With considerable fanfare, CNBC has just released its annual "Best States for Business" rankings, and at the top is a very welcome and pleasant surprise. Minnesota is now ranked first in the nation, having risen from sixth last year and 15th from two years ago. Our ranking is based on a performance scorecard that has been emblematic of Minnesota for a very long time — high scores and national leadership in foundational competitiveness issues like workforce quality, education and quality of life paid for, in part, by relatively higher business taxes and costs that place Minnesota well into the bottom half of the nation on that particular measure. It's a powerful endorsement for the idea that a "high tax and high service" governance model can be a strategy for economic success.
The findings, however, become even more interesting when considering the state we edged out for first place — Texas. It's noteworthy because of the supremely odd juxtaposition. It is difficult to imagine any state being more of a polar opposite to Minnesota than the state at the other end of Interstate 35. Not only are our tax and spending structures extremely different, but the underlying political cultures and general attitudes toward government suggests these states might exist on different planets. Yet here we are, first and second, both excelling in our own way in providing a very positive climate for business according to a high-profile business media outlet that should know a few things about the topic.
These findings suggest there are different paths to economic success. Texas places a very strong premium on economic freedom, with minimal government intrusion into the economy. Minnesota places a premium on strong public goods and quality-of-life considerations featuring a strong government presence. Different industries — and different companies within industries — will always emphasize various competitive issues and factors in different ways. Each strategy can be (and obviously is) successful in its own way.
But each of these strategies has a vulnerability that threatens its long-term success. A couple of years ago at our annual meeting of members, state tax expert and Texas native Billy Hamilton spoke of his state's economic vulnerability in the context of complimenting Minnesota's commitment to its public goods. In his opinion, overlooked in all the bouquets being tossed at Texas for its economic successes is the state's failure to adequately address health, transportation, education and water infrastructure needs, which he saw as a potential threat to the state's long-term economic performance.
So what is our vulnerability? It's getting caught up in debates about the adequacy of spending increases while paying insufficient attention to how productive that spending is and whether it produces the desired results. These last few legislative sessions demonstrated how easy it is to focus on how much we tax and spend while essentially ignoring the far more important and influential issue of how we tax and spend. Becoming a high-tax state is relatively simple; ensuring that the value proposition continues to exist for business to support above-average levels of taxation is more challenging.
It has become popular to speak of a lot of government spending as "investment," and that thinking has considerable merit. However, the logical extension of that idea seldom gets discussed. Investments can and do underperform, and simply putting more money into underperforming investments is a losing strategy. Businesses walk away from such investments.
Minnesota's competitiveness strategy — emphasizing high-quality public services in significant quantity — has clearly served us well, and can continue to do so. But sustaining this strategy requires government systems and a political culture that encourages, supports and rewards public-sector innovation combined with a continuing and relentless pursuit of efficiency and productivity gains in the delivery of those services. Otherwise, as sure as the aquifers of Texas deplete, the costs of these public services will grow, return on investment will decline and our state business climate will deteriorate.
Mark Haveman is executive director of the Minnesota Center for Fiscal Excellence.