Minnesota and Wisconsin are on divergent paths when it comes to fiscal policy.
Under Republican Gov. Scott Walker and a GOP-controlled assembly, Wisconsin cut taxes by nearly $1 billion this year, including a $650 million reduction in income taxes. The avowed goal was to make the state more attractive to businesses and bolster job growth.
In contrast, under DFL Gov. Mark Dayton and a Democratic-controlled Legislature, Minnesota raised taxes by $2.1 billion, including $1.1 billion in income tax increases. The primary talking points from DFL leaders were about investing in priorities such as education and making the tax code fairer for middle-class and low-income residents.
Which approach is more prudent won’t be known for years to come, if ever, given the complexities of economic analysis.
“Answering the question in the short term is hard,” said Larry Jacobs, director of the University of Minnesota’s Center for the Study of Politics and Governance, during a forum on Monday. “It takes time to evaluate.”
But that didn’t stop the top revenue officials for each state from making their case for their approach during an hour-long debate at the Humphrey School of Public Affairs in Minneapolis.
Minnesota Department of Revenue Commissioner Myron Frans argued that there is very little proof that businesses make decisions about where to locate or expand based primarily on the tax policies of a state. Instead, he argued that businesses consider many factors — including education, transportation and health care — in making those decisions.
“You simply can’t let your tax policy be guided by those kinds of arguments,” Frans said. “I just think you have to look at the big picture.”
But Wisconsin Department of Revenue Secretary Richard Chandler countered that he believes businesses do make important decisions about business expansion based on which states offer the most attractive tax climate.
“It’s definitely a reality, and I think states ignore it at their peril,” Chandler said.
By most statistical measures, Minnesota appears to have enjoyed an edge in the economic border battle in recent years. According to the most recent quarterly figures from the U.S. Bureau of Labor Statistics, the most comprehensive snapshot of job growth, Wisconsin gained roughly 24,000 jobs in the 12-month period that ended in March 2013. That’s a growth rate of 1.1 percent, placing it 34th in the country. By comparison, Minnesota ranked 16th nationwide, with a growth rate of 2.1 percent.
In addition, Minnesota’s current unemployment rate is 5.1 percent and Wisconsin’s is 6.7 percent. Minnesota also ranked 11th nationwide in median household income ($56,954 in 2011), while Wisconsin ranked 21st ($50,395).
Jacobs pressed Chandler for an explanation about those discrepancies. “If we’re looking for the difference that policy might make, are we seeing some kind of sign there that Wisconsin is lagging so far behind?” he asked.
Chandler blamed the state’s financial shortcomings in large part on fiscal policies that preceded the Walker administration. In particular, he cited a tax increase passed in 2009 as a drag on the economy.
“It takes a while to turn that around,” Chandler said. “There are good signs that we’re on the upswing.”
Chandler further argued that Minnesota’s tax increases, particularly a tax on business-to-business warehouse services, are now being widely questioned and could be subject to repeal.
“There’s not any second-guessing with us,” Chandler said. “It seems like there’s some second- guessing here.”
Frans conceded that there is always “buyer’s remorse” when taxes are increased. But he argued that residents largely believe that the investments supported by the additional revenue are worth the financial pain.
“In the long haul, I think the governor and the Legislature feel they have made the right choice for putting Minnesota on a growth path,” Frans said.
Minnesota and Wisconsin also have been at odds over a tax reciprocity agreement that would allow residents who cross the border to work to file just one state tax return. Such an agreement was in place from 1968 to 2009, but efforts to revive it have stalled. An Oct. 1 deadline passed without a deal in place for 2013 returns.
At issue primarily is $6 million in additional funds to which Minnesota believes it is entitled. Based on the back-and-forth between Frans and Chandler, it’s not likely to get settled anytime soon.
Chandler described the demand for an additional $6 million as a “ransom” payment. “That’s the sticking point,” he said.
Frans gave no indication that Minnesota intends to drop that demand. “We don’t think it’s appropriate to subsidize Wisconsin,” he said.