With taxes, outcomes aren't easy to predict

The fight over Gov. Mark Dayton's effort to raise taxes for high earners is underway. So, in the spirit of tossing kindling on the fire, consider this: Job growth in Minnesota slowed in the decade after it cut state income tax rates.

This is an inconvenient fact for anyone who believes that corporate and personal income tax rates are among the most important predictors of a state's long-term economic vibrancy. But it would be equal folly for supporters of tax increases to conclude the opposite, that high taxes are not a barrier to attracting, retaining and fostering job growth.

Unfortunately, it's not that simple when you're talking about economic competitiveness, long-term prosperity and the appropriate response to a budget crisis.

During the 1991 recession, for example, states that mainly cut spending outperformed those that mainly raised taxes. But the reverse was true during the 2001 recession, with states that raised taxes substantially outperforming those that did not, according to the economists at Moody's.

The best solution, said Dan White, an economist with Moody's Economy.com, "is complicated and depends on a lot of local considerations."

Dogma, alas, usually trumps nuance in the debate -- now three-plus decades on -- over the merits and failings of Minnesota's business climate.

The argument has been waged principally by Minnesota's biggest companies, and in simplistic terms it holds that Minnesota should aspire to be more like the states that routinely rank among the Top 10 in terms of attractive business climates: South Dakota, Alaska, Wyoming, Nevada, Florida, Montana, New Hampshire, Delaware, Utah and Indiana.

Minnesota's 20 Fortune 500 company headquarters are almost as many as the combined total of those 10 states (26). Seven of the 10 have one or fewer Fortune 500 companies.

Minnesota has a higher share of households with incomes above $50,000 and $150,000 than all but three of the Top 10 states: Delaware, New Hampshire and Alaska.

Minnesota has a smaller share of people living below the poverty line than eight of the Top 10 states, and a larger proportion of Minnesota residents hold a bachelor's degree or higher than the residents of any of those states.

Maybe most surprising of all, a higher share of people in each of these supposed bastions of free enterprise work in government jobs. In South Dakota, almost 16 percent of the population works for the government, while in Alaska almost 25 percent do. In Minnesota, 12.2 percent of the labor force is on the public's payroll.

This is not an argument for preserving the status quo. Minnesota's high school graduation rate is slipping, especially for the students of color, who represent a growing share of our population. We are attracting and sustaining a smaller share of young, fast-growing start-ups that, as one study after another has shown, are far more essential for job creation than a 100-year-old Fortune 500 company.

Between 1989 and 1998, employment in Minnesota grew 17 percent, or 41 percent faster than it did nationally. In the following decade, 1999 through 2008 (a year before the recession showed up in the numbers), Minnesota employment grew at less than half the rate it did nationally.

This sluggish growth came despite the fact that the second decade began with cuts in Minnesota's state income tax rates ranging from 7.6 percent to 11.9 percent.

There are lots of things to fault about Dayton's budget proposal. It's too quiet, for example, on demographic and fiscal trends that all but lock in deficit shortfalls in future years. It asks too few people to make too large a sacrifice, and for too long. While it recognizes that investing in education is essential to economic prosperity, it lacks a blueprint for helping to get Minnesota's economy growing again, which is critical to easing this crisis and limiting the potential for future ones.

The only thing less surprising and imaginative than Dayton's proposal was the reaction to it: no taxes, no way. Political leaders have been cowed into believing all tax cuts generate growth, even when the facts suggest that's not always the case.