Price of Government Declining...Thanks to More Government Spending

The growth in government transfer payments is making Minnesota’s Price of Government appear cheaper.

Legislators brought the Minnesota Price of Government (POG) report to life in the early 90s to answer the question, how much do Minnesotans pay to state and local governments in total?  It’s a seemingly simple and straightforward metric: take all the own source revenues the state and local units of government collect directly from citizens (taxes, fees, charges, assessments, and basically everything except for payments from one government to another) and divide it by total state personal income.  The result serves as a kind of financial index for the cost of public services in Minnesota.

The November 2016 Price of Government report, the most recent available from Minnesota Management and Budget, has some interesting results.  Even though governments’ total own-source revenues across the state have grown by 43% since FY 2006 and are at an all-time high, the POG declined over that period and is projected to continue to decline.  It seems like there can be only one explanation: Minnesotans’ personal income has grown even faster – at a 50% clip.  But on closer examination it’s the growth of a particular piece of personal income – government transfer payments – that has been responsible for the long term gradual decline in Minnesota’s Price of Government.

Figure 1

Minnesota Price of Government: State and Local Own-Source Revenues as % of Personal Income, FY 1991-FY 2021

Note: 2017-2021 projected

Note: Personal income for all years based on September 2016 BEA revision

Source: Data from Bureau of Economic Analysis personal income) and Minnesota Management and Budget (own-source revenues); calculations by MCFE.

Government transfers have been the fastest-growing piece of Minnesota’s personal income since 1990 – growing about 25% faster per year than personal income overall and about 35% faster per year than salaries and wages.  In calendar year 2015,1 government transfer payments accounted for $44.2 billion of Minnesota’s personal income – 19% of the overall total.  These transfers include:

The accompanying chart shows the indexed change in the Minnesota Price of Government between its inception in FY 1991 (the first year it was measured) and FY 2016 – the most recent year for which we have data on the individual pieces of Minnesotans’ personal income.  If you measure the Price of Government using just wage and salary income, the POG is actually up 1.3% since its inception.  As Figure 2 shows, when measuring the POG using all personal income except government transfer payments, government is essentially taking the same bite now as it was 25 years ago – up 0.7%.  But when transfer payments are included, we get the perspective that government is asking 5.5% less from Minnesotans than it did in FY 1991.

Figure 2

Problems arise when this reality does not factor into the policy debates into which the POG gets woven.  The POG has become synonymous with the affordability of government – because it purports to measure how much Minnesotans are paying to state and local governments – and so the conventional interpretation has been that when it declines we are demanding less from citizens.  And if you think that Minnesotans’ ability to pay for government services ought to factor in the value of Medicaid and Medicare benefits, then the conventional wisdom is correct.  For those advocating for more government spending, the POG is a dream metric.  It offers perfect circularity – greater levels of redistributive spending gets to be used as evidence for the governments’ ability to raise additional revenues that can be spent on, among other things, more government redistribution.  And as baby boomers age and safety net spending likely becomes an even bigger player, that trend will most certainly be their friend.

None of this delegitimizes the value and importance of government transfer programs.  It is, however, an example of the problem that occurs when you use the wrong tool for the job – in this case, measuring state and local governments’ claim on Minnesotans’ pocketbooks.  As Figure 2 illustrates, for a long time the influence of government transfers was a Minnesota personal income afterthought.  But with the rapid growth in transfer payments, that is no longer the case.  That is why we have now based our own published state tax and spending rankings and our annual Price of Local Government Report on a modified personal income basis – to capture what the Price of Government, we think, should be really trying to get at.

We would encourage lawmakers to rethink the Price of Government and update it to better capture what it purports to measure.  Otherwise the POG is likely to perpetuate the appearance that government somehow manages to get cheaper the larger the role it plays in the state economy.

Footnotes
  • 1 The Price of Government report uses calendar year 2015 personal income data to calculate the fiscal year 2016 POG.