Minnesota’s GDP Growth Rate Exceeded the US Average, 1967-

2007

Payroll Employment Growth1972-2007

Payroll Employment in Minnesota Has Grown Faster than the US Average

Manufacturing Employment1972-2000

Minnesota’s Unemployment Rate Has Been Well Below the US Average

From 2004 to 2007 Minnesota Underperformed the US Averages

• Personal income growthUS 6.2% MN 4.4%

• Per capita personal income growth US 16.6% MN 13.5%

• GDP growthUS 8.4% MN 4.8%

• GDP per capita growthUS 5.4% MN 2.6%

Minnesota Payroll Employment Has Struggled Since Early 2006

Minnesota’s Unemployment Rate Now Is Similar to the US Average

US Manufacturing Employment Fell Faster Than MN, 2000-2007

Minnesota Ranked 30th in Employment Growth, 2000-2007

Minnesota Ranked 24th in Real Per Capita GDP Growth, 2000-2007

Real Per Capita GDP Growth Compared to Neighboring States

2000-2007

Real Per Capita GDP Growth Compared to Midwestern States

2000-2007

Real Per Capita GDP Compared to High Tech States 2000-2007

Portfolio Theory Suggests Using a Tax System that Minimizes Volatility for a Given Growth Rate• Given the trend growth rate, variance and covariance of each major

tax, an Efficiency Frontier Line (EFL) can be estimated

– The EFL shows combinations of taxes that provide the lowest volatility for each growth rate

– Points below the frontier are suboptimal.

• The EFL is determined using quadratic programming to minimize state tax revenue volatility, σ2

T, given growth rates gT

– Minimize

– Subject to:

and and

where ω is the weight of each tax.

Actual FY 2005-2007

Portfolio

Efficient Tax Mix

Portfolio

Difference: (Efficient Less Actual)

     

Trend Growth Rate 7.70% 7.70% 0.00%Volatility (Standard Deviation)

3.26% 3.09% -0.17%       

Share of Total Tax Revenue         

General Sales 31.2% 60.3% +29.2%

Corporate Income 7.4% 13.1% +5.6%

Individual Income 48.1% 9.2% -39.0%

Other Revenues 13.3% 17.4% +4.2%       

Total 100.0% 100.0%

Actual vs. Efficient MN One-Year Tax-Mix Given the Current Trend Growth Rate

Estimating the Volatility of a System of Taxes

• Markowitz’s modern portfolio theory used as a guide:– The expected growth rate in revenues is the

weighted sum of the individual growth rates– Portfolio volatility is the square root of the

weighted sum of the variances and covariances of the individual components