“All statistics conceal a lie” is one of national tax columnist Billy Hamilton’s “Tax Rules for Realists” — his practical guide to how tax policy is really made. His point is that anyone who wants to figure out what is really going on has to dig deeper into the numbers.
Nowhere is this rule more applicable than in considering the latest Minnesota “Price of Government” (POG) report, just released by Minnesota Management and Budget and featured in a recent Star Tribune editorial (“A fact check on the price of government,” Oct. 11).
According to the report, Minnesota’s Price of Government — all Minnesota state and local own-source government revenues divided by total Minnesota personal income — is now lower than when Gov, Mark Dayton took office, about 14 percent lower than its all-time high in the mid-1990s, and is projected to decline further. As the editorial notes, that trend of ever-cheaper government exists despite a major increase in the state’s top individual income tax rate. Or, as the press release accompanying the report declared, “Minnesotans Continue to Pay Less for More Government Services.”
Having Minnesota’s Price of Government behave like the price of computers would indeed be quite a feat. But if one follows Hamilton’s advice and digs more deeply into the numbers — specifically, into what “personal income” actually includes — a more complicated story emerges.
Ultimately, the only thing a government tax/revenue system cares about is cash. Cash is what the government needs and uses to pay its obligations. But the federal government’s definition of “personal income” includes a lot of noncash resources that can’t be used to pay taxes or fees.
It includes, for example, the value of the Medicaid and Medicare benefits Minnesotans receive. It includes payments that employers make to their employees’ health care and retirement plans.
It also includes rather obscure sources of theoretical income like the rental income Minnesotans “give up” by living in the house they own instead of renting it out ($4.8 billion of personal income in 2017). It even includes government payments to nonprofit organizations. Subtract all this out in 2017 and only about 75 cents of every dollar of Minnesota personal income could be used to finance government spending.
“Where” this Minnesota personal income comes from and how that has been changing also distorts perspective regarding “how much we pay.” A growing share of Minnesota’s personal income comes from government itself. Driven in large part by health care benefits, total government transfer payments (cash and noncash) have been the fastest-growing component of Minnesota’s personal income since the POG was established nearly 30 years ago — growing about 50 percent faster than personal income overall and about 65 percent faster than salaries and wages.
Including government transfer payments as income, Minnesota’s Price of Government for 2017 — the last year for which there are actual, not projected, data — has declined 4.4 percent since its inception. But excluding these transfers, the POG has grown by 0.5 percent since then.
As a result, the Price of Government acts more like an advertisement for a perpetual motion machine of public finance. Relatively faster growth in government transfer payments boosts personal income growth, which becomes evidence for government getting “cheaper” — which sets the stage to ask more from taxpayers to spend on, among other things, greater government transfer payments.
For these reasons, our organization uses a modified personal income basis for our tax ranking studies. We exclude noncash income that can’t be remitted to government but add in other income streams that can be used to pay taxes and fees but which — to the surprise of many — are not part of personal income, notably capital gains and retirement plan withdrawals. Replicating this approach for the Price of Government would create findings that actually track governments’ claim on resources that can be used to pay for it.
It would also add some sorely needed intellectual consistency in how we think and talk about taxes.
The state’s other major “big picture” tax report is its Tax Incidence Study, which informs citizens about the fairness of governments’ claim on Minnesotans’ income. However, it uses a very different definition of income — one constructed on cash income. It’s hard not to wonder how the debate around tax fairness in Minnesota would change if the Incidence Study took out capital gains and included instead the value of government benefits.
Agree or disagree with his policies, Gov. Dayton is to be commended for leaving behind a solid fiscal foundation for the next occupant of the executive office — an (almost guaranteed) significant budget surplus, a Triple-A credit rating and a budget reserve that is the envy of most every other state in the nation.
Getting a lot more government for less, however, is not part of that legacy.
Mark Haveman is executive director of the Minnesota Center for Fiscal Excellence.