Minnesota’s “Price of Government”: Where Theoretical Income Turns into Personal Income

State budget debates have begun and attention is again returning to Minnesota’s Price of Government (POG).  Since 1991, Minnesota Management and Budget has been tracking total state and local revenues as a percent of state personal income as defined by the federal Bureau of Economic Analysis (BEA). 

Predictably, the POG now serves as an important political talking point for debates over acceptable levels of government taxation and spending. The problem is that the POG doesn’t actually measure the claim government has on what an average Minnesotan might think of as “personal income”.  Not even close. 

Here’s why.

Have you ever heard of someone paying taxes using their employer’s contributions to their retirement and health care plans?  Have you ever heard of someone paying their taxes out of the dollar value of the Medicaid and Medicare benefits they receive?  Have you ever heard of someone paying their taxes from the theoretical income they could get from renting out their house rather than using it?

The answer  to all of the above is obviously “of course not” yet all these non-cash forms of “income” are included in the BEA’s definition of personal income.  And the amount of money this non-cash income represents in Minnesota is big.  According to the BEA data, Minnesota non-cash income totaled at least $50.4 billion in 2011 or 21.2% of total Minnesota personal income.    And many of these non-cash items are among the fastest growing sources of Minnesota personal income growth.

A far better measure of government’s claim on income would compare state and local government revenues to cash income.  It’s the stuff that people can actually pay taxes with.  Using this definition of income Minnesota’s POG has historically been about 25% higher than reported in the POG.

We will have much more to say about this and related POG issues in a forthcoming report examining how Minnesota’s price of government is evolving.