The tax increase generated lots of predictions of economic doom. Consistent with the prevailing conventional wisdom that low tax states––particularly those with low or no income tax––have the best economies. Think again!

As we detailed in our latest report, State Policies Matter: How Minnesota’s tax, spending and social policies help it achieve the best economy among the Great Lakes states, Minnesota is both the highest tax state in the Great Lakes and the  state with the best economic outcomes, by far, in the Great Lakes region.

They have achieved the economic outcomes we all want––low unemployment, higher wages and high per capita income––in part through decades of public investments in the real drivers of economic growth: education, infrastructure and creating communities where people want to live and work.

Minnesota’s Governor Mark Dayton, the Star Tribune reports, wants to use the budget surplus to make even more investments in education and transportation. They write:

Gov. Mark Dayton told reporters that the surplus, which he credited to the state’s well-performing economy, should be used to invest in education and transportation, his two main priorities. Though he’s not opposed to offering tax cuts as Republicans are putting forth, he said spending on schools and the state’s infrastructure would be a way to spur future economic development.

“Inevitably, there will be another national economic slowdown or downturn, and Minnesota’s economy will be affected like everyone else’s,” he said. “Our budget surplus will disappear, so I propose that we invest our collective good fortune in our collective better future.”

If Michigan is serious about the more and better jobs goal Governor Snyder has set, Minnesota provides the playbook for achieving that goal.

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During the complete terms of Governors Romney and Blanchard Michigan’s employment growth exceeded the national average. Greater than the nation by an annual average of 0.45 percentage points in the Romney years and 0.07 percentage points in the Blanchard years. And lagged the nation during the complete terms of Governors Milliken, Engler and Granholm. Lower than the nation by an annual average of 1.19 percentage points in the Milliken years, 0.40 percentage points in the Engler years, and 1.87 percentage points in the Granholm years. (During Governor Snyder’s first year the state exceeded the nation in employment growth by 0.46 percentage points).

Over the entire five decades Michigan lagged the nation in annual employment growth by 0.67 percentage points. In only 16 years of the combined complete terms of the five governors did Michigan’s employment growth rate exceed the nation’s. Five of the 16 were in the Blanchard years.

So what do we make of this data? The data provides more evidence on the main point of these posts: that today’s conventional wisdom that raising taxes – particularly in an economic downturn – is a recipe for economic decline, and that cutting taxes is a recipe for economic growth, is not accurate  Governor Blanchard was able to grow the state’s economy and raise taxes (to the highest income tax rate in Michigan’s history during his first three year).  Not only did Michigan get strong job growth during his Administration, it also had employment growth faster than the nation’s.

The tax increases preserved the state’s ability to provide basic services, a decent safety net and make public investments in education and infrastructure.

Once again, my contention is not that the Blanchard tax increase was a major cause of the economic expansion during his years as Governor. Almost  certainly it wasn’t. But that the Blanchard record is evidence that you don’t have to choose between a growing economy and state funded goods and services. That the huge state budget cuts since 2000 – a lot due to tax cuts – in areas like higher education, revenue sharing, infrastructure and the non health care safety net were not necessary to grow the state’s economy.

Michigan’s track record from 2000 through 2011 (when the state income tax rate has ranged from 3.9% to 4.35%) provides more evidence that cutting taxes does not necessarily lead to job growth. The state enjoyed job growth in only two of those years: 2000 and 2011. But even in 2000 – when the first of income tax cuts went into effect (from 4.4% to 4.2%) – the state’s job growth rate was lower than the nation’s. The only two years it was greater than the country’s was 2008 (the year the rate went up to 4.35%) and 2011.

Once again, I do not believe that the tax and budget cuts of 2000-2011 were a major cause of the state’s serve economic decline. But it is clear that the policy of lower state taxes (and the reduced state government spending that goes with it) did not work as an economic growth strategy.

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The Governor campaigned on the need for increased public investments. Many of his supporters have described the Administration’s strategy as cut and invest. Once we get to a structural balance we can move to priority investments. But listen to what the Governor said to Rick. Snyder recently told me that once the state is financially stabilized, he wants to end the annual cuts to such areas as higher education and revenue sharing to local governments. End the annual cuts is far different than increased public investments to grow the Michigan economy.

As Rick writes: You can bet, for instance, that if an improved Michigan economy results in a surplus of tax revenues, there will be intense pressure by Republicans to cut taxes again, rather than increase spending on higher education or cities.  That would be a mistake, say those who believe the state is losing economic competitiveness because of a poorly educated work force, bad roads and the loss of bright young people who are flocking to Chicago and other vibrant cities outside of Michigan. “I understand that we need to have a moderate tax policy, but a poor quality of education leads to a poor standard of living,” said Doug Stites, CEO of Capital Area Michigan Works, a job-training agency in Lansing. States that have a high level of education in their work forces, without regard to their tax policies, have high standards of living” .

Haglund argues the lesson the private sector has learned is: We can’t just cut our way to prosperity. …. if the cuts are too deep, the future of the enterprise can be threatened. The same is true for Michigan. Cutting taxes and cutting back on public investments has been the path Michigan has travelled on for more than a decade. The result has been we are now one of the poorest states in the country (36th) and nearly all the states even poorer than us are low tax states. We need to get on a new path if we are to recreate a high prosperity Michigan.

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