Planning Decisions, Inc.

THE BOTTOM LINE FROM CHUCK LAWTON

Tax Burden and Earnings

Published Sunday March 2, 2008

Last week I puzzled over the apparent absence of any clear relationship between state and local public expenditure and the rate of per capita income growth across the states. To push the issue further, let’s look at another measure of economic prosperity—earnings per worker. Here the relationship to the public expenditure burden is a bit clearer.

Total personal income includes property income (dividends, interest and rent payments) plus transfer payments (Medicare, Medicaid, Social Security etc.). These forms of income are generally less dependent on the relative competitive positions of the states and even tend to offset those differences by redistributing money from higher income earners (through income taxes) and from workers in general (through payroll taxes).

Earnings, on the other hand, represent payments (including payroll taxes) made to employees and self-employed individuals. They reflect the decisions of business, governments and non-profits to create jobs. Dividing total earnings made in the U.S. in 2006 by the total number of jobs yields a national average per job of approximately $47,300. This ranges from a high of approximately $61,600 in New York to a low of $32,700 in Montana. In Maine, the average was $35,700, ranking us 44th among all the states.

Over the period 1993 to 2006, earnings per worker for the U.S. as a whole increased 58 percent, ranging from a high of 72 percent for Texas to a low of 38 percent for Alaska. Maine saw an increase of 48 percent, ranking us 43rd among all states.

Accepting for the moment the idea that higher productivity and thus higher earnings per worker is the goal of economic development policy, the question arises, “Is there a relationship between the burden of state and local public expenditure—meaning taxes and fees, what the Census calls ‘own-source revenue,’ and earnings per worker?” The table nearby suggests that the answer is, “Yes.”

Comparison of States Ranked by Increase in Earnings per Worker, 1993 to 2006

Source: Bureau of the Census, Bureau of Economic Analysis.

The ten states with the highest rates of growth in earnings per worker over the period saw an average increase of 67 percent, 16 percent above the national average rate of 58 percent. The ten states with the lowest rates of growth in earnings per worker—this group includes Maine—saw an average increase of 45 percent, 22 percent below the national average. The average earnings per worker of the top ten states was nearly $50,000, 5 percent above the national average. The average earnings per worker for the bottom 10 states, in contrast, was just above $40,000, fully 15 percent below the national average.

Looking at public expenditure “burden”—here taken to mean “own source” revenue as a share of total earnings—the difference is less striking. The average public expense “burden” of the top 10 states was 18 percent, only slightly below the national average of 19 percent. For the bottom 10 states, the “burden” is slightly above the national average at 22 percent.

Looking at change in the public expenditure “burden,” however, the difference is more striking. For the nation as a whole, the “burden” remained unchanged at approximately 19 percent. For the ten states with the highest growth in earnings per worker, the average public expenditure “burden” fell 4 percent between 1993 and 2006. Indeed, it fell in eight of the ten states, with only Wyoming and Virginia showing slight increases.

For the 10 states with the lowest growth in earnings per worker, it was another story. The average increase in the public expenditure “burden” was 4 percent. Four states—Ohio, West Virginia, Nevada and Idaho—saw their “burdens” increase over 10 percent. For Maine, the increase was nearly 9 percent.

This association of growth in state and local expenditure “burden” with below average growth in earnings per worker does not mean that the former causes the latter. It does, however, call attention to an important balance. Last November, Maine voters approved a bond issue to increase research and development funding in hopes of creating more high paying jobs in Maine. If that that investment is to pay dividends, we must demand similar investments aimed at increasing productivity in our public spending.

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