Michigan's knowledge-based economy is just as strong as Minnesota's
By Lyman Stone
This post was originally posted on the Tax Foundation's Tax Policy Blog, and has been reposted here with permission from the Tax Foundation.
A new report by Michigan Future Inc. focuses on Minnesota, claiming to show how Minnesota has maintained a high level of economic prosperity despite being a high-tax state.
After a detailed look at Minnesota's tax policies, the report claims that Minnesota's strong economy is due to investing "additional revenue in services and investments that matter in a knowledge-based economy," which means, broadly, higher government spending. But it does not address key structural differences between Michigan and Minnesota's economies, and it actually misses the fact that Michigan's "knowledge-based economy" is, by many metrics, just as strong as Minnesota's.
Ultimately, there is little reason to believe that changing course now would help Michigan when it is already enjoying one of the fastest economic recoveries in the region.
Michigan Future's Account Problematically Omits Detroit
Detroit's economic decline is an essential story for Michigan since 1990, the year when the Michigan Future report begins its analysis, yet it is almost entirely absent from the report.
Since 1990, according to the Bureau of Labor Statistics, private employment in the Detroit metro area has fallen by 18.3 percent. In the rest of Michigan, it has risen by 17.3 percent. This huge divergence goes entirely unmentioned.
Furthermore, the Twin Cities metro area accounts for 66 percent of the private employment of Minnesota, while similarly sized metro areas in Michigan account for just 30 percent of employment. This distinction has enormous consequences. Cities often have higher nominal incomes, higher cost of living, and may naturally consume more government services like public transportation. Cities also tend to specialize in certain industries (like the auto industry), and thus a state with one metro area representing a large share of its economic activity will tend to have more exceptional economic activity, either for better, as in Minneapolis, or for worse, as in Detroit.
These factors mean that Minnesota isn't a good comparison for Michigan unless there are careful adjustments for major urban differences. Michigan Future did not provide any such adjustments.
Michigan Has a Strong Knowledge Economy
The report places a heavy emphasis on education as a form of "investment that matters in a knowledge-based economy." It claims that Minnesota's heavy higher education spending "has resulted in the state having one of the most highly educated work forces in the country, a clear advantage in a growing knowledge-based economy." But, in reality, the story isn't as clear as Michigan Future implies.
Looking at specifically science and technology intensive sectors, it becomes clear that Michigan's knowledge economy is at least as strong as Minnesota's.
According to the National Science Board's Science and Engineering Indicators, in 2011 (the most recently available data), Michigan was fourth in the nation for business research and development, at over 4 percent of private economic output. Minnesota was 10th at 2.4 percent. Science and engineering occupations made up 5 percent of state employment in 2012, 9th highest in the nation. On high-tech business creation, Minnesota and Michigan were roughly comparable. High-tech employment suffered with the auto industry for several years, but began to rebound in 2009: the most recently available data places Michigan not far below Minnesota.
This data casts doubt on claims that Minnesota's high-tax, high-spending model has created a strong knowledge economy relative to Michigan. On some measures, Minnesota edges out Michigan, while on many other measures, Michigan's high-tech, knowledge-intensive economy seems stronger than Minnesota's.
Any comparison with Michigan requires assessing the role of urban economies: something the Michigan Future report did not do. This is especially glaring given the choice to compare Michigan to a state with a much greater urban concentration.
Even if the states were entirely comparable, their different economic outcomes don't fit a story of Minnesota investing more in knowledge-economy skills. Michigan's performance on various knowledge-economy indicators is similar to, and in some cases better than, Minnesota's.
There is good evidence that high taxes negatively impact economic growth, especially highly progressive taxes. More well-defined comparisons between truly similar states have also demonstrated the impact of taxes, with low-tax states often performing better.
Michigan under Gov. Rick Snyder has made numerous valuable reforms in the last few years such as repealing tangible personal property taxes and the Michigan Business Tax, and a modest income tax cut. Another such reform in recent years was the elimination of the Single Business Tax, a destructive gross receipts tax that had no analogue in Minnesota.
Overall, with Michigan's recovery easily outpacing any other economy in the region (though Indiana and Minnesota are also performing well), it's hard to justify claims that the Great Lakes State needs higher taxes and spending.
Lyman Stone is an economist at the Tax Foundation's Center for State Tax Policy.