Minnesota is a high tax state. Has been for decades. Minnesota is the Great Lakes States best in economic well being and demographic outcomes. Has been for decades.

Michigan is not a high tax state. Its taxes per capita far lower than Minnesota’s. Minnesota is far ahead of Michigan in all well being and demographic outcomes.

Minnesota has been a successful high tax state for decades. The Census Bureau reports in 1980 Minnesota had the 6th highest state taxes per capita in the country. Michigan ranked 13th. Minnesota’s state taxes per capita were 122 percent of Michigan’s. In 2021 Minnesota had the 5th highest state taxes per capita in the country. Michigan ranked 28th. Minnesota’s state taxes per capita were 163 percent of Michigan’s.

There is no question Minnesota is a high tax state––its residents paid $2,145 more in 2021 than Michigan residents in state taxes alone. So for decades Michigan chose lower taxes as its prime lever to compete for economic growth and population. While Minnesota for decades chose to use its higher taxes for public investments in good schools and high quality communities as its prime lever to compete for economic growth and population.

When you combine state and local taxes per capita in 2020 Minnesota was the 7th highest in nation, Michigan was the 10th lowest. State and local taxes per capita in Minnesota are $6,507, 116 percent of the national average. State and local taxes per capita in Michigan were $4,263, 76 percent of the national average.

As reported by the Tax Foundation, on all the major state taxes Minnesota has substantially higher rates than Michigan:

Minnesota has a graduated individual income tax, with rates ranging from 5.35 percent to 9.85 percent. Minnesota also has a 9.80 percent corporate income tax rate. Minnesota has a 6.875 percent state sales tax rate, a max local sales tax rate of 2.00 percent, and an average combined state and local sales tax rate of 7.49 percent.

Michigan has a flat 4.25 percent individual income tax rate. There are also jurisdictions that collect local income taxes. Michigan has a 6.00 percent corporate income tax rate. Michigan has a 6.00 percent state sales tax rate and does not levy any local sales taxes.

We have been told over and over again for decades that high taxes leads to economic decline and depopulation. Think again!

• Minnesota has not lost a congressional seat in six decades while Michigan’s congressional delegation since 1960 has declined from 19 to 13.
• A recent study found that Minnesota is one of only nine “brain-gain” states with 8 percent more recent college graduates residents compared to those who graduated from its college and universities. Michigan is a “brain-drain” state with 14 percent fewer college graduates compared to those who graduated from its college and universities.
• In November 2022 Minnesota was tied for the second lowest unemployment rate in the country, Michigan was tied for 43rd.
• In November 2022 Minnesota was fifth in labor force participation, Michigan was 40th.
• In 2021 per capita income in Minnesota was three percent above the national average, ranking 13th. Michigan was 12 percent below the national average, ranking 35th.
• In 1979 Minnesota per capita income was one percent above the national average, Michigan was three percent above. So as Michigan’s state taxes per capita declined from 13th highest in the nation to 28th the state’s per capita income declined by fifteen percentage points compared to the nation. While Minnesota gained two percentage points while staying a high tax state.

Why is the conventional wisdom that high taxes leads to economic and population decline so wrong? Former New York City Mayor got it right when he wrote in a Financial Times op ed:

Many newly successful cities on the global stage – such as Shenzhen and Dubai – have sought to make themselves attractive to businesses based on price and infrastructure subsidies. Those competitive advantages can work in the short term, but they tend to be transitory. For cities to have sustained success, they must compete for the grand prize: intellectual capital and talent. I have long believed that talent attracts capital far more effectively and consistently than capital attracts talent. … Economists may not say it this way but the truth of the matter is: being cool counts. When people can find inspiration in a community that also offers great parks, safe streets and extensive mass transit, they vote with their feet.

At its core the Minnesota playbook for economic and demographic success has been higher taxes used for public investments to “compete for the grand prize: intellectual capital and talent” by offering good schools from birth through colleges and creating places where people want to live by offering high quality basic services, infrastructure and amenities.

Minnesota has used those higher taxes for services and investments that matter in a knowledge-based economy. An educated work force, efficient transportation systems, vibrant cities and metropolitan areas, and a secure safety net.

The Minnesota good schools and quality communities strategy has paid off in the best in the Great Lakes economic and demographic outcomes. Michigan’s low tax/low public investment strategy has been accompanied by a decades long decline compared to the nation in both economic and demographic outcomes.

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Why? Because the proportion of adults with a four-year degree or more is arguably the single most important predictor of a state’s per capita income. In 2015 of the top 15 states in per capita income, all 12 of  the non oil and natural gas states were also in the top 15 in college attainment.

As the Bridge maps make clear, Michigan is in the bottom third of states in the proportion of adults with a four-year degree or more, even though Michigan is average in the number of high school graduates who ultimately earn a four-year degree. What makes us a national laggard is where college educated adults choose to live and work after they complete college. As they write:

Michigan ranks 49th in the percentage of adults who were born elsewhere, either in another state or another country. That’s a problem for our economy, because people who move across state (or international) borders are typically more educated than native residents. So while Michigan’s first-generation residents are more likely to have degrees than people born here, there just aren’t enough of them, compared with the flow of people moving into other states.

The Michigan Bureau of Labor Market Information and Strategic Initiatives in their recently released 2016 Michigan’s Annual Economic Analysis provide detailed information (Figure 4.4 on page 32) on net migration of 25-34 year old college graduates. As they note every year from 2005-2015 has seen a net outmigration of recent college graduates, except for 2014. In 2015, in a relatively strong state economy with an even stronger domestic auto industry, Michigan had more young professionals move out than moved in.

At the bottom of this post is some additional data we tabulated from the American Community Survey. It shows how Michigan compares from 2006-2016 in the growth of college educated adults with Minnesota and Illinois, the top two Great Lakes states in both the proportion of adults with a four-year degree and in per capita income. Yes, as Bridge points out, lots of migration between states is due to Americans moving to warm weather states. But when it comes to college graduates some cold weather states are doing better at attracting college graduates.

What jumps out first in the table is the big increase in those 25 and older with a four-year degree in all three states. This is mainly due to the aging in of the Millennials who are the generation with the highest proportion ever of college graduates.

What jumps out next is that Illinois and Minnesota are doing far better than Michigan in attracting college graduate born in other states. 75% of the growth of those with a four-year degree or more in Michigan’s comes from those born in the state, compared to 56% of Illinois’ growth and 58% of Minnesota’s.

This data, along with that reported by Bridge and the Bureau of Labor Market Information and Strategic Initiatives, should ring alarm bells among state policymakers. The reason that all three of us write about this topic is that it matters to the state’s long-term economic well being. It’s almost certain that unless Michigan reverses this persistent talent gap, particularly becoming an exporter of recent college graduates, it will remain a low-prosperity state

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And there is an editorial on what the findings in the report mean for the future of metro Lansing. The Journal’s editors write:

Economic development leaders have spoken eloquently about the need to attract young professionals to the region. They can speak at length about the importance of the knowledge-based service sector — jobs in health care, insurance, professional services — to the region’s prosperity. But in the hearts of many a Michigander beats the proud history of manufacturing. That’s true in mid-Michigan, too, where the region continues to celebrate successes of its two state-of-the-art General Motors Co. plants even as it watches new companies such as Niowave work to develop superconducting linear particle accelerators. Manufacturing, particularly advanced manufacturing, has a role in the region’s future. Yet two decades of data compiled by Michigan Future Inc. strongly suggest that the knowledge economy will support the middle class of the future and that’s where the region and the state must devote more attention and energy.

…  The good news is, we have a road map. Greater Lansing needs more educated workers: More high school graduates, more community college graduates, more university graduates. And we need them to stay here, which means protecting the quality of life not only with basic public services but with amenities that set the community apart. Nurture talent and companies with jobs will come. If the region succeeds, prosperity follows. (Emphasis added.)

Metro Lansing has the assets needed to be prosperous in the future. Mainly a big research university in Michigan State as well as a growing cluster of IT and insurance companies. The asset though that is missing most is talent. College educated adults, particularly young talent. Stites has it exactly right when he writes:

The key to creating this economy is by growing places where young talent want to live — that is, dense, walkable and urban communities with excellent public transportation. Lansing cannot be Chicago or Minneapolis, but we can be a successful mid-sized metro region with a major research university almost identical in size to Madison, Wis.. We have 8,000 25- to 34-year-olds with four-year degrees here in the metro Lansing area. Madison has 24,000. Our per capita income is $33,273; Madison’s is $42,456. Young talent matters

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The main ingredient that allows Minnesota to participate more in the knowledge sectors of the economy is human capital. As Governor Snyder says: “Today, talent has surpassed other resources as the driver of economic growth.” Specifically the proportion of adults with a four year degree or more. Which now is the best predictor of a state’s per capita income. Here again Minnesota is one of the leading states, Indiana near the bottom.

Here are the details:

• Minnesota is 10th in proportion of adults 25 and older with a four year degree or more at 32.4%
• Indiana is 43rd in proportion of adults 25 and older with a four year degree or more at 23.0%
• Minnesota is 8th in the proportion of 25-34 year olds  with a four year degree or more at 37.2%
• Indiana is 33rd in the proportion of 25-34 year olds with a four year degree or more at 27.0%

As we have explored extensively, 25-34 year olds are the mobile young talent every state has made an economic development priority. There is a strong case that where they settle will determine whether or not a state will be prosperous or not in the future. If that is true Minnesota is going to continue to be prosperous, Indiana not.

• In 2011 there were 276,000 young professionals in Minnesota compared to 224,000 in Indiana
• From 2006 to 2011 the number of young professionals in Minnesota grew 17.7% in Indiana 6.1%
• Minnesota is 21st in total population and 17th in population of 25-34 year olds with a four year degree or more
• Indiana is the reverse, 16th in total population and 20th in population of 25-34 year olds with a four year degree or more

As is true in most states the difference is in the concentration of college educated adults in their big metro and its central city.

• Metro Minneapolis four year degree attainment rate is 37.2%, metro Indianapolis is 29.2%
• For 25-34 year olds its 42.9% compared to 34.3%
• Metro Minneapolis is home to 226,000 young professionals, metro Indianapolis 100,000
• Minneapolis and St. Paul combined have 62,000 young professionals, the city of Indianapolis (which is a county)  40,000

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The conventional wisdom seems to be that due to more fuel efficient vehicles, Michigan drivers are spending less on gasoline, therefore less on the gasoline taxes, and the state’s transportation budget is suffering because of it. We need to find more money to make sure our roads are well maintained and commerce can move forward.

While the need for additional investment in critical infrastructure – and in mass transit – is obvious, the reality is that Michigan today is spending more tax dollars on roads today than it did in 2000 – a lot more, largely due to federal support. Meanwhile, in other equally vital areas of the state’s budget – higher education and cities – the state is spending a lot less. And there’s little groundswell of support for greater investment in those areas, even though they are vital to preparing, attracting and retaining college graduates, the key source of prosperity in the knowledge economy.

Here are the numbers (courtesy of the Senate Fiscal Agency):

In 2000-01, the state spent $3.036 billion on roads, including federal funds. In the 2012-13 fiscal year we are now in, that will be $3.466 billion, a $410 million or 13 percent increase.

Turn to higher education. In 2000-01, the state spent $1.910 billion, including federal funds. This year, it will spend $1.399 billion. That’s a 26 percent cut in overall spending, down $511 million.

Revenue sharing? In 2000-01, the state sent $1.555 billion to cities. This year: $1.096 billion – a $459 million cut, 29.5 percent less than a decade ago.

Meanwhile, the miles of roads and number of bridges the state is responsible for likely has changed very, very little over that decade. But the number of college students has increased by more than 8 percent.

It’s good for people to argue that we need to invest more in the state’s transportation system. That’s particularly true when it comes to mass transit.

But the argument for investment in higher education and cities is equally – if not more – important if Michigan is going to win the war for prosperity by moving our state firmly into the 3.0 economy where good paying jobs are being created.

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Dan Gilbert, CEO of Quicken, was the keynote speaker. He gave, quite simply, the best speech I have heard on the importance of Detroit to the future of the region’s and state’s economy. As Gilbert described we are moving from a muscles to a brains economy. The asset that matters most in a brains-based economy is talent. Talent – particularly young talent – is mobile. And young, mobile talent is moving to vibrant central cities. As Gilbert emphasized not the suburbs of big metros, but to the central city. So a vibrant Detroit is central to the success of the metro Detroit and Michigan economy.

Gilbert talked about those themes in a recent NPR interview which you can listen and read here.

Most encouraging is Gilbert is putting his money where his mouth is. Moving his company headquarters from the suburbs to the city, buying up many Detroit office buildings to develop now (not sit on as too many are doing), helping new companies get started and then investing in them if they locate in the city. And leading the effort to develop light rail on the Woodward Corridor. Gilbert described a Woodward light rail as essential to the growth of the city and region.

The good news is Gilbert is not alone. Increasingly Detroit’s business leadership and foundations are not waiting for government (city, region or state) to make the development of Detroit as an attractive place for young talent to live and work. No more waiting for government to get it, the time for action for them is now. Between business and foundation leadership and the growing interest of young professionals to settle in Detroit the city’s future is much brighter

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Detroit’s problem is not that there is no demand for central city living. The last two decades have seen a rebirth of urban neighborhoods that were written off as dead across the country. They have largely been revitalized by a combination of immigrants and college educated households – mainly young and without children. Detroit’s problem is that it has not participated at any scale with these trends. Detroit needs an agenda to take advantage of the renewed demand for city living.

Two recent articles demonstrate that growth is possible. Both focused on young talent moving into the city. In fact, despite all the naysayers who have written Detroit off, growth is occurring in the city today. The Detroit News article is entitled: Cool factor lures the young, artsy to Detroit. Detroit’s renewal is also garnering national attention. The New York Times story is entitled: Detroit Pushes Back With Young Muscles. I recently did an interview with a video journalist from the Financial Times who, as part of a rust belt story, is interested in Detroit’s Live Midtown initiative.

The Times writes:  The scene might have been run of the mill in Seattle or Williamsburg, Brooklyn, or other urban enclaves that draw the young, the entrepreneurial and the hip. But this was downtown Detroit, far better known in recent years for crime, blight and economic decline. Recent census figures show that Detroit’s overall population shrank by 25 percent in the last 10 years. But another figure tells a different and more intriguing story: During the same time period, downtown Detroit experienced a 59 percent increase in the number of college-educated residents under the age of 35 …

For most of Michigan, and unfortunately many in Detroit, the notion that the city could be compared to Seattle or Brooklyn is not believable. But not to young professionals. The News writes:  “My friends in New York, L.A., Europe all think Detroit is really cool, and, thankfully, so do more and more people here. The energy seems great right now,” said Angela Topacio, an artist and managing partner of Gyro Creative Group downtown.

Obviously at the moment the growth is at a small scale. Hundreds of new residents, stores and businesses, not the tens of thousands the city needs. But it is evidence that growth is possible. And that growth not only matters to the city, but to the region and state as well.

Governor Snyder was both courageous and right when he campaigned across the state with the message that Michigan cannot succeed unless Detroit succeeds. The reality is there is a clear pattern across the country: the most prosperous states are either rich in energy resources or are anchored by an even more prosperous big metro with a vibrant central city.

The revitalization of Detroit that is enabling the growth has been led by foundations, anchor institutions, business leaders and community development organizations. The Hudson-Webber Foundation and Dan Gilbert – both featured in the Times article – have been particularly visionary in their leadership. As well as the energy and dedication of the young professionals who now call Detroit home.

It is time for city, regional and state policy makers to get more active. The region and state have a big stake in Detroit becoming a talent magnet. As we have written before the priority for city leadership is to be far more welcoming to all, development friendly and to provide quality basic services – starting with safety – and amenities. For the region and state the priority is to help with the investments that matter: starting with making Woodward light rail a reality but also finding ways to reverse the cuts in revenue sharing and the ending of historic preservation and brownfield tax credits. At the moment city policies and practices as well as regional and state policies are a headwind hindering Detroit’s growth. That needs to change!

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