Minnesota revenue growth third-fastest in country since before Recession

Minnesota's state revenue growth during and after the Great Recession far outpaced most of the nation, the Pew Charitable Trust reported in a just-released national analysis.

Only North Dakota, with its oil drilling boom, and Illinois showed larger percentage increases in revenue from the first quarter of 2006 to the second quarter of 2014, the analysis revealed.

Meanwhile, inflation-adjusted state revenue remains below prerecession levels in 29 states, including Wisconsin and Michigan, the Pew study said.

The research raises the question of whether Minnesota is recession-proof and why.

Calling the state recession-proof would be a mistake, said Nathan Grawe, chairman of the economics department at Carleton College in Northfield. But in the past 70 years Minnesota's economy has moved from being more volatile than the national average to less volatile than the national average.

"A lot of that was moving away from agriculture," Grawe explained.

While agriculture still plays a major role in the state's economy, Minnesota has expanded into medical technology, higher education, insurance, finance and other industries that pay good wages and offer job stability, Grawe said.

Unemployment in Minnesota stayed roughly 2 percentage points lower than the national average throughout the Great Recession.

"We don't seem to suffer the same lows as the rest of the country, and we recover faster," he said.

Part of the reason is that Minnesota has structured state tax collections to take advantage of progressive taxes, which levy higher tax rates the wealthier a person becomes, Hamline University economics professor Stacie Bosley said.

"There is a heavier reliance on the income tax [in Minnesota]," she said. "If you see the most gains in the highest income groups, a progressive tax system gets more revenue."

During the recession and since, the very wealthy have seen their net worth and incomes preserved or grow while middle class and low income wages stagnated or grew very little.

Pew also cited new revenue sources as a driving force behind the state's revenue growth. Minnesota has imposed several significant new taxes since the recession.

In 2008, the state raised the per gallon gasoline tax from 20 to 25 cents and has since phased in another 3.5-cent increase. That same year, voters approved a constitutional amendment that raised the sales tax 0.375 percent, with all of the increase going to a state Legacy Fund, that pays to protect and improve water resources, parks, wetlands, prairies, forests, and fish, game, and wildlife habitat.

In 2013, the state established a higher income tax rate for married couples making more than $250,000 and individuals making more than $150,000. It also removed some corporate tax write-offs and raised taxes on cigarettes and other tobacco products.

In sum, diversification and new revenue sources stabilized the tax base. The state's overall revenue dropped about 3 percent — $632 million — from 2008 to 2009, but grew year-over-year after that. By the end of the second quarter of 2014, inflation-adjusted state revenue sat 16.3 percent higher than its prerecession peak. This happened despite the fact that corporate tax revenue crashed 43 percent — from $1.17 billion in 2007 to $663.5 million in 2010.

Last week, the state announced that October's revenue take was $75 million above what government officials anticipated.

But as Grawe and Frans both noted, taxes new or old cannot drive revenue increases without economic growth.

"Last year — 2013 — we had the fifth-fastest-growing economy in the country," Frans said. "Revenues follow the economy."

Jim Spencer • 202-383-6123