Changes in tax law appear to have had some effect.
Personal income fell in Minnesota and most of the nation in the first quarter of 2013 compared with the previous three months, thanks in large part to tax changes that took effect at the start of the year.
Total personal income in Minnesota fell at an annualized rate of 1.4 percent in the first quarter, a drop of $3.5 billion, according to figures released Friday by the U.S. Department of Commerce. Nationally, income fell 1.2 percent, a decline of $171 billion.
The decline amid otherwise cheery economic news can be explained mostly by the expiration of a two-year federal payroll tax holiday, and an end-of-2012 rush to report income before a tax hike hit high earners at the beginning of 2013. The figures reflect all income, including paychecks, property rent and investments.
Minnesota’s decline was most evident in dividends, interest and rent, which fell 4 percent. Among industries in Minnesota, finance fared worst, reflecting the national trend.
“People did respond to higher taxes on upper-income individuals,” said Tom Stinson, an extension economist at the University of Minnesota. “There obviously has been some income shifted into 2012 from 2013.”
While Minnesota’s personal income fell faster than the national average in the first three months of the year, income in the state rose 2.9 percent from the first quarter of 2012, or about $7.1 billion. That’s slightly faster than the national average.
Personal income fell in 49 states, including North Dakota, where it fell 2.3 percent, or $873 million. Wyoming, North Dakota, Arkansas, California and Delaware saw income fall the most.
The states that fared the best were South Dakota, Iowa, the District of Columbia and Kentucky. South Dakota was the only state where income rose in the first quarter, by 1.6 percent, or $610 million.
Stinson said Minnesota’s quarterly loss looks worse relative to its neighbors because of a statistical quirk in the way farm income is measured. First-quarter farm income is generally estimated as if it were a normal year, and for states hit by drought last year, the first quarter of a normal year is an improvement.
“If you had a drought in your state, you’re going to have a big jump in agricultural earnings in the first quarter,” he said. “It’s just assumed you’re going to grow a normal amount.”
Drought had limited impact on Minnesota last year, so it didn’t get the same bump.
Personal income statistics provide a framework for analyzing economic conditions in each state. Federal agencies use the statistics as a basis for allocating funds and determining matching grants to states.
The statistics are also used in forecasting models for state revenue, demand for public services and energy and water use.