below average on “government/academia research and development, higher education affordability, and higher education spending efficiency.” The Legislature this year wisely froze undergraduate higher-education tuition and pushed for more efficiency in our public colleges and universities. We need research and development to be more prolific.
On investment attractiveness, Minnesota businesses face high state and local tax burdens and labor costs. Fortunately, the Legislature rejected the proposal for a business-to-business sales tax, except on warehouses and equipment repair and maintenance. It should reconsider those added business taxes.
According to the center’s report, “Minnesota has long enjoyed the benefits of being a high wage state because the productivity justified these premiums.” However, productivity relative to wages is falling. Is Minnesota in a small slump in an otherwise favorable history, or is the latest trend more permanent? This question is important, because business location and expansion is based not only on availability of skilled labor but also the cost of that labor.
The report’s key recommendation is: “Prioritize foundational competitiveness spending in government” using “a ‘value proposition’ perspective.” Stated differently, spend smarter to avoid further tax increases.
We can all agree on that. The difficulty is in implementation.
Gov. Mark Dayton and the Legislature made some progress on spending smarter. The rapidly rising costs of public health care were flattened. Investments were made in early childhood education. The budget was balanced without gimmicks or borrowing. But much remains to be done.
The governor put forth a comprehensive tax reform plan that would have lowered sales and corporate income tax rates by reducing exclusions and deductions. Unfortunately, he withdrew it when opponents loudly objected. Dayton should renew the effort for revenue-neutral tax reform.
The governor proposed, and the Legislature adopted, a number of special tax breaks for businesses and governments. These should have been avoided.
An effort to institute performance measures in the budget process this year is a good way to ensure that state services are getting more productive. Better management practices need to be implemented throughout Minnesota.
Finally, the governor proposed, and the Legislature agreed, that more investment was needed in K-12 education. More, however, needs to be done to improve our education system.
As we approach the next legislative session and the next state election, we need to avoid the false dichotomy of taxes vs. spending. Let’s accept that our taxes are about right and that we do indeed need to invest in beneficial public services at the current level. Our focus should be on how Minnesota can be more productive in all of its sectors — not only public, but nonprofit and private as well. Productivity is what built our great state, and it is what will keep Minnesota a great state.
Jay Kiedrowski is a senior fellow at the Humphrey School of Public Affairs at the University of Minnesota.