For more than a decade, Michigan has been undermining local government budgets and the ability of its communities to be successful. The primary reason is an inaccurate belief that low- tax places have the best economies. Not surprisingly, while many cities around the country—even those that have also experienced decades of population decline—are now growing, Michigan’s major cities are not.

Michigan needs to reverse course and invest in the growth and development of its regions and local communities. When in June 2018, Highland Park exited emergency management, it was the first time Michigan had no cities or school districts under emergency management since 2000. Though municipal finance has been a challenge in cities around the country, it seems especially widespread and acute in Michigan.

Michigan’s municipal funding crisis occurs at the crux of three state policies, that, taken together, have been devastating. One set of policies constrains the rate at which property taxes can grow; another prohibits municipalities from levying taxes not enabled by state law; and the third has cut revenue sharing to local communities precipitously over the past nearly 20 years. We will add to this that Michigan’s emergency management approach to fiscal distress is too little, too late given the convergence of the aforementioned policies, and thereby increases the likelihood that local governments end up in trouble.

Michigan needs to transform its system for funding local government. The current system structurally leaves regions and local communities with inadequate resources to fund the infrastructure, basic services and amenities require to compete for talent.

As we documented in our State Policies Matter report, Minnesota has the Great Lakes’ best economic outcomes and the highest taxes in the Great Lakes. Minnesota ranks 46th in the latest Tax Foundation state business tax index; Michigan ranks 12th. High taxes have not prevented Minnesota from having the economic outcomes all Michiganders want: third in the proportion of adults who work, 14th in per capita income and eighth in employment earnings per capita. Michigan on those measures ranks 40th, 32nd and 36th. One can make a strong case that the increased public investments those higher taxes enabled is a major reason for Minnesota being the most prosperous Great Lakes state.

Substantial increase in returning state revenue from the state and local governments in a way that encourages regional cooperation.

The big idea here is something that might be thought of as super revenue sharing. Returning a substantial proportion to Michigan regions of the state taxes raised from each region to pay for basic services, infrastructure and amenities. Not just revenue sharing, but also transportation, water, parks and outdoor recreation, housing and any other state funding streams that involve the provision of local/regional infrastructure, basic services and amenities. The funds should be returned with little or no state mandates on how the funds can be used. The goal is to allow regions to develop and fund their own strategies for creating places where people want to live and work.

Removing restrictions on local government taxing authority, including a local/regional sales tax option.

Michigan clearly needs to rethink its restrictions on property tax increases. The inability of local communities to share in the increase of property values is a major impediment to creating places where people want to live and work.

Click here to read the full report.

Photo credit: Kenneth Sponsler/Shutterstock.com.

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Median household income in the Twin Cities of $73,231 was the seventh highest among the 53 metro areas with a population of 1 million or more in 2016, according to American Community Survey figures. (Detroit ranked 38th and Grand Rapids 29th.)

Unemployment hasn’t reached double-digit levels in at least the past three decades. The highest annual jobless rate since 1990 in metro Minneapolis was 7.7 percent in 2009 at the depth of the national Great Recession. Just 2.7 percent of the Twin Cities’ workforce was unemployed in April 2018, the fifth-lowest jobless rate among the 50 largest metro areas in the country. (Metro Detroit, with a jobless rate of 3.6 percent, ranked 31st.)

Economists attribute much of the metro area’s economic vitality to its diverse mix of industries, including food processing, health care, medical device manufacturing and financial services, and to its highly educated workforce.

“It’s very clear that the quality of our workforce is a key element in our success,” said Art Rolnick, a senior fellow at the University of Minnesota’s Humphrey School of Public Affairs and a former economist at the Minneapolis Federal Reserve. “It’s been a big payoff in this economy.”

A roster of highly educated, mostly home-grown workers and managers is a major reason why Minnesota hosts the largest number of Fortune 500 companies per capita in the country, said Myles Shaver, a management professor in the University of Minnesota’s Carlson School of Management. And most don’t leave.

“Metro Minneapolis doesn’t attract people well,” he said, citing a climate he says many equate with the Arctic. “But it’s been able to build a strong workforce because it retains so many talented people. Retention rates here are extreme.”

Minnesota was home to 18 Fortune 500 companies in 2017, the most per capita of any state. All but one are located in metro Minneapolis. Paced by metro Minneapolis, the state’s largest metro area, Minnesota also has long ranked as one of the top knowledge economies in the country.

The Washington, D.C.-based Information Technology and Innovation Foundation ranked Minnesota 12th in its 2017 State New Economy Index, which uses 25 indicators to measure how well state economies are “knowledge-based, globalized, entrepreneurial, IT-driven, and innovation-oriented.” Michigan ranked 15th, up from 34th in 1999.

Its broadly educated workforce also has helped metro Minneapolis grow new industries as old ones fell away.

The Twin Cities became a center of supercomputing in the late 1950s. (The CDC 6600, introduced in 1964 by Control Data Corp. in suburban Minneapolis, is considered the world’s first supercomputer.) But as the computer industry gradually moved to west to Silicon Valley, local computing engineers, scientists and others shifted to the expanding medical device industry.

While the conventional wisdom is that low taxes are key to economic growth, metro Minneapolis—and the rest of the state—has taken the opposite approach.

Twin Cities’ residents and businesses pay some of the highest taxes in the country. Minnesota regularly ranks as among the worst states in the Tax Foundation’s Business Tax Climate Index, which includes corporate, personal income, sales, unemployment insurance and property taxes.

Minnesota ranks 46th in the Tax Foundation’s 2018 study in which a lower number indicates a better rank.

Gov. Mark Dayton and the then-Democratic controlled Legislature raised taxes on the wealthy in 2013, boosting the top individual rate in its progressive income tax system from 7.85 percent to 9.85 percent.

On top of high state taxes, Twin Cities’ residents pay additional special levies to support regional government (the Metropolitan Council), public transit and other amenities, such as parks.

Rolnick said he doesn’t think economic growth is necessarily predicated on low or high taxes. It’s how the money is spent.

“If you’re investing well, you get great infrastructure and great education,” he said. “That’s what you need for a thriving economy.”

The Twin Cities’ diverse economy is somewhat serendipitous. Companies in different industry sectors, such as General Mills, Target and United Healthcare, were born there. But none dominated the economy in the way the auto industry, which is subject to wild cyclical swings, did in Detroit.

Local experts say the key to maintaining that healthy diversity and the wealth it engenders is a continued focus on education and infrastructure.

Metro Detroit and the rest of Michigan could copy that formula for success if policymakers can muster the political will to do it.

Check our new report, Regional Collaboration Matters, How Metro Minneapolis has forged one of the wealthiest and most livable metropolitan regions in the United States, for more stories and lessons from the most successful state in the Great Lakes.

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Over those three years, California’s job growth has exceed the U.S. average by a substantial amount. California employment growth in the past three years: 2.5%, 2.9% and 2.3%; U.S. growth during same periods: 1.6%, 1.7%, and 1.9%.

What might be even more interesting and important for Michigan is the breakdown of the job growth by sector. California achieved this faster than the nation job growth even though its manufacturing sector was substantially lagging the growth in the U.S. and was actually losing jobs the past two years: California manufacturing employment growth for the three years: 0.5%, -0.3%, -0.3%; compared to U.S. manufacturing growth of 1.9%, 0.4%, 1.1%.

California’s recent out performance can be traced to a stronger rebound in construction, but mostly to much stronger job growth in professional and technical services, corporate headquarters and health care services. In the two big job-growth, knowledge-based sectors California increased professional and technical service employment by 5.8%, 3.7%, 3.6% ; compared to 2.7%, 3.0%, 2.9% for the nation. In private health service California employment grew 3.5%, 7.2%, 4.1%; compared to 2.1%, 2.4%, 1.9% for the U.S.

The strong job gains in these highly paid, highly educated sectors seem to also support stronger job growth in retail trade and restaurants and bars than in the U.S. overall.

This is consistent with the trends we have been reporting on in our annual reports and detailed in our recent The New Path to Prosperity report. Growth is occurring in knowledge-based services which tend to be higher wage which drives employment increases in retail and hospitality which are low wage. The lesson is clear, if states and region are going to grow and be prosperous, unless they have major oil and gas deposits, this is what it will look like. Manufacturing isn’t a sustainable growth option and the rest of the goods producing sector on a structural basis is not going to grow much either.

Two lessons from California seem important for Michigan to learn:

1. You don’t need job growth in manufacturing to thrive.
2.  It’s not all about taxes. You can be a prosperous state even if you have relatively high taxes, or more generally business costs, if you can grow the knowledge economy. If Michigan can grow its knowledge economy, as we have been advocating, then it doesn’t matter if manufacturing and other cost sensitive sectors move to lower cost states – Michigan will still thrive

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And this has been true for decades. High tax and spending policy has been associated with higher employment rates and higher per capita income in Minnesota for decades. And the gap between it and the rest of the Great Lakes states and the nation has been growing.

The one substantive critique we have received has been from anti-tax advocates that correlation does not equal causation. Pretty amazing that they would use that critique since it is the hallmark of the anti-tax movement. Claiming, without evidence, both that low tax states have the best economies and that by adopting low taxes Michigan would soar is what they have done for decades.

It is true that correlation does not equal causation. The fact is that Minnesota is a high tax and spending state and they have more and better jobs. But that does not mean that they have those results because of their tax and spending policies. We have always been skeptical about the impact of state policies on a state’s economic outcomes. In a 2009 post entitled The Limits of State Policy I wrote: “Turns out state and local economic policies are a weak lever at best.”

That said the reality is that the states with the highest per capita income and even more so those with the highest private sector employment earnings (wages and benefits) per capita tend to be high tax states. Minnesota fits the pattern among high prosperity, non energy-driven, states.

What I take away from the Minnesota report is that to the degree that state tax and spending policies matter to state economic outcomes that what you get from higher taxes is more important to the long term strength of the economy than the burden of higher taxes. That in an increasingly knowledge-driven economy the kind of public investments Minnesota has made over decades in education (from early childhood through higher education), infrastructure and placemaking (creating communities that are good places to live and work) trumps lower taxes.

Minnesota even more demonstrates that the conventional wisdom that we have been bombarded with for decades that high taxes and a generous safety net are the path to economic disaster is nonsense. Choosing to have better schools, roads, police, parks and other basic services and amenities and a more generous safety net does not mean fewer jobs and lower incomes. Minnesota and most of the high prosperity states have more of each than Michigan and they are doing better economically than us and the gap between us and them, since we adopted low tax/smaller spending policies, is growing, not shrinking.

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The report details two decades of tax cuts from 1994 to 2012. The costs of the cuts in declining public investments in education, support of local governments and infrastructure. And the consequences of those policies. A state that is less prosperous today than when it adopted tax cuts as its  primary economic development strategy.

The report also details––as we have frequently in these posts––that Michigan has joined a large number of low tax states with poor economic outcomes.  Low per capita income, high unemployment and high poverty rates.

Drake writes: “For several decades, Michigan has been part of an economic experiment: What would happen if a large, relatively prosperous state took major steps to cut taxes on its people and businesses. Would we see major increases in prosperity by the measures of income and employment, as predicted by supporters of these reductions in state and local taxes? Or would the necessary cuts in services to people lead to less prosperity and not attract good paying employers and less prosperity? This report suggests that the experiment has failed, and we should stop repeating it. … It would seem that if Michigan is a laboratory of democracy, the experiment has been run, and the data is in. Dramatic cuts in taxes do not increase prosperity measured by income of average citizens, or add to a state’s ability to create jobs.” (Emphasis added.)

…  “Our conclusion is that the political focus of recent years – low taxes, smaller government, lower levels of services to Michigan citizens – has not and will not lead the prosperity its proponents claim is their target. We have taken the wrong path to prosperity. We must instead develop an investment strategy that is based on getting smarter, not cheaper, if we are to have our citizens prepared to take on and our state ready to attract the best paying jobs available in today’s economy. The greatest crisis Michigan faces today is one of vision, of a failure to recognize the need for investments in education, in infrastructure and in our communities. Michigan needs to get smarter, not cheaper. Failure to recognize the need for a change to a strategy of investment – in education, in infrastructure and in public safety and health will mean Michigan in the future will look more and more like the other low tax, low public goods states: poor with a perennially high unemployment rate.”

Exactly!

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In doing the work the question arose “how to measure tax burden?” The answer effects the comparison between the path Minnesota has chosen compared to Michigan. Two metrics are commonly used:  per capita and as a percent of personal income. We decided to use both in the report. (As we did in our 2005 A New Agenda for a New Michigan report).

Here is why. Percent of personal income is a measure of ability to pay for public goods and services. Per capita probably is the best metric of political will to pay for public goods and services. The fact that you have more income to pay for more public goods and services doesn’t mean that you will.  Taxes are a choice.

In 1992 when per capita income was close between the two states––Minnesota 15th and Michigan 20th––Minnesota state and local taxes combined were $357 (17%) per capita higher than Michigan ($2,488 to $2,131). So both states could “afford” about the same level of taxes but Minnesota chose to buy more public goods and services. Including in categories like education and infrastructure that we describe as public investments that we believe lead to future economic growth.

That preference for more public goods and services has continues for the past two decades. Growing from taxes higher by $357 per capita in 1992 to $1,363 ($5,018 to $3,655) in 2011 (latest available). (As we will detail in the report the difference between the two states is in state taxes. Local tax burden is about the same in the two states.)

Contrary to today’s conventional wisdom their economy did better than ours, by far, the last two decades. Minnesota went from 15th in per capita income in 1992 to 11th in 2011. Michigan went from 20th to 36th. Of course, the will to pay higher taxes and make public investments are only a part of the reason why. But one clearly can make a stronger case that that will helped Minnesota get to where they are today than the one we are told constantly that higher taxes leads to worse economic outcomes.

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The column’s conclusion: “Which side of the experiment — the new right or modern progressivism — has been most effective in increasing jobs and improving business opportunities, not to mention living conditions? Obviously, firm answers will require more time and more data, but the first round of evidence gives the edge to Minnesota’s model of increased services, higher costs (mostly for the affluent) and reduced payments to entrenched interests like the insurers who cover the Medicaid population.”

The column then goes on to detail the outperformance of Minnesota’s economy. As we have detailed here many times before. Its not just Wisconsin, but every other Great Lakes state (including Michigan) that Minnesota is performing better than with a policy regime of  higher state taxes and spending. Which according to convention wisdom should lead to economic ruin.

As readers of this blog know I believe the Dayton approach to growing the economy is more likely to lead to long term prosperity than the Walker approach. But I am skeptical that the outperformance of the Minnesota economy compared to Wisconsin’s the past three years has much to do with the policies of either Dayton or Walker. State tax and spending polices simply are not powerful enough to have an immediate impact on a state’s economic performance. If they matter at all, it is over the long term. Either building or not the assets that matter for long term economic success.

To me the more accurate lesson to learn is Minnesota, under both D and R governors, for at least two decades, has been a higher tax/higher spending state than Wisconsin, Michigan, Ohio and Indiana, also under both D and R governors, and for that entire period has done best on every measure of economic well being with the gap between Minnesota and the rest growing greater over time.

The higher taxes Minnesota has imposed over the long term has enabled them to make more of the public investments that matter most to concentrating talent: education from early childhood through higher eduction; infrastructure; and quality of place to prepare, retain and attract talent. Which leads to a state with higher college attainment than the other Great Lakes states. Which leads to higher employment and personal earnings. The more and better jobs nearly everyone agrees should be the goal of state economic policy.

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For those interested in more of the details that the op ed is based on you can find them in four posts I have written for this blog on the economic record of the Blanchard Administration. They can be read here, here, here and here.

There are three big picture ideas that emerge from the evidence that I believe should underpin our approach to using state policy to grow the Michigan economy:

1. The tax and spending policies pursued by Governors –– more broadly state and local governments –– don’t have much to do with how well their state’s economy performs during their time in office. The state of the national economy and the performance of the state’s dominant industry(s) are by far the prime drivers of state economies.

2. As the Blanchard Administration record demonstrates, you don’t have to cut taxes to grow the state economy. And because you don’t have to cut taxes you don’t have to slash spending –– the inevitable consequence of tax cuts. You can have a decent safety net; public investments in education and infrastructure; and state support for the provision of quality basic services and amenities at the local level and have a prosperous and growing economy. What we have been told repeatedly for two decades or so that Michigan needs to have a smaller government to have economic growth is simply not accurate.

3. Understanding the limited impact of state tax and spending policies on long term state economic performance, it is our belief –– and it is belief, not fact –– that the state policy levers that matter most to growing the economy long term are public investments in education –– particularly higher education –– and creating quality of place –– particularly vibrant central cities –– to retain and attract mobile talent. Higher education and support for local government being the two areas that have suffered the biggest spending cuts the last decade. Almost certainly, not smart.

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Globalization and technology are mega forces––more powerful by far than politics or policy––that are constantly reshaping the economy. Machines increasingly can do more and more of the work humans use to plus help create new industries that make old industries obsolete. And globalization keeps spreading so that more and more folks compete with us for work. No one can predict what changes will occur and when. But the new reality is the job you have, the company you worked for and even the occupation you are in are less stable today than yesterday and almost certainly will be less stable tomorrow than today. The people and places that align with––rather than resist––these new realities will do best.

The places with the greatest concentration of talent win. The new path to prosperity is the broad knowledge-based economy. High prosperity is occurring chiefly in those places where knowledge-based enterprises across many sectors are concentrating. Increasingly that is states and regions with a high proportion of adults with a bachelor’s degree or more. Michigan’s fundamental economic challenge is that we rank 34th in the proportion of adults with a four-year degree.

Factory-based economies no longer support a broad middle class. The high paid, lower education attainment factory jobs that made Michigan one of the most prosperous places on the planet in the 20th Century, won’t in the 21st. Manufacturing will continue to be an important part of the American economy, but it is now a source of, at best, slow job growth (as machines do more and more of the work) and no longer a sustainable source of high paid jobs.

Quality education matters most. The evidence is overwhelming: the individuals and places that are the most prosperous––have the highest income––are those with the most education. Particularly a four year degree. So that a high quality p-20 education system (from early childhood through undergraduate college) matters most to Michiganders success. In addition to its economic power, education also is the foundation of the American belief that all children should have an equal opportunity to live the American Dream. Michigan seems to be moving away from that commitment as policy makers push to (1) decrease investment in both k-12 and higher education, (2) move away from providing every student with a real opportunity to leave high school ready, if they choose, to pursue a four year degree or more in favor of schools preparing students for immediate job openings with Michigan employers and (3) allow anyone, without quality standards, to access public funding to educate our kids.

Strategic public investments are the policy priority. Economic growth priority #1 is preparing, retaining and attracting talent. The policy priorities to create a knowledge-based Michigan are public investments in education and quality of place. With a particular emphasis on higher education and central cities. The first to prepare Michiganders for the economy of the future, the second to retain and attract mobile talent which increasingly is choosing big metros anchored by vibrant central cities.

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In a post on what 2011 might bring I wrote:

… If 2011 is to be a start of a long term Michigan economic recovery it will be because Governor-elect Snyder gets us on the path to the Michigan 3.0 he promised in his campaign. The challenge is that most of the legislature that got elected with him campaigned on restoring Michigan 2.0. The decision we make on which direction to go is what matters most in 2011. It will go a long ways towards defining our economic future. Move towards Michigan 3.0 and we can once again be one of the most prosperous places on the planet. Stay as Michigan 2.0 and we will continue to lag the nation.

What appears to be the preeminent vision of a successful future Michigan is an economy still anchored by factories, farms and tourism. And a policy agenda to get us back to our past success largely through smaller government and weaker unions. If I had to predict where we will go in 2011 it is towards that vision and agenda.

But if we go in that direction I also predict it won’t work. There are some hard truths that Michiganders needs to confront:

Michigan’s prosperity in the last century was built primarily on good-paying, lower-education attainment jobs. Those jobs are gone forever.

• The auto industry will never again be the major engine of prosperity in Michigan. It will be substantially smaller, employ far fewer and will pay its workers less with fewer benefits.
• The decline in autos is part of an irreversible new reality that manufacturing (work done in factories) is no longer a sustainable source of high-paid jobs. Nor is it a source of future job growth. Manufacturing makes up less than 10 percent of the American workforce today and is declining.
• The other industries that are widely believed to be drivers of the Michigan economy – farming and tourism – are also not a source of lots of good-paying jobs. Less than 2 percent of Michiganians work on a farm and, on average, it is not a high paying industry. And tourism, although a likely source of job growth, is also a low-wage industry.

If the Michigan economy of the future is built on a base of factories, farms and tourism we will be a low-prosperity state. The world has changed fundamentally. We either adjust to the changes or we will continue to get poorer compared to the nation.

The alternative – Michigan 3.0 – is a Michigan concentrated in the knowledge-based sectors of the economy: health care, education, finance and insurance, professional and technical service and information. These are the fast growing and high wage sectors of the American economy today and tomorrow.

To get there requires first and foremost that Michiganders get better educated. Nearly all the states and regions with the highest incomes will be those with the highest proportion of adults with a four-year degree or more. The policy agenda to create Michigan 3.0 is focused on public investments in education and quality of place. With a particular emphasis on higher education and central cities. The first to prepare Michiganders for the economy of the future, the second to retain and attract mobile talent which increasing is choosing big metros anchored by vibrant central cities.

The Michigan turnaround, compared to the nation, will start only when we focus on improving our ranking of thirty fourth in college attainment. That is our fundamental challenge! Low education attainment regions and states will be low prosperity regions and states. We can do better! But it will require us letting go of what made us prosperous in the past and getting on a new path: one that is aligned with new realities.

Unfortunately the prediction that policy makers (Administration and legislature) would choose 2.0 and a policy agenda “to get us back to our past success largely through smaller government and weaker unions” turned out to be true. And by choosing that vision and agenda they have chosen to take us in the direction of a shrinking, rather than expanding, middle class.

The capstone to positioning Michigan to compete in the 2.0 economy came in the recently completed lame duck session. By passing right to work legislation and another round of business tax cuts, Michigan policy makers gave up on recreating Michigan as a place with a broad middle class. Instead choosing to position the state to compete for low wage jobs with states like Indiana (explicitly) and Mississippi.

As Rick Haglund writes in a terrific MLive column entitled “Gov. Snyder, look to Minnesota, not Indiana, for economic inspiration”:

Snyder cited Indiana’s decision earlier this year to become a right-to-work state as playing a major role in his own decision to support the divisive legislation in Michigan. … in most measures of economic health, including per capita income, poverty rates and educational attainment, Indiana is worse off than Michigan. So it seems awfully strange that Snyder, a data geek, would pick Indiana as his economic model. Indiana is the antithesis of what Snyder says he wants for Michigan—better jobs, higher incomes and a more highly educated work force. Minnesota offers a smarter path for achieving those goals. Yet Minnesota, a non-right-to-work state, is rarely mentioned in Lansing’s policy debates. We are left to believe that Snyder and his fellow Republicans who control the Legislature have a different agenda that includes weakened labor unions, more corporate power and lower-wage jobs. (emphasis added)

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