Price of Government Projected to Hit All-Time Low

July 14, 2014 By By Jeff Van Wychen , Fellow and Director of Tax Policy & Analysis

Despite all of the crying from the right about tax increases, Minnesota’s “Price of Government” is projected to reach the lowest level in its 25 year history. The “Price of Government” (or POG) is calculated periodically by non-partisan staff at Minnesota Management & Budget (MMB) and is equal to total state and local government revenue excluding federal grants (referred to as “own-source revenue”) as a percentage of statewide personal income.

MMB has calculated the POG percentage each year since fiscal year (FY) 1991. According to MMB:

In broad terms, the “Price of Government” is a measure of the cost of all general government services statewide. It answers the question: How much do Minnesotans pay to state and local governments in total? It is comprehensive and includes nearly all revenues generated by state and local units of government as well as public school districts. All state taxes, property taxes, special assessments, fees and charges are included. Federal taxes are not included. The measure serves as a financial index for the cost of public services in Minnesota.

According to the conservative Coalition of Minnesota Businesses, the POG percentage is “an index of what taxpayers can afford.”

The “index of what taxpayers can afford” is projected to drop to 14.66 percent by FY 2017—the lowest level in the POG’s quarter century history. The next lowest POG percentage—14.72 percent—was set in FY 2009. The FY 2009 POG is atypically low because state and local own-source revenues in that year were depressed due to the Great Recession; while Minnesota and other states received stimulus funding beginning in FY 2009 through the American Recovery and Reinvestment Act, these dollars were federal grants and thus excluded from the POG calculation.

Excluding FY 2009, the only other time prior to the current fiscal year in which the POG percentage dipped below 15 percent was in FY 2003 (14.99 percent). The graph below shows the entire history of the POG percentage from FY 1991 through projected FY 2017.*



State and Local Revenues as % of MN Personal Income

The POG percentage increased from 15.28 percent in FY 2013 to 15.64 percent in FY 2014 as a result of tax increases in the 2013 tax act. However, the FY 2014 POG percentage is still less than in 15 of the 23 preceding years. Furthermore, the POG percentage is projected to drop steadily after FY 2014. The extent of the decline in the POG percentage after FY 2014 accelerated relative to what was predicted in the preceding POG report (from February 2014) as a result of the tax reductions enacted in the 2014 session, which reduced total state and local own-source revenue in FY 2016 and FY 2017 by 1.2 percent relative to earlier projections.

With all the complaints from the right about the 2013 tax increases, it may come as a surprise to many that Minnesota’s average POG during the four years following enactment of the 2013 tax increases (15.04 percent) is less than during the preceding four years (15.41 percent), less than during the years under “no new tax” Governor Tim Pawlenty (15.58 percent), and dramatically less than during the 1990s (16.99 percent).

To be sure, government revenue increased as a result of the 2013 tax act. Furthermore, the tax reductions included in the two tax acts passed during the 2014 were far less than the tax increases enacted in 2013, so the result of the 2013 and 2014 sessions was a net increase in state and local government revenue. However, even after passage of the 2013 and 2014 tax acts, real (i.e., inflation-adjusted) per capita state and local government own-source revenue will be less than it was at the beginning of the century—a clear indication that the net revenue increase enacted over the last two years was merely replacing a portion of the revenue lost since 2000.

Furthermore, the fact that the POG is projected to fall to an all-time low belies conservative claims that government is growing faster than the state’s economy. Growth in personal income is a reasonable proxy of growth in Minnesota’s economy. By definition, the fact that the POG is projected to fall to new lows means that state and local own-source revenue is growing less rapidly than statewide personal income and, by extension, less rapidly than the state’s economy.

During the 2013 and 2014 sessions, progressive state policymakers succeeded in increasing state investments in education, infrastructure, workforce development, and affordable healthcare and housing, while at the same time reducing the Price of Government—the “index of what taxpayers can afford.” In doing so, progressive leaders showed their ability to properly fund important public assets while simultaneously limiting government growth to reasonable levels.

*Due to differences in the budget year for state and local governments, the POG report groups state and school district fiscal year data with county, city, town, and special taxing district data from the preceding calendar year. For example, the FY 2014 POG is based on state and school district own-source revenue for fiscal year 2014 (which began on July 1, 2013) and non-school local government own-source revenue for calendar year 2013 (which began on January 1, 2013).

1 Comments: