How Does Minnesota's Safety Net Compare?

A new analysis out of the Federal Reserve Bank of Chicago finds that Minnesota's reputation as a state the looks after its most economically disadvantaged is well deserved.  From our May-June 2014 edition of Fiscal Focus.

With all the focus on tax fairness and income inequality over the past few years, it’s easy to forget that progressive taxation isn’t the only way to address redistributive interests. One powerful way to address these issues is on the spending side of the ledger; including the design, scope, and generosity of various anti-poverty and safety net programs.

A recent examination1 by a Federal Reserve Bank of Chicago economist on differences in state safety net spending sheds interesting new light on how Minnesota compares to other states. Using expenditure data from national accounts and household income data from the Census, the researcher focused only on programs over which states have some discretion to set benefits (and therefore excludes the two largest transfer programs, Social Security and Medicare). The investigation looked at the benefits available to “low-income” households (any household in the bottom quartile of the national market income2 distribution) with nonelderly adults and children. Importantly, expenditure data and low-income thresholds were adjusted for each state for regional price disparities, based on the recognition that purchasing power differs dramatically across the country. As Table 1 shows, Minnesota provides low-income households the fifth most-generous benefits in the nation, after adjusting for price disparities.

Table 1

States With Most Generous Low Income Safety Nets

  Rank State Avg. Real Value of Benefit per Person in Bottom Quartile
  1 Vermont $26,100
  2 District of Columbia $24,039
  3 North Dakota $23,530
  4 Massachusetts $22,140
  5 Minnesota $21,450
    National Average $13,929
Source: Federal Reserve Bank of Chicago

For additional color and perspective, we contacted the Chicago Federal Reserve for a detailed breakdown for all the different programs included in the analysis. This data provides a look at how Minnesota’s spending compares to the national averages for the various types of programs. Those spending figures and the associated national rankings are presented in Table 2. Readers need to take several precautions when interpreting this information. First, these data are derived from state outlays so they include only households that actually collect benefits. Because the value of the benefits is being spread across a population that includes people who do not participate in these programs, even when they are eligible, the average amount a beneficiary receives may be higher than what is reported. Second, relative spending levels and rankings say little about spending adequacy – many would undoubtedly argue that even top performers are not spending enough in these areas to adequately address low-income households’ needs. Finally, this analysis excludes many spending areas – such as education, transportation, and housing – that directly influence low-income households’ welfare and as a result should not be considered a comprehensive assessment of state safety net spending. Nevertheless, this analysis suggests that Minnesota’s reputation as a state that looks after its most disadvantaged is very well justified.

Table 2

Average Benefit per Person in Bottom Income Quartile for Safety Net Programs Over Which States Have Program Discretion

 ProgramAverage BenefitMN vs Natl AverageMN Rank
 MNNatl. AverageAmountPercent
 Workers Compensation$147$266($119)(44.8%)22
 Temporary Disability Insurance$44$150($106)(70.7%)24
 Medicaid and CHIP#$13,318$7,435$5,88279.1%3
 Other Income##$3,333$2,065$1,26861.4%5
 Unemployment Insurance$1,985$1,468$51735.2%11
# Children's Health Insurance Program
* Supplemental Security Income
& Temporary Assistance for Needy Families
@ Supplemental Nutrition Assistance Program
## Consists largely of general assistance; expenditures for food under the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC); Other Needs Assistance; refugee assistance; foster home care and adoption assistance; the 2008 Economic Stimulus Act Rebates; Earned Income Tax Credits (EITC); Child Tax Credits; ARRA funded tax credits; other tax credits; and energy assistance.
Note: Excludes elderly and childless households
Note: Figures adjusted for real personal income based on geography
Source: Federal Reserve Bank of Chicago; calculations by MCFE.

One final piece of analysis from this Federal Reserve investigation is worth noting. A regression analysis examined the relationship between the proportion of a state’s population defined as low income and average benefits. A positive correlation would suggest at least the possibility that more generous benefits disincentivize work. However, the relationship was negatively correlated and statistically significant, leading the author to conclude that any disincentive effects more generous benefits may have “appears to be outweighed by the treatment of social insurance as a normal good: richer states are more willing to pay for benefits that safety nets provide.”

The author concludes, “developing a more complete accounting of the redistributive effects of state and local policies would be a valuable effort for further research.” Given the emerging focus on income inequality, we could not agree more. The state’s tax incidence curve has been dissected for every wiggle and turn, yet the expansion of property tax relief to households with over $100,000 of income gets an analytical pass. Tax progressivity is only one arrow in the quiver, and an understanding of the progressivity of our spending systems is necessary to address income inequality in a full and intellectually honest way.

  • 1 Jacob Berman, "Differences in Safety Net Spending", Federal Reserve Bank of Chicago, April 2014.
  • 2 "Market income" is essentially all income except for noncash income and income related to government transfers.  See for a complete definition.