As I wrote in my last Business Journal post, the headline from Michigan Future’s just released report “State Policies Matter: How Minnesota’s Tax, Spending and Social Policies Help It Achieve the Best Economy Among Great Lakes States” clearly represents the starkly different path Minnesota has taken on state taxes and spending. Minnesota has much higher state taxes and spending, yet a far better economy than Michigan.
Now I want to focus on another key difference in the Minnesota approach to economic growth that doesn’t get a lot of headlines but matters a lot: regionalism.
Economies are regional. States and municipalities are political jurisdictions; they are not economic units. State economies can best be understood as the sum of their regional economies.
A core finding of Michigan Future’s research has been that the most prosperous states — except for a few driven by oil and natural gas — have a big metro that is even more prosperous than the state.
The difference in economic outcomes between Minnesota and Michigan can largely be explained by the superior performance of metro Minneapolis compared to metro Detroit and metro Grand Rapids.
Metro Minneapolis-St. Paul has long been one of the nation’s most prosperous metropolitan areas with a high concentration in the growing knowledge-based sectors of the economy and one of the best-educated work forces in the country. It also is a magnet for young professionals, having one of the highest rates in the country of 25-34 year olds with a four-year degree or more.
These are all key ingredients to both regional and state economic success, and these are lacking in Michigan’s two big metros.
In 2012, metro Minneapolis had per capita income of $50,260, the 27th highest of all metro areas in the United States, according to the Bureau of Economic Analysis. Metro Grand Rapids had per capita income of $37,264 and ranked 211th.
Metro Minneapolis also had the lowest unemployment rate of any large metro area in the country in May with a jobless rate of 4 percent. Metro Grand Rapids’ jobless rate in May was 5.4 percent.
We asked Rick Haglund, the author of our report, to investigate metro Minneapolis’s approach to regional governance. Here is what he found:
Underpinning the Twin Cities’ prosperity is a decades-long commitment to regionalism, an idea that metro Grand Rapids and many other communities across the state and country have struggled to accept.
The key ingredients — both in place for more than four decades — to strong regionalism in the Twin Cities are:
1. The regional planning agency in the Twin Cities metro area, the Metropolitan Council, also operates the public transit and wastewater treatment system.
The Minnesota Legislature established the Metropolitan Council in 1967 as the regional planning agency serving the seven-county Minneapolis-St. Paul metro area. It’s similar to the Grand Valley Metropolitan Council, but with a much broader mandate and taxing powers. In addition to long-range planning, the Metropolitan Council operates Metro Transit, which last year served 81 million bus and rail passengers, and operates the metro area’s wastewater treatment system.
Forty-seven percent of its $887.8 million budget for 2014 comes from the state and federal government. The federal government contributes $86 million, while $241 million comes from state government, including the general fund and the sales tax on motor vehicles. The Metropolitan Council gets 36 percent of the state motor vehicle sales tax. Thirty-nine percent of the council’s budget comes from transit fares and wastewater treatment charges, 10 percent is funded by a metropolitan-wide property tax, and 4 percent is from other sources.
2. Local governments in Metro Minneapolis share a portion of their tax revenues to promote more even economic development and level the tax burden throughout the seven-county region.
The Fiscal Disparities program was begun in 1971 as a way of evening out the tax burden in the metro area. The program shifts tens of millions of dollars a year among 240 local governments and school districts, and dozens of other taxing authorities in the metro area.
Under Fiscal Disparities, 40 percent of the growth in the commercial-industrial tax base since 1971 in the metro area goes into a shared pool, reducing the fiscal disparities among local units. Communities with a smaller per capita property value compared to the metro average get a larger distribution, while communities with a larger per capita property value get a smaller distribution. Shared tax base totaled $390 million in 2013, or 37 percent of the total commercial-industrial tax base in the Twin Cities.
Lou Glazer is president of Michigan Future Inc.