Presentation is loading. Please wait.

Presentation is loading. Please wait.

1/12/2012 Executive Director’s Report 88 TH ANNUAL MEETING OF MEMBERS 10.8.14.

Similar presentations


Presentation on theme: "1/12/2012 Executive Director’s Report 88 TH ANNUAL MEETING OF MEMBERS 10.8.14."— Presentation transcript:

1 1/12/2012 Executive Director’s Report 88 TH ANNUAL MEETING OF MEMBERS

2 1/12/2012 Our Mission Sound Tax Policy, Efficient Spending, Accountable Government By Monitoring trends in state and local government finances Conducting in-depth studies of tax and fiscal policy issues Analyzing the structure and organization of government Educating policymakers and citizens

3 1/12/ Research and Education Publications: “I have looked at everything on pensions and public pension reform, and I find this report to be the clearest, most helpful report that I have ever seen. It is the best. It has an excellent tone, and has managed to synthesize the issues and present possible solutions in a way that most people can understand. What a gift.” Gretchen Tegeler, Former Director, Iowa Department of Management and Governor Branstad’s Chief of Staff. A lay-friendly guide to public pension issues, problems, and solutions Will be updated annually as part of our citizen education series

4 1/12/2012 An examination of the marginal impacts and opportunity costs created by Minnesota’s new fourth tier income tax with respect to the residence decisions of high income Minnesotans Featured in State Tax Notes 1 No. 0005|April 2013 Minnesota’s Troubled “Price of Government” AbstractSince the early 1990’s, the Minnesota Price of Government has been calculated tomeasure and track state and local government’s claim on Minnesota income. However,since its inception, the composition of Minnesota Personal Income – the denominator ofthe POG – has changed dramatically. 20 years ago, five major non-money componentsof Minnesota Personal Income – that taxpayerscannot use to pay taxes or fees or remit inany way to finance government – were roughly 15% of the total. Today those non-money components are over 20% of the total,which represents a shift of approximately$13 billion in Minnesota Personal Income frommoney to non-money income. Moreover,the fastest growing sources of Personal Incomegrowth are government transfer payments– including the value of Medicare and Medicaid benefits – which have grown over 2.5times faster than wages and salaries over the past decade.These findings have major ramifications for theinterpretation of the Price of Governmentmetric and its use in public policy debates. Including Personal Income in the POGunderstates state and local government’s claim on money income – which is 20%-35%higher when substituting the household income measure usedin the state’sTax IncidenceStudy.Moreover, trends in the composition ofPersonal Income and demographic trendssignificantly compromise its common use as ameasure to evaluate affordability orbenchmark a sustainable “level” of spending.If policymakers want to maintain a POG-type measure, the state should modify the current metric by replacing Minnesota PersonalIncome with some measure of money income.Even with this adaptation, we encouragecaution in using the POG to assess the affordability of government or set a “price target”for government because some of the major demographic factors and trends affectingincome will continue for the indefinite future. 2 No. 0005|April 2013 IntroductionFor nearly twenty years, the state’s Department of Management and Budget (MMB) has prepared a Price of Government(POG) report to accompany the November and February economic forecasts and following the conclusion of eachlegislative session. 1 The POG metric measures the ratio of state and local government own source revenues 2 to statewidePersonal Income. MMB staff have described the POG as “the state’s maintransparency method and tool forcommunicating the total cost of state and local government to citizens.” 3 Policymakers created the POG with broad-based political support, including the endorsement of Minnesota’s businesscommunity, because it was seen as a simple, straightforwardmetric to track state and local government’s claim onMinnesotans’ income. Because it is seemingly so easy to understand and interpret, the POG has inevitably served as anevidence point in debates over budgets and acceptable levels of governmenttaxation and spending.However, simple metrics can often mask underlying complexity,rendering interpretations of the metric problematic in theprocess. This is especially true whenmajor changes are taking place in the components of the metric, as has happened withMinnesota’s Price of Government.Specifically, two major trends have transformed MinnesotaPersonal Income since the POG was developed two decadesago. As a result, the use of the POGwith respect to both evaluating taxpayercost of state and local government andproviding time-series comparisons about the level of investment Minnesotans make in state and local government areseverely compromised.Trend #1 – Rapid Growth in Non-Money Incomeas a Share of Total Minnesota Personal Income“Personal Income” as determined by the U.S. Bureau of Economic Analysis (BEA) is an extremely broad measure. BEAeconomists designed it to capture the income associated withparticipating in “production activities” and with transferpayments (largely from the government).Minnesota’s Personal Income for calendar year (CY) 2011 (the most recent yearfor which detailed information is available) was $238.2billion, which can be broken into the following pieces 4 :Table 1: Major Components of BEAPersonal Income for Minnesota, CY 2011ComponentAmount ($000)$ billions% of TotalWages & Salaries %Dividends, Interest, & Rent %Transfer Receipts %Proprietor Income %Employers’ Pension and Insurance Contributions %Employee & Self-Employed Contributions to “Social Insurance”Programs; and Adjustment for Interstate Commuters(9.7)(4.1%)Total % Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment, Table SA04. While “wages and salaries” is self-evident, someof the other components merit further description:  Dividends, interest, and rent: represent income generatedbyassets, but not income from thesale ofassets (thisexcludes capital gains).  Transfer receipts: these are mostly government benefit payments toindividuals – examples include Social Securitypayments, the value of Medicare and Medicaidbenefits, and income maintenance benefits. 1 Seehttp://www.mmb.state.mn.us/supporting-documents-nov-12for the most recent Price of Government report, from the November2012 Economic Forecast. 2 Own source revenues: all state and local revenues less “intergovernmental revenues” – grants from one unit of government to another,such as state Local Government Aid given to cities. 3 Testimony before the Legislative Commission on Fiscal Policy, February 22, 2013 meeting. 4 All BEA personal income data in this publication are as of the September 25, 2012 update. Seewww.bea.govfor data.3 No. 0005|April 2013  Proprietor income: income generated by businesses for their owners.  Employer pension and insurance contributions: basically, employers’ costs for fringe benefits, except for SocialSecurity and Medicare.  The final portion represents employees’ and self-employed persons contributions to “social insurance programs” –mainly Social Security and Medicare – and an adjustmentfor net flow of income between Minnesota and otherstates based on commuting patterns. Since more non-residents earn income in Minnesota than Minnesotans earn inother states, the adjustment is negative.As these descriptions make clear, Minnesota’s $238 billion Personal Income amount includes many items that an averageMinnesotan would not think of as income that could be usedto pay taxes. And the average Minnesotan would be right.Personal Income includes non-money benefits and “imputed” income– the market value of selected transactions that don’toccur in the market economy and that cannot be used to paytaxes. Table 2 shows five major non-money income areas.Table 2: Five Major Non-Money Components of BEA Personal Income for Minnesota, CY 2011ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed interest %Imputed rent %Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35, and SA 40 As the table indicates, in 2011 non-money income – essentiallyirrelevant to assessing the tax price of state and localgovernment and evaluating its affordability – represented over 20cents of every dollar of Minnesota Personal Income. Thisis a major departure from the earliest days of Minnesota’s Price of Government. As Table 3 shows; in 1990, these fivepieces of non-money income were a much smaller share – 15.5%– of total Minnesota Personal Income. Most significantly,the share of government sponsored medical benefits has nearlydoubled over 20 years from 3.8% to 7.0% of state PersonalIncome.Table 3: Major Non-Money Components ofBEA Personal Income for Minnesota, CY 1990ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Imputed interest3.33.8%Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed rent0.30.3%Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35 and SA This is the value of investment income earned on life insurance and the value of services that depository institutions providewithoutan explicit charge for doing so. 6 This includes the value of things such as the rental value of owner-occupied housing, the value of farm products consumed at home bythe producers, and pay-in-kind in the form of meals and lodging.1 No. 0005|April 2013 Minnesota’s Troubled “Price of Government” AbstractSince the early 1990’s, the Minnesota Price of Government has been calculated tomeasure and track state and local government’s claim on Minnesota income. However,since its inception, the composition of Minnesota Personal Income – the denominator ofthe POG – has changed dramatically. 20 years ago, five major non-money componentsof Minnesota Personal Income – that taxpayerscannot use to pay taxes or fees or remit inany way to finance government – were roughly 15% of the total. Today those non-money components are over 20% of the total,which represents a shift of approximately$13 billion in Minnesota Personal Income frommoney to non-money income. Moreover,the fastest growing sources of Personal Incomegrowth are government transfer payments– including the value of Medicare and Medicaid benefits – which have grown over 2.5times faster than wages and salaries over the past decade.These findings have major ramifications for theinterpretation of the Price of Governmentmetric and its use in public policy debates. Including Personal Income in the POGunderstates state and local government’s claim on money income – which is 20%-35%higher when substituting the household income measure usedin the state’sTax IncidenceStudy.Moreover, trends in the composition ofPersonal Income and demographic trendssignificantly compromise its common use as ameasure to evaluate affordability orbenchmark a sustainable “level” of spending.If policymakers want to maintain a POG-type measure, the state should modify the current metric by replacing Minnesota PersonalIncome with some measure of money income.Even with this adaptation, we encouragecaution in using the POG to assess the affordability of government or set a “price target”for government because some of the major demographic factors and trends affectingincome will continue for the indefinite future. 2 No. 0005|April 2013 IntroductionFor nearly twenty years, the state’s Department of Management and Budget (MMB) has prepared a Price of Government(POG) report to accompany the November and February economic forecasts and following the conclusion of eachlegislative session. 1 The POG metric measures the ratio of state and local government own source revenues 2 to statewidePersonal Income. MMB staff have described the POG as “the state’s maintransparency method and tool forcommunicating the total cost of state and local government to citizens.” 3 Policymakers created the POG with broad-based political support, including the endorsement of Minnesota’s businesscommunity, because it was seen as a simple, straightforwardmetric to track state and local government’s claim onMinnesotans’ income. Because it is seemingly so easy to understand and interpret, the POG has inevitably served as anevidence point in debates over budgets and acceptable levels of governmenttaxation and spending.However, simple metrics can often mask underlying complexity,rendering interpretations of the metric problematic in theprocess. This is especially true whenmajor changes are taking place in the components of the metric, as has happened withMinnesota’s Price of Government.Specifically, two major trends have transformed MinnesotaPersonal Income since the POG was developed two decadesago. As a result, the use of the POGwith respect to both evaluating taxpayercost of state and local government andproviding time-series comparisons about the level of investment Minnesotans make in state and local government areseverely compromised.Trend #1 – Rapid Growth in Non-Money Incomeas a Share of Total Minnesota Personal Income“Personal Income” as determined by the U.S. Bureau of Economic Analysis (BEA) is an extremely broad measure. BEAeconomists designed it to capture the income associated withparticipating in “production activities” and with transferpayments (largely from the government).Minnesota’s Personal Income for calendar year (CY) 2011 (the most recent yearfor which detailed information is available) was $238.2billion, which can be broken into the following pieces 4 :Table 1: Major Components of BEAPersonal Income for Minnesota, CY 2011ComponentAmount ($000)$ billions% of TotalWages & Salaries %Dividends, Interest, & Rent %Transfer Receipts %Proprietor Income %Employers’ Pension and Insurance Contributions %Employee & Self-Employed Contributions to “Social Insurance”Programs; and Adjustment for Interstate Commuters(9.7)(4.1%)Total % Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment, Table SA04. While “wages and salaries” is self-evident, someof the other components merit further description:  Dividends, interest, and rent: represent income generatedbyassets, but not income from thesale ofassets (thisexcludes capital gains).  Transfer receipts: these are mostly government benefit payments toindividuals – examples include Social Securitypayments, the value of Medicare and Medicaidbenefits, and income maintenance benefits. 1 Seehttp://www.mmb.state.mn.us/supporting-documents-nov-12for the most recent Price of Government report, from the November2012 Economic Forecast. 2 Own source revenues: all state and local revenues less “intergovernmental revenues” – grants from one unit of government to another,such as state Local Government Aid given to cities. 3 Testimony before the Legislative Commission on Fiscal Policy, February 22, 2013 meeting. 4 All BEA personal income data in this publication are as of the September 25, 2012 update. Seewww.bea.govfor data.3 No. 0005|April 2013  Proprietor income: income generated by businesses for their owners.  Employer pension and insurance contributions: basically, employers’ costs for fringe benefits, except for SocialSecurity and Medicare.  The final portion represents employees’ and self-employed persons contributions to “social insurance programs” –mainly Social Security and Medicare – and an adjustmentfor net flow of income between Minnesota and otherstates based on commuting patterns. Since more non-residents earn income in Minnesota than Minnesotans earn inother states, the adjustment is negative.As these descriptions make clear, Minnesota’s $238 billion Personal Income amount includes many items that an averageMinnesotan would not think of as income that could be usedto pay taxes. And the average Minnesotan would be right.Personal Income includes non-money benefits and “imputed” income– the market value of selected transactions that don’toccur in the market economy and that cannot be used to paytaxes. Table 2 shows five major non-money income areas.Table 2: Five Major Non-Money Components of BEA Personal Income for Minnesota, CY 2011ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed interest %Imputed rent %Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35, and SA 40 As the table indicates, in 2011 non-money income – essentiallyirrelevant to assessing the tax price of state and localgovernment and evaluating its affordability – represented over 20cents of every dollar of Minnesota Personal Income. Thisis a major departure from the earliest days of Minnesota’s Price of Government. As Table 3 shows; in 1990, these fivepieces of non-money income were a much smaller share – 15.5%– of total Minnesota Personal Income. Most significantly,the share of government sponsored medical benefits has nearlydoubled over 20 years from 3.8% to 7.0% of state PersonalIncome.Table 3: Major Non-Money Components ofBEA Personal Income for Minnesota, CY 1990ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Imputed interest3.33.8%Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed rent0.30.3%Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35 and SA This is the value of investment income earned on life insurance and the value of services that depository institutions providewithoutan explicit charge for doing so. 6 This includes the value of things such as the rental value of owner-occupied housing, the value of farm products consumed at home bythe producers, and pay-in-kind in the form of meals and lodging.1 No. 0005|April 2013 Minnesota’s Troubled “Price of Government” AbstractSince the early 1990’s, the Minnesota Price of Government has been calculated tomeasure and track state and local government’s claim on Minnesota income. However,since its inception, the composition of Minnesota Personal Income – the denominator ofthe POG – has changed dramatically. 20 years ago, five major non-money componentsof Minnesota Personal Income – that taxpayerscannot use to pay taxes or fees or remit inany way to finance government – were roughly 15% of the total. Today those non-money components are over 20% of the total,which represents a shift of approximately$13 billion in Minnesota Personal Income frommoney to non-money income. Moreover,the fastest growing sources of Personal Incomegrowth are government transfer payments– including the value of Medicare and Medicaid benefits – which have grown over 2.5times faster than wages and salaries over the past decade.These findings have major ramifications for theinterpretation of the Price of Governmentmetric and its use in public policy debates. Including Personal Income in the POGunderstates state and local government’s claim on money income – which is 20%-35%higher when substituting the household income measure usedin the state’sTax IncidenceStudy.Moreover, trends in the composition ofPersonal Income and demographic trendssignificantly compromise its common use as ameasure to evaluate affordability orbenchmark a sustainable “level” of spending.If policymakers want to maintain a POG-type measure, the state should modify the current metric by replacing Minnesota PersonalIncome with some measure of money income.Even with this adaptation, we encouragecaution in using the POG to assess the affordability of government or set a “price target”for government because some of the major demographic factors and trends affectingincome will continue for the indefinite future. 2 No. 0005|April 2013 IntroductionFor nearly twenty years, the state’s Department of Management and Budget (MMB) has prepared a Price of Government(POG) report to accompany the November and February economic forecasts and following the conclusion of eachlegislative session. 1 The POG metric measures the ratio of state and local government own source revenues 2 to statewidePersonal Income. MMB staff have described the POG as “the state’s maintransparency method and tool forcommunicating the total cost of state and local government to citizens.” 3 Policymakers created the POG with broad-based political support, including the endorsement of Minnesota’s businesscommunity, because it was seen as a simple, straightforwardmetric to track state and local government’s claim onMinnesotans’ income. Because it is seemingly so easy to understand and interpret, the POG has inevitably served as anevidence point in debates over budgets and acceptable levels of governmenttaxation and spending.However, simple metrics can often mask underlying complexity,rendering interpretations of the metric problematic in theprocess. This is especially true whenmajor changes are taking place in the components of the metric, as has happened withMinnesota’s Price of Government.Specifically, two major trends have transformed MinnesotaPersonal Income since the POG was developed two decadesago. As a result, the use of the POGwith respect to both evaluating taxpayercost of state and local government andproviding time-series comparisons about the level of investment Minnesotans make in state and local government areseverely compromised.Trend #1 – Rapid Growth in Non-Money Incomeas a Share of Total Minnesota Personal Income“Personal Income” as determined by the U.S. Bureau of Economic Analysis (BEA) is an extremely broad measure. BEAeconomists designed it to capture the income associated withparticipating in “production activities” and with transferpayments (largely from the government).Minnesota’s Personal Income for calendar year (CY) 2011 (the most recent yearfor which detailed information is available) was $238.2billion, which can be broken into the following pieces 4 :Table 1: Major Components of BEAPersonal Income for Minnesota, CY 2011ComponentAmount ($000)$ billions% of TotalWages & Salaries %Dividends, Interest, & Rent %Transfer Receipts %Proprietor Income %Employers’ Pension and Insurance Contributions %Employee & Self-Employed Contributions to “Social Insurance”Programs; and Adjustment for Interstate Commuters(9.7)(4.1%)Total % Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment, Table SA04. While “wages and salaries” is self-evident, someof the other components merit further description:  Dividends, interest, and rent: represent income generatedbyassets, but not income from thesale ofassets (thisexcludes capital gains).  Transfer receipts: these are mostly government benefit payments toindividuals – examples include Social Securitypayments, the value of Medicare and Medicaidbenefits, and income maintenance benefits. 1 Seehttp://www.mmb.state.mn.us/supporting-documents-nov-12for the most recent Price of Government report, from the November2012 Economic Forecast. 2 Own source revenues: all state and local revenues less “intergovernmental revenues” – grants from one unit of government to another,such as state Local Government Aid given to cities. 3 Testimony before the Legislative Commission on Fiscal Policy, February 22, 2013 meeting. 4 All BEA personal income data in this publication are as of the September 25, 2012 update. Seewww.bea.govfor data.3 No. 0005|April 2013  Proprietor income: income generated by businesses for their owners.  Employer pension and insurance contributions: basically, employers’ costs for fringe benefits, except for SocialSecurity and Medicare.  The final portion represents employees’ and self-employed persons contributions to “social insurance programs” –mainly Social Security and Medicare – and an adjustmentfor net flow of income between Minnesota and otherstates based on commuting patterns. Since more non-residents earn income in Minnesota than Minnesotans earn inother states, the adjustment is negative.As these descriptions make clear, Minnesota’s $238 billion Personal Income amount includes many items that an averageMinnesotan would not think of as income that could be usedto pay taxes. And the average Minnesotan would be right.Personal Income includes non-money benefits and “imputed” income– the market value of selected transactions that don’toccur in the market economy and that cannot be used to paytaxes. Table 2 shows five major non-money income areas.Table 2: Five Major Non-Money Components of BEA Personal Income for Minnesota, CY 2011ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed interest %Imputed rent %Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35, and SA 40 As the table indicates, in 2011 non-money income – essentiallyirrelevant to assessing the tax price of state and localgovernment and evaluating its affordability – represented over 20cents of every dollar of Minnesota Personal Income. Thisis a major departure from the earliest days of Minnesota’s Price of Government. As Table 3 shows; in 1990, these fivepieces of non-money income were a much smaller share – 15.5%– of total Minnesota Personal Income. Most significantly,the share of government sponsored medical benefits has nearlydoubled over 20 years from 3.8% to 7.0% of state PersonalIncome.Table 3: Major Non-Money Components ofBEA Personal Income for Minnesota, CY 1990ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Imputed interest3.33.8%Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed rent0.30.3%Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35 and SA This is the value of investment income earned on life insurance and the value of services that depository institutions providewithoutan explicit charge for doing so. 6 This includes the value of things such as the rental value of owner-occupied housing, the value of farm products consumed at home bythe producers, and pay-in-kind in the form of meals and lodging.1 No. 0005|April 2013 Minnesota’s Troubled “Price of Government” AbstractSince the early 1990’s, the Minnesota Price of Government has been calculated tomeasure and track state and local government’s claim on Minnesota income. However,since its inception, the composition of Minnesota Personal Income – the denominator ofthe POG – has changed dramatically. 20 years ago, five major non-money componentsof Minnesota Personal Income – that taxpayerscannot use to pay taxes or fees or remit inany way to finance government – were roughly 15% of the total. Today those non-money components are over 20% of the total,which represents a shift of approximately$13 billion in Minnesota Personal Income frommoney to non-money income. Moreover,the fastest growing sources of Personal Incomegrowth are government transfer payments– including the value of Medicare and Medicaid benefits – which have grown over 2.5times faster than wages and salaries over the past decade.These findings have major ramifications for theinterpretation of the Price of Governmentmetric and its use in public policy debates. Including Personal Income in the POGunderstates state and local government’s claim on money income – which is 20%-35%higher when substituting the household income measure usedin the state’sTax IncidenceStudy.Moreover, trends in the composition ofPersonal Income and demographic trendssignificantly compromise its common use as ameasure to evaluate affordability orbenchmark a sustainable “level” of spending.If policymakers want to maintain a POG-type measure, the state should modify the current metric by replacing Minnesota PersonalIncome with some measure of money income.Even with this adaptation, we encouragecaution in using the POG to assess the affordability of government or set a “price target”for government because some of the major demographic factors and trends affectingincome will continue for the indefinite future. 2 No. 0005|April 2013 IntroductionFor nearly twenty years, the state’s Department of Management and Budget (MMB) has prepared a Price of Government(POG) report to accompany the November and February economic forecasts and following the conclusion of eachlegislative session. 1 The POG metric measures the ratio of state and local government own source revenues 2 to statewidePersonal Income. MMB staff have described the POG as “the state’s maintransparency method and tool forcommunicating the total cost of state and local government to citizens.” 3 Policymakers created the POG with broad-based political support, including the endorsement of Minnesota’s businesscommunity, because it was seen as a simple, straightforwardmetric to track state and local government’s claim onMinnesotans’ income. Because it is seemingly so easy to understand and interpret, the POG has inevitably served as anevidence point in debates over budgets and acceptable levels of governmenttaxation and spending.However, simple metrics can often mask underlying complexity,rendering interpretations of the metric problematic in theprocess. This is especially true whenmajor changes are taking place in the components of the metric, as has happened withMinnesota’s Price of Government.Specifically, two major trends have transformed MinnesotaPersonal Income since the POG was developed two decadesago. As a result, the use of the POGwith respect to both evaluating taxpayercost of state and local government andproviding time-series comparisons about the level of investment Minnesotans make in state and local government areseverely compromised.Trend #1 – Rapid Growth in Non-Money Incomeas a Share of Total Minnesota Personal Income“Personal Income” as determined by the U.S. Bureau of Economic Analysis (BEA) is an extremely broad measure. BEAeconomists designed it to capture the income associated withparticipating in “production activities” and with transferpayments (largely from the government).Minnesota’s Personal Income for calendar year (CY) 2011 (the most recent yearfor which detailed information is available) was $238.2billion, which can be broken into the following pieces 4 :Table 1: Major Components of BEAPersonal Income for Minnesota, CY 2011ComponentAmount ($000)$ billions% of TotalWages & Salaries %Dividends, Interest, & Rent %Transfer Receipts %Proprietor Income %Employers’ Pension and Insurance Contributions %Employee & Self-Employed Contributions to “Social Insurance”Programs; and Adjustment for Interstate Commuters(9.7)(4.1%)Total % Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment, Table SA04. While “wages and salaries” is self-evident, someof the other components merit further description:  Dividends, interest, and rent: represent income generatedbyassets, but not income from thesale ofassets (thisexcludes capital gains).  Transfer receipts: these are mostly government benefit payments toindividuals – examples include Social Securitypayments, the value of Medicare and Medicaidbenefits, and income maintenance benefits. 1 Seehttp://www.mmb.state.mn.us/supporting-documents-nov-12for the most recent Price of Government report, from the November2012 Economic Forecast. 2 Own source revenues: all state and local revenues less “intergovernmental revenues” – grants from one unit of government to another,such as state Local Government Aid given to cities. 3 Testimony before the Legislative Commission on Fiscal Policy, February 22, 2013 meeting. 4 All BEA personal income data in this publication are as of the September 25, 2012 update. Seewww.bea.govfor data.3 No. 0005|April 2013  Proprietor income: income generated by businesses for their owners.  Employer pension and insurance contributions: basically, employers’ costs for fringe benefits, except for SocialSecurity and Medicare.  The final portion represents employees’ and self-employed persons contributions to “social insurance programs” –mainly Social Security and Medicare – and an adjustmentfor net flow of income between Minnesota and otherstates based on commuting patterns. Since more non-residents earn income in Minnesota than Minnesotans earn inother states, the adjustment is negative.As these descriptions make clear, Minnesota’s $238 billion Personal Income amount includes many items that an averageMinnesotan would not think of as income that could be usedto pay taxes. And the average Minnesotan would be right.Personal Income includes non-money benefits and “imputed” income– the market value of selected transactions that don’toccur in the market economy and that cannot be used to paytaxes. Table 2 shows five major non-money income areas.Table 2: Five Major Non-Money Components of BEA Personal Income for Minnesota, CY 2011ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed interest %Imputed rent %Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35, and SA 40 As the table indicates, in 2011 non-money income – essentiallyirrelevant to assessing the tax price of state and localgovernment and evaluating its affordability – represented over 20cents of every dollar of Minnesota Personal Income. Thisis a major departure from the earliest days of Minnesota’s Price of Government. As Table 3 shows; in 1990, these fivepieces of non-money income were a much smaller share – 15.5%– of total Minnesota Personal Income. Most significantly,the share of government sponsored medical benefits has nearlydoubled over 20 years from 3.8% to 7.0% of state PersonalIncome.Table 3: Major Non-Money Components ofBEA Personal Income for Minnesota, CY 1990ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Imputed interest3.33.8%Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed rent0.30.3%Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35 and SA This is the value of investment income earned on life insurance and the value of services that depository institutions providewithoutan explicit charge for doing so. 6 This includes the value of things such as the rental value of owner-occupied housing, the value of farm products consumed at home bythe producers, and pay-in-kind in the form of meals and lodging.1 No. 0005|April 2013 Minnesota’s Troubled “Price of Government” AbstractSince the early 1990’s, the Minnesota Price of Government has been calculated tomeasure and track state and local government’s claim on Minnesota income. However,since its inception, the composition of Minnesota Personal Income – the denominator ofthe POG – has changed dramatically. 20 years ago, five major non-money componentsof Minnesota Personal Income – that taxpayerscannot use to pay taxes or fees or remit inany way to finance government – were roughly 15% of the total. Today those non-money components are over 20% of the total,which represents a shift of approximately$13 billion in Minnesota Personal Income frommoney to non-money income. Moreover,the fastest growing sources of Personal Incomegrowth are government transfer payments– including the value of Medicare and Medicaid benefits – which have grown over 2.5times faster than wages and salaries over the past decade.These findings have major ramifications for theinterpretation of the Price of Governmentmetric and its use in public policy debates. Including Personal Income in the POGunderstates state and local government’s claim on money income – which is 20%-35%higher when substituting the household income measure usedin the state’sTax IncidenceStudy.Moreover, trends in the composition ofPersonal Income and demographic trendssignificantly compromise its common use as ameasure to evaluate affordability orbenchmark a sustainable “level” of spending.If policymakers want to maintain a POG-type measure, the state should modify the current metric by replacing Minnesota PersonalIncome with some measure of money income.Even with this adaptation, we encouragecaution in using the POG to assess the affordability of government or set a “price target”for government because some of the major demographic factors and trends affectingincome will continue for the indefinite future. 2 No. 0005|April 2013 IntroductionFor nearly twenty years, the state’s Department of Management and Budget (MMB) has prepared a Price of Government(POG) report to accompany the November and February economic forecasts and following the conclusion of eachlegislative session. 1 The POG metric measures the ratio of state and local government own source revenues 2 to statewidePersonal Income. MMB staff have described the POG as “the state’s maintransparency method and tool forcommunicating the total cost of state and local government to citizens.” 3 Policymakers created the POG with broad-based political support, including the endorsement of Minnesota’s businesscommunity, because it was seen as a simple, straightforwardmetric to track state and local government’s claim onMinnesotans’ income. Because it is seemingly so easy to understand and interpret, the POG has inevitably served as anevidence point in debates over budgets and acceptable levels of governmenttaxation and spending.However, simple metrics can often mask underlying complexity,rendering interpretations of the metric problematic in theprocess. This is especially true whenmajor changes are taking place in the components of the metric, as has happened withMinnesota’s Price of Government.Specifically, two major trends have transformed MinnesotaPersonal Income since the POG was developed two decadesago. As a result, the use of the POGwith respect to both evaluating taxpayercost of state and local government andproviding time-series comparisons about the level of investment Minnesotans make in state and local government areseverely compromised.Trend #1 – Rapid Growth in Non-Money Incomeas a Share of Total Minnesota Personal Income“Personal Income” as determined by the U.S. Bureau of Economic Analysis (BEA) is an extremely broad measure. BEAeconomists designed it to capture the income associated withparticipating in “production activities” and with transferpayments (largely from the government).Minnesota’s Personal Income for calendar year (CY) 2011 (the most recent yearfor which detailed information is available) was $238.2billion, which can be broken into the following pieces 4 :Table 1: Major Components of BEAPersonal Income for Minnesota, CY 2011ComponentAmount ($000)$ billions% of TotalWages & Salaries %Dividends, Interest, & Rent %Transfer Receipts %Proprietor Income %Employers’ Pension and Insurance Contributions %Employee & Self-Employed Contributions to “Social Insurance”Programs; and Adjustment for Interstate Commuters(9.7)(4.1%)Total % Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment, Table SA04. While “wages and salaries” is self-evident, someof the other components merit further description:  Dividends, interest, and rent: represent income generatedbyassets, but not income from thesale ofassets (thisexcludes capital gains).  Transfer receipts: these are mostly government benefit payments toindividuals – examples include Social Securitypayments, the value of Medicare and Medicaidbenefits, and income maintenance benefits. 1 Seehttp://www.mmb.state.mn.us/supporting-documents-nov-12for the most recent Price of Government report, from the November2012 Economic Forecast. 2 Own source revenues: all state and local revenues less “intergovernmental revenues” – grants from one unit of government to another,such as state Local Government Aid given to cities. 3 Testimony before the Legislative Commission on Fiscal Policy, February 22, 2013 meeting. 4 All BEA personal income data in this publication are as of the September 25, 2012 update. Seewww.bea.govfor data.3 No. 0005|April 2013  Proprietor income: income generated by businesses for their owners.  Employer pension and insurance contributions: basically, employers’ costs for fringe benefits, except for SocialSecurity and Medicare.  The final portion represents employees’ and self-employed persons contributions to “social insurance programs” –mainly Social Security and Medicare – and an adjustmentfor net flow of income between Minnesota and otherstates based on commuting patterns. Since more non-residents earn income in Minnesota than Minnesotans earn inother states, the adjustment is negative.As these descriptions make clear, Minnesota’s $238 billion Personal Income amount includes many items that an averageMinnesotan would not think of as income that could be usedto pay taxes. And the average Minnesotan would be right.Personal Income includes non-money benefits and “imputed” income– the market value of selected transactions that don’toccur in the market economy and that cannot be used to paytaxes. Table 2 shows five major non-money income areas.Table 2: Five Major Non-Money Components of BEA Personal Income for Minnesota, CY 2011ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed interest %Imputed rent %Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35, and SA 40 As the table indicates, in 2011 non-money income – essentiallyirrelevant to assessing the tax price of state and localgovernment and evaluating its affordability – represented over 20cents of every dollar of Minnesota Personal Income. Thisis a major departure from the earliest days of Minnesota’s Price of Government. As Table 3 shows; in 1990, these fivepieces of non-money income were a much smaller share – 15.5%– of total Minnesota Personal Income. Most significantly,the share of government sponsored medical benefits has nearlydoubled over 20 years from 3.8% to 7.0% of state PersonalIncome.Table 3: Major Non-Money Components ofBEA Personal Income for Minnesota, CY 1990ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Imputed interest3.33.8%Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed rent0.30.3%Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35 and SA This is the value of investment income earned on life insurance and the value of services that depository institutions providewithoutan explicit charge for doing so. 6 This includes the value of things such as the rental value of owner-occupied housing, the value of farm products consumed at home bythe producers, and pay-in-kind in the form of meals and lodging.1 No. 0005|April 2013 Minnesota’s Troubled “Price of Government” AbstractSince the early 1990’s, the Minnesota Price of Government has been calculated tomeasure and track state and local government’s claim on Minnesota income. However,since its inception, the composition of Minnesota Personal Income – the denominator ofthe POG – has changed dramatically. 20 years ago, five major non-money componentsof Minnesota Personal Income – that taxpayerscannot use to pay taxes or fees or remit inany way to finance government – were roughly 15% of the total. Today those non-money components are over 20% of the total,which represents a shift of approximately$13 billion in Minnesota Personal Income frommoney to non-money income. Moreover,the fastest growing sources of Personal Incomegrowth are government transfer payments– including the value of Medicare and Medicaid benefits – which have grown over 2.5times faster than wages and salaries over the past decade.These findings have major ramifications for theinterpretation of the Price of Governmentmetric and its use in public policy debates. Including Personal Income in the POGunderstates state and local government’s claim on money income – which is 20%-35%higher when substituting the household income measure usedin the state’sTax IncidenceStudy.Moreover, trends in the composition ofPersonal Income and demographic trendssignificantly compromise its common use as ameasure to evaluate affordability orbenchmark a sustainable “level” of spending.If policymakers want to maintain a POG-type measure, the state should modify the current metric by replacing Minnesota PersonalIncome with some measure of money income.Even with this adaptation, we encouragecaution in using the POG to assess the affordability of government or set a “price target”for government because some of the major demographic factors and trends affectingincome will continue for the indefinite future. 2 No. 0005|April 2013 IntroductionFor nearly twenty years, the state’s Department of Management and Budget (MMB) has prepared a Price of Government(POG) report to accompany the November and February economic forecasts and following the conclusion of eachlegislative session. 1 The POG metric measures the ratio of state and local government own source revenues 2 to statewidePersonal Income. MMB staff have described the POG as “the state’s maintransparency method and tool forcommunicating the total cost of state and local government to citizens.” 3 Policymakers created the POG with broad-based political support, including the endorsement of Minnesota’s businesscommunity, because it was seen as a simple, straightforwardmetric to track state and local government’s claim onMinnesotans’ income. Because it is seemingly so easy to understand and interpret, the POG has inevitably served as anevidence point in debates over budgets and acceptable levels of governmenttaxation and spending.However, simple metrics can often mask underlying complexity,rendering interpretations of the metric problematic in theprocess. This is especially true whenmajor changes are taking place in the components of the metric, as has happened withMinnesota’s Price of Government.Specifically, two major trends have transformed MinnesotaPersonal Income since the POG was developed two decadesago. As a result, the use of the POGwith respect to both evaluating taxpayercost of state and local government andproviding time-series comparisons about the level of investment Minnesotans make in state and local government areseverely compromised.Trend #1 – Rapid Growth in Non-Money Incomeas a Share of Total Minnesota Personal Income“Personal Income” as determined by the U.S. Bureau of Economic Analysis (BEA) is an extremely broad measure. BEAeconomists designed it to capture the income associated withparticipating in “production activities” and with transferpayments (largely from the government).Minnesota’s Personal Income for calendar year (CY) 2011 (the most recent yearfor which detailed information is available) was $238.2billion, which can be broken into the following pieces 4 :Table 1: Major Components of BEAPersonal Income for Minnesota, CY 2011ComponentAmount ($000)$ billions% of TotalWages & Salaries %Dividends, Interest, & Rent %Transfer Receipts %Proprietor Income %Employers’ Pension and Insurance Contributions %Employee & Self-Employed Contributions to “Social Insurance”Programs; and Adjustment for Interstate Commuters(9.7)(4.1%)Total % Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment, Table SA04. While “wages and salaries” is self-evident, someof the other components merit further description:  Dividends, interest, and rent: represent income generatedbyassets, but not income from thesale ofassets (thisexcludes capital gains).  Transfer receipts: these are mostly government benefit payments toindividuals – examples include Social Securitypayments, the value of Medicare and Medicaidbenefits, and income maintenance benefits. 1 Seehttp://www.mmb.state.mn.us/supporting-documents-nov-12for the most recent Price of Government report, from the November2012 Economic Forecast. 2 Own source revenues: all state and local revenues less “intergovernmental revenues” – grants from one unit of government to another,such as state Local Government Aid given to cities. 3 Testimony before the Legislative Commission on Fiscal Policy, February 22, 2013 meeting. 4 All BEA personal income data in this publication are as of the September 25, 2012 update. Seewww.bea.govfor data.3 No. 0005|April 2013  Proprietor income: income generated by businesses for their owners.  Employer pension and insurance contributions: basically, employers’ costs for fringe benefits, except for SocialSecurity and Medicare.  The final portion represents employees’ and self-employed persons contributions to “social insurance programs” –mainly Social Security and Medicare – and an adjustmentfor net flow of income between Minnesota and otherstates based on commuting patterns. Since more non-residents earn income in Minnesota than Minnesotans earn inother states, the adjustment is negative.As these descriptions make clear, Minnesota’s $238 billion Personal Income amount includes many items that an averageMinnesotan would not think of as income that could be usedto pay taxes. And the average Minnesotan would be right.Personal Income includes non-money benefits and “imputed” income– the market value of selected transactions that don’toccur in the market economy and that cannot be used to paytaxes. Table 2 shows five major non-money income areas.Table 2: Five Major Non-Money Components of BEA Personal Income for Minnesota, CY 2011ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed interest %Imputed rent %Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35, and SA 40 As the table indicates, in 2011 non-money income – essentiallyirrelevant to assessing the tax price of state and localgovernment and evaluating its affordability – represented over 20cents of every dollar of Minnesota Personal Income. Thisis a major departure from the earliest days of Minnesota’s Price of Government. As Table 3 shows; in 1990, these fivepieces of non-money income were a much smaller share – 15.5%– of total Minnesota Personal Income. Most significantly,the share of government sponsored medical benefits has nearlydoubled over 20 years from 3.8% to 7.0% of state PersonalIncome.Table 3: Major Non-Money Components ofBEA Personal Income for Minnesota, CY 1990ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Imputed interest3.33.8%Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed rent0.30.3%Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35 and SA This is the value of investment income earned on life insurance and the value of services that depository institutions providewithoutan explicit charge for doing so. 6 This includes the value of things such as the rental value of owner-occupied housing, the value of farm products consumed at home bythe producers, and pay-in-kind in the form of meals and lodging.1 No. 0005|April 2013 Minnesota’s Troubled “Price of Government” AbstractSince the early 1990’s, the Minnesota Price of Government has been calculated tomeasure and track state and local government’s claim on Minnesota income. However,since its inception, the composition of Minnesota Personal Income – the denominator ofthe POG – has changed dramatically. 20 years ago, five major non-money componentsof Minnesota Personal Income – that taxpayerscannot use to pay taxes or fees or remit inany way to finance government – were roughly 15% of the total. Today those non-money components are over 20% of the total,which represents a shift of approximately$13 billion in Minnesota Personal Income frommoney to non-money income. Moreover,the fastest growing sources of Personal Incomegrowth are government transfer payments– including the value of Medicare and Medicaid benefits – which have grown over 2.5times faster than wages and salaries over the past decade.These findings have major ramifications for theinterpretation of the Price of Governmentmetric and its use in public policy debates. Including Personal Income in the POGunderstates state and local government’s claim on money income – which is 20%-35%higher when substituting the household income measure usedin the state’sTax IncidenceStudy.Moreover, trends in the composition ofPersonal Income and demographic trendssignificantly compromise its common use as ameasure to evaluate affordability orbenchmark a sustainable “level” of spending.If policymakers want to maintain a POG-type measure, the state should modify the current metric by replacing Minnesota PersonalIncome with some measure of money income.Even with this adaptation, we encouragecaution in using the POG to assess the affordability of government or set a “price target”for government because some of the major demographic factors and trends affectingincome will continue for the indefinite future. 2 No. 0005|April 2013 IntroductionFor nearly twenty years, the state’s Department of Management and Budget (MMB) has prepared a Price of Government(POG) report to accompany the November and February economic forecasts and following the conclusion of eachlegislative session. 1 The POG metric measures the ratio of state and local government own source revenues 2 to statewidePersonal Income. MMB staff have described the POG as “the state’s maintransparency method and tool forcommunicating the total cost of state and local government to citizens.” 3 Policymakers created the POG with broad-based political support, including the endorsement of Minnesota’s businesscommunity, because it was seen as a simple, straightforwardmetric to track state and local government’s claim onMinnesotans’ income. Because it is seemingly so easy to understand and interpret, the POG has inevitably served as anevidence point in debates over budgets and acceptable levels of governmenttaxation and spending.However, simple metrics can often mask underlying complexity,rendering interpretations of the metric problematic in theprocess. This is especially true whenmajor changes are taking place in the components of the metric, as has happened withMinnesota’s Price of Government.Specifically, two major trends have transformed MinnesotaPersonal Income since the POG was developed two decadesago. As a result, the use of the POGwith respect to both evaluating taxpayercost of state and local government andproviding time-series comparisons about the level of investment Minnesotans make in state and local government areseverely compromised.Trend #1 – Rapid Growth in Non-Money Incomeas a Share of Total Minnesota Personal Income“Personal Income” as determined by the U.S. Bureau of Economic Analysis (BEA) is an extremely broad measure. BEAeconomists designed it to capture the income associated withparticipating in “production activities” and with transferpayments (largely from the government).Minnesota’s Personal Income for calendar year (CY) 2011 (the most recent yearfor which detailed information is available) was $238.2billion, which can be broken into the following pieces 4 :Table 1: Major Components of BEAPersonal Income for Minnesota, CY 2011ComponentAmount ($000)$ billions% of TotalWages & Salaries %Dividends, Interest, & Rent %Transfer Receipts %Proprietor Income %Employers’ Pension and Insurance Contributions %Employee & Self-Employed Contributions to “Social Insurance”Programs; and Adjustment for Interstate Commuters(9.7)(4.1%)Total % Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment, Table SA04. While “wages and salaries” is self-evident, someof the other components merit further description:  Dividends, interest, and rent: represent income generatedbyassets, but not income from thesale ofassets (thisexcludes capital gains).  Transfer receipts: these are mostly government benefit payments toindividuals – examples include Social Securitypayments, the value of Medicare and Medicaidbenefits, and income maintenance benefits. 1 Seehttp://www.mmb.state.mn.us/supporting-documents-nov-12for the most recent Price of Government report, from the November2012 Economic Forecast. 2 Own source revenues: all state and local revenues less “intergovernmental revenues” – grants from one unit of government to another,such as state Local Government Aid given to cities. 3 Testimony before the Legislative Commission on Fiscal Policy, February 22, 2013 meeting. 4 All BEA personal income data in this publication are as of the September 25, 2012 update. Seewww.bea.govfor data.3 No. 0005|April 2013  Proprietor income: income generated by businesses for their owners.  Employer pension and insurance contributions: basically, employers’ costs for fringe benefits, except for SocialSecurity and Medicare.  The final portion represents employees’ and self-employed persons contributions to “social insurance programs” –mainly Social Security and Medicare – and an adjustmentfor net flow of income between Minnesota and otherstates based on commuting patterns. Since more non-residents earn income in Minnesota than Minnesotans earn inother states, the adjustment is negative.As these descriptions make clear, Minnesota’s $238 billion Personal Income amount includes many items that an averageMinnesotan would not think of as income that could be usedto pay taxes. And the average Minnesotan would be right.Personal Income includes non-money benefits and “imputed” income– the market value of selected transactions that don’toccur in the market economy and that cannot be used to paytaxes. Table 2 shows five major non-money income areas.Table 2: Five Major Non-Money Components of BEA Personal Income for Minnesota, CY 2011ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed interest %Imputed rent %Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35, and SA 40 As the table indicates, in 2011 non-money income – essentiallyirrelevant to assessing the tax price of state and localgovernment and evaluating its affordability – represented over 20cents of every dollar of Minnesota Personal Income. Thisis a major departure from the earliest days of Minnesota’s Price of Government. As Table 3 shows; in 1990, these fivepieces of non-money income were a much smaller share – 15.5%– of total Minnesota Personal Income. Most significantly,the share of government sponsored medical benefits has nearlydoubled over 20 years from 3.8% to 7.0% of state PersonalIncome.Table 3: Major Non-Money Components ofBEA Personal Income for Minnesota, CY 1990ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Imputed interest3.33.8%Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed rent0.30.3%Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35 and SA This is the value of investment income earned on life insurance and the value of services that depository institutions providewithoutan explicit charge for doing so. 6 This includes the value of things such as the rental value of owner-occupied housing, the value of farm products consumed at home bythe producers, and pay-in-kind in the form of meals and lodging.1 No. 0005|April 2013 Minnesota’s Troubled “Price of Government” AbstractSince the early 1990’s, the Minnesota Price of Government has been calculated tomeasure and track state and local government’s claim on Minnesota income. However,since its inception, the composition of Minnesota Personal Income – the denominator ofthe POG – has changed dramatically. 20 years ago, five major non-money componentsof Minnesota Personal Income – that taxpayerscannot use to pay taxes or fees or remit inany way to finance government – were roughly 15% of the total. Today those non-money components are over 20% of the total,which represents a shift of approximately$13 billion in Minnesota Personal Income frommoney to non-money income. Moreover,the fastest growing sources of Personal Incomegrowth are government transfer payments– including the value of Medicare and Medicaid benefits – which have grown over 2.5times faster than wages and salaries over the past decade.These findings have major ramifications for theinterpretation of the Price of Governmentmetric and its use in public policy debates. Including Personal Income in the POGunderstates state and local government’s claim on money income – which is 20%-35%higher when substituting the household income measure usedin the state’sTax IncidenceStudy.Moreover, trends in the composition ofPersonal Income and demographic trendssignificantly compromise its common use as ameasure to evaluate affordability orbenchmark a sustainable “level” of spending.If policymakers want to maintain a POG-type measure, the state should modify the current metric by replacing Minnesota PersonalIncome with some measure of money income.Even with this adaptation, we encouragecaution in using the POG to assess the affordability of government or set a “price target”for government because some of the major demographic factors and trends affectingincome will continue for the indefinite future. 2 No. 0005|April 2013 IntroductionFor nearly twenty years, the state’s Department of Management and Budget (MMB) has prepared a Price of Government(POG) report to accompany the November and February economic forecasts and following the conclusion of eachlegislative session. 1 The POG metric measures the ratio of state and local government own source revenues 2 to statewidePersonal Income. MMB staff have described the POG as “the state’s maintransparency method and tool forcommunicating the total cost of state and local government to citizens.” 3 Policymakers created the POG with broad-based political support, including the endorsement of Minnesota’s businesscommunity, because it was seen as a simple, straightforwardmetric to track state and local government’s claim onMinnesotans’ income. Because it is seemingly so easy to understand and interpret, the POG has inevitably served as anevidence point in debates over budgets and acceptable levels of governmenttaxation and spending.However, simple metrics can often mask underlying complexity,rendering interpretations of the metric problematic in theprocess. This is especially true whenmajor changes are taking place in the components of the metric, as has happened withMinnesota’s Price of Government.Specifically, two major trends have transformed MinnesotaPersonal Income since the POG was developed two decadesago. As a result, the use of the POGwith respect to both evaluating taxpayercost of state and local government andproviding time-series comparisons about the level of investment Minnesotans make in state and local government areseverely compromised.Trend #1 – Rapid Growth in Non-Money Incomeas a Share of Total Minnesota Personal Income“Personal Income” as determined by the U.S. Bureau of Economic Analysis (BEA) is an extremely broad measure. BEAeconomists designed it to capture the income associated withparticipating in “production activities” and with transferpayments (largely from the government).Minnesota’s Personal Income for calendar year (CY) 2011 (the most recent yearfor which detailed information is available) was $238.2billion, which can be broken into the following pieces 4 :Table 1: Major Components of BEAPersonal Income for Minnesota, CY 2011ComponentAmount ($000)$ billions% of TotalWages & Salaries %Dividends, Interest, & Rent %Transfer Receipts %Proprietor Income %Employers’ Pension and Insurance Contributions %Employee & Self-Employed Contributions to “Social Insurance”Programs; and Adjustment for Interstate Commuters(9.7)(4.1%)Total % Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment, Table SA04. While “wages and salaries” is self-evident, someof the other components merit further description:  Dividends, interest, and rent: represent income generatedbyassets, but not income from thesale ofassets (thisexcludes capital gains).  Transfer receipts: these are mostly government benefit payments toindividuals – examples include Social Securitypayments, the value of Medicare and Medicaidbenefits, and income maintenance benefits. 1 Seehttp://www.mmb.state.mn.us/supporting-documents-nov-12for the most recent Price of Government report, from the November2012 Economic Forecast. 2 Own source revenues: all state and local revenues less “intergovernmental revenues” – grants from one unit of government to another,such as state Local Government Aid given to cities. 3 Testimony before the Legislative Commission on Fiscal Policy, February 22, 2013 meeting. 4 All BEA personal income data in this publication are as of the September 25, 2012 update. Seewww.bea.govfor data.3 No. 0005|April 2013  Proprietor income: income generated by businesses for their owners.  Employer pension and insurance contributions: basically, employers’ costs for fringe benefits, except for SocialSecurity and Medicare.  The final portion represents employees’ and self-employed persons contributions to “social insurance programs” –mainly Social Security and Medicare – and an adjustmentfor net flow of income between Minnesota and otherstates based on commuting patterns. Since more non-residents earn income in Minnesota than Minnesotans earn inother states, the adjustment is negative.As these descriptions make clear, Minnesota’s $238 billion Personal Income amount includes many items that an averageMinnesotan would not think of as income that could be usedto pay taxes. And the average Minnesotan would be right.Personal Income includes non-money benefits and “imputed” income– the market value of selected transactions that don’toccur in the market economy and that cannot be used to paytaxes. Table 2 shows five major non-money income areas.Table 2: Five Major Non-Money Components of BEA Personal Income for Minnesota, CY 2011ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed interest %Imputed rent %Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35, and SA 40 As the table indicates, in 2011 non-money income – essentiallyirrelevant to assessing the tax price of state and localgovernment and evaluating its affordability – represented over 20cents of every dollar of Minnesota Personal Income. Thisis a major departure from the earliest days of Minnesota’s Price of Government. As Table 3 shows; in 1990, these fivepieces of non-money income were a much smaller share – 15.5%– of total Minnesota Personal Income. Most significantly,the share of government sponsored medical benefits has nearlydoubled over 20 years from 3.8% to 7.0% of state PersonalIncome.Table 3: Major Non-Money Components ofBEA Personal Income for Minnesota, CY 1990ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Imputed interest3.33.8%Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed rent0.30.3%Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35 and SA This is the value of investment income earned on life insurance and the value of services that depository institutions providewithoutan explicit charge for doing so. 6 This includes the value of things such as the rental value of owner-occupied housing, the value of farm products consumed at home bythe producers, and pay-in-kind in the form of meals and lodging.1 No. 0005|April 2013 Minnesota’s Troubled “Price of Government” AbstractSince the early 1990’s, the Minnesota Price of Government has been calculated tomeasure and track state and local government’s claim on Minnesota income. However,since its inception, the composition of Minnesota Personal Income – the denominator ofthe POG – has changed dramatically. 20 years ago, five major non-money componentsof Minnesota Personal Income – that taxpayerscannot use to pay taxes or fees or remit inany way to finance government – were roughly 15% of the total. Today those non-money components are over 20% of the total,which represents a shift of approximately$13 billion in Minnesota Personal Income frommoney to non-money income. Moreover,the fastest growing sources of Personal Incomegrowth are government transfer payments– including the value of Medicare and Medicaid benefits – which have grown over 2.5times faster than wages and salaries over the past decade.These findings have major ramifications for theinterpretation of the Price of Governmentmetric and its use in public policy debates. Including Personal Income in the POGunderstates state and local government’s claim on money income – which is 20%-35%higher when substituting the household income measure usedin the state’sTax IncidenceStudy.Moreover, trends in the composition ofPersonal Income and demographic trendssignificantly compromise its common use as ameasure to evaluate affordability orbenchmark a sustainable “level” of spending.If policymakers want to maintain a POG-type measure, the state should modify the current metric by replacing Minnesota PersonalIncome with some measure of money income.Even with this adaptation, we encouragecaution in using the POG to assess the affordability of government or set a “price target”for government because some of the major demographic factors and trends affectingincome will continue for the indefinite future. 2 No. 0005|April 2013 IntroductionFor nearly twenty years, the state’s Department of Management and Budget (MMB) has prepared a Price of Government(POG) report to accompany the November and February economic forecasts and following the conclusion of eachlegislative session. 1 The POG metric measures the ratio of state and local government own source revenues 2 to statewidePersonal Income. MMB staff have described the POG as “the state’s maintransparency method and tool forcommunicating the total cost of state and local government to citizens.” 3 Policymakers created the POG with broad-based political support, including the endorsement of Minnesota’s businesscommunity, because it was seen as a simple, straightforwardmetric to track state and local government’s claim onMinnesotans’ income. Because it is seemingly so easy to understand and interpret, the POG has inevitably served as anevidence point in debates over budgets and acceptable levels of governmenttaxation and spending.However, simple metrics can often mask underlying complexity,rendering interpretations of the metric problematic in theprocess. This is especially true whenmajor changes are taking place in the components of the metric, as has happened withMinnesota’s Price of Government.Specifically, two major trends have transformed MinnesotaPersonal Income since the POG was developed two decadesago. As a result, the use of the POGwith respect to both evaluating taxpayercost of state and local government andproviding time-series comparisons about the level of investment Minnesotans make in state and local government areseverely compromised.Trend #1 – Rapid Growth in Non-Money Incomeas a Share of Total Minnesota Personal Income“Personal Income” as determined by the U.S. Bureau of Economic Analysis (BEA) is an extremely broad measure. BEAeconomists designed it to capture the income associated withparticipating in “production activities” and with transferpayments (largely from the government).Minnesota’s Personal Income for calendar year (CY) 2011 (the most recent yearfor which detailed information is available) was $238.2billion, which can be broken into the following pieces 4 :Table 1: Major Components of BEAPersonal Income for Minnesota, CY 2011ComponentAmount ($000)$ billions% of TotalWages & Salaries %Dividends, Interest, & Rent %Transfer Receipts %Proprietor Income %Employers’ Pension and Insurance Contributions %Employee & Self-Employed Contributions to “Social Insurance”Programs; and Adjustment for Interstate Commuters(9.7)(4.1%)Total % Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment, Table SA04. While “wages and salaries” is self-evident, someof the other components merit further description:  Dividends, interest, and rent: represent income generatedbyassets, but not income from thesale ofassets (thisexcludes capital gains).  Transfer receipts: these are mostly government benefit payments toindividuals – examples include Social Securitypayments, the value of Medicare and Medicaidbenefits, and income maintenance benefits. 1 Seehttp://www.mmb.state.mn.us/supporting-documents-nov-12for the most recent Price of Government report, from the November2012 Economic Forecast. 2 Own source revenues: all state and local revenues less “intergovernmental revenues” – grants from one unit of government to another,such as state Local Government Aid given to cities. 3 Testimony before the Legislative Commission on Fiscal Policy, February 22, 2013 meeting. 4 All BEA personal income data in this publication are as of the September 25, 2012 update. Seewww.bea.govfor data.3 No. 0005|April 2013  Proprietor income: income generated by businesses for their owners.  Employer pension and insurance contributions: basically, employers’ costs for fringe benefits, except for SocialSecurity and Medicare.  The final portion represents employees’ and self-employed persons contributions to “social insurance programs” –mainly Social Security and Medicare – and an adjustmentfor net flow of income between Minnesota and otherstates based on commuting patterns. Since more non-residents earn income in Minnesota than Minnesotans earn inother states, the adjustment is negative.As these descriptions make clear, Minnesota’s $238 billion Personal Income amount includes many items that an averageMinnesotan would not think of as income that could be usedto pay taxes. And the average Minnesotan would be right.Personal Income includes non-money benefits and “imputed” income– the market value of selected transactions that don’toccur in the market economy and that cannot be used to paytaxes. Table 2 shows five major non-money income areas.Table 2: Five Major Non-Money Components of BEA Personal Income for Minnesota, CY 2011ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed interest %Imputed rent %Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35, and SA 40 As the table indicates, in 2011 non-money income – essentiallyirrelevant to assessing the tax price of state and localgovernment and evaluating its affordability – represented over 20cents of every dollar of Minnesota Personal Income. Thisis a major departure from the earliest days of Minnesota’s Price of Government. As Table 3 shows; in 1990, these fivepieces of non-money income were a much smaller share – 15.5%– of total Minnesota Personal Income. Most significantly,the share of government sponsored medical benefits has nearlydoubled over 20 years from 3.8% to 7.0% of state PersonalIncome.Table 3: Major Non-Money Components ofBEA Personal Income for Minnesota, CY 1990ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Imputed interest3.33.8%Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed rent0.30.3%Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35 and SA This is the value of investment income earned on life insurance and the value of services that depository institutions providewithoutan explicit charge for doing so. 6 This includes the value of things such as the rental value of owner-occupied housing, the value of farm products consumed at home bythe producers, and pay-in-kind in the form of meals and lodging. I Research and Education Publications

5 1/12/ No. 0005|April 2013 Minnesota’s Troubled “Price of Government” AbstractSince the early 1990’s, the Minnesota Price of Government has been calculated tomeasure and track state and local government’s claim on Minnesota income. However,since its inception, the composition of Minnesota Personal Income – the denominator ofthe POG – has changed dramatically. 20 years ago, five major non-money componentsof Minnesota Personal Income – that taxpayerscannot use to pay taxes or fees or remit inany way to finance government – were roughly 15% of the total. Today those non-money components are over 20% of the total,which represents a shift of approximately$13 billion in Minnesota Personal Income frommoney to non-money income. Moreover,the fastest growing sources of Personal Incomegrowth are government transfer payments– including the value of Medicare and Medicaid benefits – which have grown over 2.5times faster than wages and salaries over the past decade.These findings have major ramifications for theinterpretation of the Price of Governmentmetric and its use in public policy debates. Including Personal Income in the POGunderstates state and local government’s claim on money income – which is 20%-35%higher when substituting the household income measure usedin the state’sTax IncidenceStudy.Moreover, trends in the composition ofPersonal Income and demographic trendssignificantly compromise its common use as ameasure to evaluate affordability orbenchmark a sustainable “level” of spending.If policymakers want to maintain a POG-type measure, the state should modify the current metric by replacing Minnesota PersonalIncome with some measure of money income.Even with this adaptation, we encouragecaution in using the POG to assess the affordability of government or set a “price target”for government because some of the major demographic factors and trends affectingincome will continue for the indefinite future. 2 No. 0005|April 2013 IntroductionFor nearly twenty years, the state’s Department of Management and Budget (MMB) has prepared a Price of Government(POG) report to accompany the November and February economic forecasts and following the conclusion of eachlegislative session. 1 The POG metric measures the ratio of state and local government own source revenues 2 to statewidePersonal Income. MMB staff have described the POG as “the state’s maintransparency method and tool forcommunicating the total cost of state and local government to citizens.” 3 Policymakers created the POG with broad-based political support, including the endorsement of Minnesota’s businesscommunity, because it was seen as a simple, straightforwardmetric to track state and local government’s claim onMinnesotans’ income. Because it is seemingly so easy to understand and interpret, the POG has inevitably served as anevidence point in debates over budgets and acceptable levels of governmenttaxation and spending.However, simple metrics can often mask underlying complexity,rendering interpretations of the metric problematic in theprocess. This is especially true whenmajor changes are taking place in the components of the metric, as has happened withMinnesota’s Price of Government.Specifically, two major trends have transformed MinnesotaPersonal Income since the POG was developed two decadesago. As a result, the use of the POGwith respect to both evaluating taxpayercost of state and local government andproviding time-series comparisons about the level of investment Minnesotans make in state and local government areseverely compromised.Trend #1 – Rapid Growth in Non-Money Incomeas a Share of Total Minnesota Personal Income“Personal Income” as determined by the U.S. Bureau of Economic Analysis (BEA) is an extremely broad measure. BEAeconomists designed it to capture the income associated withparticipating in “production activities” and with transferpayments (largely from the government).Minnesota’s Personal Income for calendar year (CY) 2011 (the most recent yearfor which detailed information is available) was $238.2billion, which can be broken into the following pieces 4 :Table 1: Major Components of BEAPersonal Income for Minnesota, CY 2011ComponentAmount ($000)$ billions% of TotalWages & Salaries %Dividends, Interest, & Rent %Transfer Receipts %Proprietor Income %Employers’ Pension and Insurance Contributions %Employee & Self-Employed Contributions to “Social Insurance”Programs; and Adjustment for Interstate Commuters(9.7)(4.1%)Total % Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment, Table SA04. While “wages and salaries” is self-evident, someof the other components merit further description:  Dividends, interest, and rent: represent income generatedbyassets, but not income from thesale ofassets (thisexcludes capital gains).  Transfer receipts: these are mostly government benefit payments toindividuals – examples include Social Securitypayments, the value of Medicare and Medicaidbenefits, and income maintenance benefits. 1 Seehttp://www.mmb.state.mn.us/supporting-documents-nov-12for the most recent Price of Government report, from the November2012 Economic Forecast. 2 Own source revenues: all state and local revenues less “intergovernmental revenues” – grants from one unit of government to another,such as state Local Government Aid given to cities. 3 Testimony before the Legislative Commission on Fiscal Policy, February 22, 2013 meeting. 4 All BEA personal income data in this publication are as of the September 25, 2012 update. Seewww.bea.govfor data.3 No. 0005|April 2013  Proprietor income: income generated by businesses for their owners.  Employer pension and insurance contributions: basically, employers’ costs for fringe benefits, except for SocialSecurity and Medicare.  The final portion represents employees’ and self-employed persons contributions to “social insurance programs” –mainly Social Security and Medicare – and an adjustmentfor net flow of income between Minnesota and otherstates based on commuting patterns. Since more non-residents earn income in Minnesota than Minnesotans earn inother states, the adjustment is negative.As these descriptions make clear, Minnesota’s $238 billion Personal Income amount includes many items that an averageMinnesotan would not think of as income that could be usedto pay taxes. And the average Minnesotan would be right.Personal Income includes non-money benefits and “imputed” income– the market value of selected transactions that don’toccur in the market economy and that cannot be used to paytaxes. Table 2 shows five major non-money income areas.Table 2: Five Major Non-Money Components of BEA Personal Income for Minnesota, CY 2011ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed interest %Imputed rent %Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35, and SA 40 As the table indicates, in 2011 non-money income – essentiallyirrelevant to assessing the tax price of state and localgovernment and evaluating its affordability – represented over 20cents of every dollar of Minnesota Personal Income. Thisis a major departure from the earliest days of Minnesota’s Price of Government. As Table 3 shows; in 1990, these fivepieces of non-money income were a much smaller share – 15.5%– of total Minnesota Personal Income. Most significantly,the share of government sponsored medical benefits has nearlydoubled over 20 years from 3.8% to 7.0% of state PersonalIncome.Table 3: Major Non-Money Components ofBEA Personal Income for Minnesota, CY 1990ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Imputed interest3.33.8%Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed rent0.30.3%Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35 and SA This is the value of investment income earned on life insurance and the value of services that depository institutions providewithoutan explicit charge for doing so. 6 This includes the value of things such as the rental value of owner-occupied housing, the value of farm products consumed at home bythe producers, and pay-in-kind in the form of meals and lodging.1 No. 0005|April 2013 Minnesota’s Troubled “Price of Government” AbstractSince the early 1990’s, the Minnesota Price of Government has been calculated tomeasure and track state and local government’s claim on Minnesota income. However,since its inception, the composition of Minnesota Personal Income – the denominator ofthe POG – has changed dramatically. 20 years ago, five major non-money componentsof Minnesota Personal Income – that taxpayerscannot use to pay taxes or fees or remit inany way to finance government – were roughly 15% of the total. Today those non-money components are over 20% of the total,which represents a shift of approximately$13 billion in Minnesota Personal Income frommoney to non-money income. Moreover,the fastest growing sources of Personal Incomegrowth are government transfer payments– including the value of Medicare and Medicaid benefits – which have grown over 2.5times faster than wages and salaries over the past decade.These findings have major ramifications for theinterpretation of the Price of Governmentmetric and its use in public policy debates. Including Personal Income in the POGunderstates state and local government’s claim on money income – which is 20%-35%higher when substituting the household income measure usedin the state’sTax IncidenceStudy.Moreover, trends in the composition ofPersonal Income and demographic trendssignificantly compromise its common use as ameasure to evaluate affordability orbenchmark a sustainable “level” of spending.If policymakers want to maintain a POG-type measure, the state should modify the current metric by replacing Minnesota PersonalIncome with some measure of money income.Even with this adaptation, we encouragecaution in using the POG to assess the affordability of government or set a “price target”for government because some of the major demographic factors and trends affectingincome will continue for the indefinite future. 2 No. 0005|April 2013 IntroductionFor nearly twenty years, the state’s Department of Management and Budget (MMB) has prepared a Price of Government(POG) report to accompany the November and February economic forecasts and following the conclusion of eachlegislative session. 1 The POG metric measures the ratio of state and local government own source revenues 2 to statewidePersonal Income. MMB staff have described the POG as “the state’s maintransparency method and tool forcommunicating the total cost of state and local government to citizens.” 3 Policymakers created the POG with broad-based political support, including the endorsement of Minnesota’s businesscommunity, because it was seen as a simple, straightforwardmetric to track state and local government’s claim onMinnesotans’ income. Because it is seemingly so easy to understand and interpret, the POG has inevitably served as anevidence point in debates over budgets and acceptable levels of governmenttaxation and spending.However, simple metrics can often mask underlying complexity,rendering interpretations of the metric problematic in theprocess. This is especially true whenmajor changes are taking place in the components of the metric, as has happened withMinnesota’s Price of Government.Specifically, two major trends have transformed MinnesotaPersonal Income since the POG was developed two decadesago. As a result, the use of the POGwith respect to both evaluating taxpayercost of state and local government andproviding time-series comparisons about the level of investment Minnesotans make in state and local government areseverely compromised.Trend #1 – Rapid Growth in Non-Money Incomeas a Share of Total Minnesota Personal Income“Personal Income” as determined by the U.S. Bureau of Economic Analysis (BEA) is an extremely broad measure. BEAeconomists designed it to capture the income associated withparticipating in “production activities” and with transferpayments (largely from the government).Minnesota’s Personal Income for calendar year (CY) 2011 (the most recent yearfor which detailed information is available) was $238.2billion, which can be broken into the following pieces 4 :Table 1: Major Components of BEAPersonal Income for Minnesota, CY 2011ComponentAmount ($000)$ billions% of TotalWages & Salaries %Dividends, Interest, & Rent %Transfer Receipts %Proprietor Income %Employers’ Pension and Insurance Contributions %Employee & Self-Employed Contributions to “Social Insurance”Programs; and Adjustment for Interstate Commuters(9.7)(4.1%)Total % Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment, Table SA04. While “wages and salaries” is self-evident, someof the other components merit further description:  Dividends, interest, and rent: represent income generatedbyassets, but not income from thesale ofassets (thisexcludes capital gains).  Transfer receipts: these are mostly government benefit payments toindividuals – examples include Social Securitypayments, the value of Medicare and Medicaidbenefits, and income maintenance benefits. 1 Seehttp://www.mmb.state.mn.us/supporting-documents-nov-12for the most recent Price of Government report, from the November2012 Economic Forecast. 2 Own source revenues: all state and local revenues less “intergovernmental revenues” – grants from one unit of government to another,such as state Local Government Aid given to cities. 3 Testimony before the Legislative Commission on Fiscal Policy, February 22, 2013 meeting. 4 All BEA personal income data in this publication are as of the September 25, 2012 update. Seewww.bea.govfor data.3 No. 0005|April 2013  Proprietor income: income generated by businesses for their owners.  Employer pension and insurance contributions: basically, employers’ costs for fringe benefits, except for SocialSecurity and Medicare.  The final portion represents employees’ and self-employed persons contributions to “social insurance programs” –mainly Social Security and Medicare – and an adjustmentfor net flow of income between Minnesota and otherstates based on commuting patterns. Since more non-residents earn income in Minnesota than Minnesotans earn inother states, the adjustment is negative.As these descriptions make clear, Minnesota’s $238 billion Personal Income amount includes many items that an averageMinnesotan would not think of as income that could be usedto pay taxes. And the average Minnesotan would be right.Personal Income includes non-money benefits and “imputed” income– the market value of selected transactions that don’toccur in the market economy and that cannot be used to paytaxes. Table 2 shows five major non-money income areas.Table 2: Five Major Non-Money Components of BEA Personal Income for Minnesota, CY 2011ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed interest %Imputed rent %Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35, and SA 40 As the table indicates, in 2011 non-money income – essentiallyirrelevant to assessing the tax price of state and localgovernment and evaluating its affordability – represented over 20cents of every dollar of Minnesota Personal Income. Thisis a major departure from the earliest days of Minnesota’s Price of Government. As Table 3 shows; in 1990, these fivepieces of non-money income were a much smaller share – 15.5%– of total Minnesota Personal Income. Most significantly,the share of government sponsored medical benefits has nearlydoubled over 20 years from 3.8% to 7.0% of state PersonalIncome.Table 3: Major Non-Money Components ofBEA Personal Income for Minnesota, CY 1990ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Imputed interest3.33.8%Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed rent0.30.3%Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35 and SA This is the value of investment income earned on life insurance and the value of services that depository institutions providewithoutan explicit charge for doing so. 6 This includes the value of things such as the rental value of owner-occupied housing, the value of farm products consumed at home bythe producers, and pay-in-kind in the form of meals and lodging.1 No. 0005|April 2013 Minnesota’s Troubled “Price of Government” AbstractSince the early 1990’s, the Minnesota Price of Government has been calculated tomeasure and track state and local government’s claim on Minnesota income. However,since its inception, the composition of Minnesota Personal Income – the denominator ofthe POG – has changed dramatically. 20 years ago, five major non-money componentsof Minnesota Personal Income – that taxpayerscannot use to pay taxes or fees or remit inany way to finance government – were roughly 15% of the total. Today those non-money components are over 20% of the total,which represents a shift of approximately$13 billion in Minnesota Personal Income frommoney to non-money income. Moreover,the fastest growing sources of Personal Incomegrowth are government transfer payments– including the value of Medicare and Medicaid benefits – which have grown over 2.5times faster than wages and salaries over the past decade.These findings have major ramifications for theinterpretation of the Price of Governmentmetric and its use in public policy debates. Including Personal Income in the POGunderstates state and local government’s claim on money income – which is 20%-35%higher when substituting the household income measure usedin the state’sTax IncidenceStudy.Moreover, trends in the composition ofPersonal Income and demographic trendssignificantly compromise its common use as ameasure to evaluate affordability orbenchmark a sustainable “level” of spending.If policymakers want to maintain a POG-type measure, the state should modify the current metric by replacing Minnesota PersonalIncome with some measure of money income.Even with this adaptation, we encouragecaution in using the POG to assess the affordability of government or set a “price target”for government because some of the major demographic factors and trends affectingincome will continue for the indefinite future. 2 No. 0005|April 2013 IntroductionFor nearly twenty years, the state’s Department of Management and Budget (MMB) has prepared a Price of Government(POG) report to accompany the November and February economic forecasts and following the conclusion of eachlegislative session. 1 The POG metric measures the ratio of state and local government own source revenues 2 to statewidePersonal Income. MMB staff have described the POG as “the state’s maintransparency method and tool forcommunicating the total cost of state and local government to citizens.” 3 Policymakers created the POG with broad-based political support, including the endorsement of Minnesota’s businesscommunity, because it was seen as a simple, straightforwardmetric to track state and local government’s claim onMinnesotans’ income. Because it is seemingly so easy to understand and interpret, the POG has inevitably served as anevidence point in debates over budgets and acceptable levels of governmenttaxation and spending.However, simple metrics can often mask underlying complexity,rendering interpretations of the metric problematic in theprocess. This is especially true whenmajor changes are taking place in the components of the metric, as has happened withMinnesota’s Price of Government.Specifically, two major trends have transformed MinnesotaPersonal Income since the POG was developed two decadesago. As a result, the use of the POGwith respect to both evaluating taxpayercost of state and local government andproviding time-series comparisons about the level of investment Minnesotans make in state and local government areseverely compromised.Trend #1 – Rapid Growth in Non-Money Incomeas a Share of Total Minnesota Personal Income“Personal Income” as determined by the U.S. Bureau of Economic Analysis (BEA) is an extremely broad measure. BEAeconomists designed it to capture the income associated withparticipating in “production activities” and with transferpayments (largely from the government).Minnesota’s Personal Income for calendar year (CY) 2011 (the most recent yearfor which detailed information is available) was $238.2billion, which can be broken into the following pieces 4 :Table 1: Major Components of BEAPersonal Income for Minnesota, CY 2011ComponentAmount ($000)$ billions% of TotalWages & Salaries %Dividends, Interest, & Rent %Transfer Receipts %Proprietor Income %Employers’ Pension and Insurance Contributions %Employee & Self-Employed Contributions to “Social Insurance”Programs; and Adjustment for Interstate Commuters(9.7)(4.1%)Total % Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment, Table SA04. While “wages and salaries” is self-evident, someof the other components merit further description:  Dividends, interest, and rent: represent income generatedbyassets, but not income from thesale ofassets (thisexcludes capital gains).  Transfer receipts: these are mostly government benefit payments toindividuals – examples include Social Securitypayments, the value of Medicare and Medicaidbenefits, and income maintenance benefits. 1 Seehttp://www.mmb.state.mn.us/supporting-documents-nov-12for the most recent Price of Government report, from the November2012 Economic Forecast. 2 Own source revenues: all state and local revenues less “intergovernmental revenues” – grants from one unit of government to another,such as state Local Government Aid given to cities. 3 Testimony before the Legislative Commission on Fiscal Policy, February 22, 2013 meeting. 4 All BEA personal income data in this publication are as of the September 25, 2012 update. Seewww.bea.govfor data.3 No. 0005|April 2013  Proprietor income: income generated by businesses for their owners.  Employer pension and insurance contributions: basically, employers’ costs for fringe benefits, except for SocialSecurity and Medicare.  The final portion represents employees’ and self-employed persons contributions to “social insurance programs” –mainly Social Security and Medicare – and an adjustmentfor net flow of income between Minnesota and otherstates based on commuting patterns. Since more non-residents earn income in Minnesota than Minnesotans earn inother states, the adjustment is negative.As these descriptions make clear, Minnesota’s $238 billion Personal Income amount includes many items that an averageMinnesotan would not think of as income that could be usedto pay taxes. And the average Minnesotan would be right.Personal Income includes non-money benefits and “imputed” income– the market value of selected transactions that don’toccur in the market economy and that cannot be used to paytaxes. Table 2 shows five major non-money income areas.Table 2: Five Major Non-Money Components of BEA Personal Income for Minnesota, CY 2011ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed interest %Imputed rent %Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35, and SA 40 As the table indicates, in 2011 non-money income – essentiallyirrelevant to assessing the tax price of state and localgovernment and evaluating its affordability – represented over 20cents of every dollar of Minnesota Personal Income. Thisis a major departure from the earliest days of Minnesota’s Price of Government. As Table 3 shows; in 1990, these fivepieces of non-money income were a much smaller share – 15.5%– of total Minnesota Personal Income. Most significantly,the share of government sponsored medical benefits has nearlydoubled over 20 years from 3.8% to 7.0% of state PersonalIncome.Table 3: Major Non-Money Components ofBEA Personal Income for Minnesota, CY 1990ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Imputed interest3.33.8%Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed rent0.30.3%Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35 and SA This is the value of investment income earned on life insurance and the value of services that depository institutions providewithoutan explicit charge for doing so. 6 This includes the value of things such as the rental value of owner-occupied housing, the value of farm products consumed at home bythe producers, and pay-in-kind in the form of meals and lodging.1 No. 0005|April 2013 Minnesota’s Troubled “Price of Government” AbstractSince the early 1990’s, the Minnesota Price of Government has been calculated tomeasure and track state and local government’s claim on Minnesota income. However,since its inception, the composition of Minnesota Personal Income – the denominator ofthe POG – has changed dramatically. 20 years ago, five major non-money componentsof Minnesota Personal Income – that taxpayerscannot use to pay taxes or fees or remit inany way to finance government – were roughly 15% of the total. Today those non-money components are over 20% of the total,which represents a shift of approximately$13 billion in Minnesota Personal Income frommoney to non-money income. Moreover,the fastest growing sources of Personal Incomegrowth are government transfer payments– including the value of Medicare and Medicaid benefits – which have grown over 2.5times faster than wages and salaries over the past decade.These findings have major ramifications for theinterpretation of the Price of Governmentmetric and its use in public policy debates. Including Personal Income in the POGunderstates state and local government’s claim on money income – which is 20%-35%higher when substituting the household income measure usedin the state’sTax IncidenceStudy.Moreover, trends in the composition ofPersonal Income and demographic trendssignificantly compromise its common use as ameasure to evaluate affordability orbenchmark a sustainable “level” of spending.If policymakers want to maintain a POG-type measure, the state should modify the current metric by replacing Minnesota PersonalIncome with some measure of money income.Even with this adaptation, we encouragecaution in using the POG to assess the affordability of government or set a “price target”for government because some of the major demographic factors and trends affectingincome will continue for the indefinite future. 2 No. 0005|April 2013 IntroductionFor nearly twenty years, the state’s Department of Management and Budget (MMB) has prepared a Price of Government(POG) report to accompany the November and February economic forecasts and following the conclusion of eachlegislative session. 1 The POG metric measures the ratio of state and local government own source revenues 2 to statewidePersonal Income. MMB staff have described the POG as “the state’s maintransparency method and tool forcommunicating the total cost of state and local government to citizens.” 3 Policymakers created the POG with broad-based political support, including the endorsement of Minnesota’s businesscommunity, because it was seen as a simple, straightforwardmetric to track state and local government’s claim onMinnesotans’ income. Because it is seemingly so easy to understand and interpret, the POG has inevitably served as anevidence point in debates over budgets and acceptable levels of governmenttaxation and spending.However, simple metrics can often mask underlying complexity,rendering interpretations of the metric problematic in theprocess. This is especially true whenmajor changes are taking place in the components of the metric, as has happened withMinnesota’s Price of Government.Specifically, two major trends have transformed MinnesotaPersonal Income since the POG was developed two decadesago. As a result, the use of the POGwith respect to both evaluating taxpayercost of state and local government andproviding time-series comparisons about the level of investment Minnesotans make in state and local government areseverely compromised.Trend #1 – Rapid Growth in Non-Money Incomeas a Share of Total Minnesota Personal Income“Personal Income” as determined by the U.S. Bureau of Economic Analysis (BEA) is an extremely broad measure. BEAeconomists designed it to capture the income associated withparticipating in “production activities” and with transferpayments (largely from the government).Minnesota’s Personal Income for calendar year (CY) 2011 (the most recent yearfor which detailed information is available) was $238.2billion, which can be broken into the following pieces 4 :Table 1: Major Components of BEAPersonal Income for Minnesota, CY 2011ComponentAmount ($000)$ billions% of TotalWages & Salaries %Dividends, Interest, & Rent %Transfer Receipts %Proprietor Income %Employers’ Pension and Insurance Contributions %Employee & Self-Employed Contributions to “Social Insurance”Programs; and Adjustment for Interstate Commuters(9.7)(4.1%)Total % Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment, Table SA04. While “wages and salaries” is self-evident, someof the other components merit further description:  Dividends, interest, and rent: represent income generatedbyassets, but not income from thesale ofassets (thisexcludes capital gains).  Transfer receipts: these are mostly government benefit payments toindividuals – examples include Social Securitypayments, the value of Medicare and Medicaidbenefits, and income maintenance benefits. 1 Seehttp://www.mmb.state.mn.us/supporting-documents-nov-12for the most recent Price of Government report, from the November2012 Economic Forecast. 2 Own source revenues: all state and local revenues less “intergovernmental revenues” – grants from one unit of government to another,such as state Local Government Aid given to cities. 3 Testimony before the Legislative Commission on Fiscal Policy, February 22, 2013 meeting. 4 All BEA personal income data in this publication are as of the September 25, 2012 update. Seewww.bea.govfor data.3 No. 0005|April 2013  Proprietor income: income generated by businesses for their owners.  Employer pension and insurance contributions: basically, employers’ costs for fringe benefits, except for SocialSecurity and Medicare.  The final portion represents employees’ and self-employed persons contributions to “social insurance programs” –mainly Social Security and Medicare – and an adjustmentfor net flow of income between Minnesota and otherstates based on commuting patterns. Since more non-residents earn income in Minnesota than Minnesotans earn inother states, the adjustment is negative.As these descriptions make clear, Minnesota’s $238 billion Personal Income amount includes many items that an averageMinnesotan would not think of as income that could be usedto pay taxes. And the average Minnesotan would be right.Personal Income includes non-money benefits and “imputed” income– the market value of selected transactions that don’toccur in the market economy and that cannot be used to paytaxes. Table 2 shows five major non-money income areas.Table 2: Five Major Non-Money Components of BEA Personal Income for Minnesota, CY 2011ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed interest %Imputed rent %Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35, and SA 40 As the table indicates, in 2011 non-money income – essentiallyirrelevant to assessing the tax price of state and localgovernment and evaluating its affordability – represented over 20cents of every dollar of Minnesota Personal Income. Thisis a major departure from the earliest days of Minnesota’s Price of Government. As Table 3 shows; in 1990, these fivepieces of non-money income were a much smaller share – 15.5%– of total Minnesota Personal Income. Most significantly,the share of government sponsored medical benefits has nearlydoubled over 20 years from 3.8% to 7.0% of state PersonalIncome.Table 3: Major Non-Money Components ofBEA Personal Income for Minnesota, CY 1990ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Imputed interest3.33.8%Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed rent0.30.3%Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35 and SA This is the value of investment income earned on life insurance and the value of services that depository institutions providewithoutan explicit charge for doing so. 6 This includes the value of things such as the rental value of owner-occupied housing, the value of farm products consumed at home bythe producers, and pay-in-kind in the form of meals and lodging.1 No. 0005|April 2013 Minnesota’s Troubled “Price of Government” AbstractSince the early 1990’s, the Minnesota Price of Government has been calculated tomeasure and track state and local government’s claim on Minnesota income. However,since its inception, the composition of Minnesota Personal Income – the denominator ofthe POG – has changed dramatically. 20 years ago, five major non-money componentsof Minnesota Personal Income – that taxpayerscannot use to pay taxes or fees or remit inany way to finance government – were roughly 15% of the total. Today those non-money components are over 20% of the total,which represents a shift of approximately$13 billion in Minnesota Personal Income frommoney to non-money income. Moreover,the fastest growing sources of Personal Incomegrowth are government transfer payments– including the value of Medicare and Medicaid benefits – which have grown over 2.5times faster than wages and salaries over the past decade.These findings have major ramifications for theinterpretation of the Price of Governmentmetric and its use in public policy debates. Including Personal Income in the POGunderstates state and local government’s claim on money income – which is 20%-35%higher when substituting the household income measure usedin the state’sTax IncidenceStudy.Moreover, trends in the composition ofPersonal Income and demographic trendssignificantly compromise its common use as ameasure to evaluate affordability orbenchmark a sustainable “level” of spending.If policymakers want to maintain a POG-type measure, the state should modify the current metric by replacing Minnesota PersonalIncome with some measure of money income.Even with this adaptation, we encouragecaution in using the POG to assess the affordability of government or set a “price target”for government because some of the major demographic factors and trends affectingincome will continue for the indefinite future. 2 No. 0005|April 2013 IntroductionFor nearly twenty years, the state’s Department of Management and Budget (MMB) has prepared a Price of Government(POG) report to accompany the November and February economic forecasts and following the conclusion of eachlegislative session. 1 The POG metric measures the ratio of state and local government own source revenues 2 to statewidePersonal Income. MMB staff have described the POG as “the state’s maintransparency method and tool forcommunicating the total cost of state and local government to citizens.” 3 Policymakers created the POG with broad-based political support, including the endorsement of Minnesota’s businesscommunity, because it was seen as a simple, straightforwardmetric to track state and local government’s claim onMinnesotans’ income. Because it is seemingly so easy to understand and interpret, the POG has inevitably served as anevidence point in debates over budgets and acceptable levels of governmenttaxation and spending.However, simple metrics can often mask underlying complexity,rendering interpretations of the metric problematic in theprocess. This is especially true whenmajor changes are taking place in the components of the metric, as has happened withMinnesota’s Price of Government.Specifically, two major trends have transformed MinnesotaPersonal Income since the POG was developed two decadesago. As a result, the use of the POGwith respect to both evaluating taxpayercost of state and local government andproviding time-series comparisons about the level of investment Minnesotans make in state and local government areseverely compromised.Trend #1 – Rapid Growth in Non-Money Incomeas a Share of Total Minnesota Personal Income“Personal Income” as determined by the U.S. Bureau of Economic Analysis (BEA) is an extremely broad measure. BEAeconomists designed it to capture the income associated withparticipating in “production activities” and with transferpayments (largely from the government).Minnesota’s Personal Income for calendar year (CY) 2011 (the most recent yearfor which detailed information is available) was $238.2billion, which can be broken into the following pieces 4 :Table 1: Major Components of BEAPersonal Income for Minnesota, CY 2011ComponentAmount ($000)$ billions% of TotalWages & Salaries %Dividends, Interest, & Rent %Transfer Receipts %Proprietor Income %Employers’ Pension and Insurance Contributions %Employee & Self-Employed Contributions to “Social Insurance”Programs; and Adjustment for Interstate Commuters(9.7)(4.1%)Total % Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment, Table SA04. While “wages and salaries” is self-evident, someof the other components merit further description:  Dividends, interest, and rent: represent income generatedbyassets, but not income from thesale ofassets (thisexcludes capital gains).  Transfer receipts: these are mostly government benefit payments toindividuals – examples include Social Securitypayments, the value of Medicare and Medicaidbenefits, and income maintenance benefits. 1 Seehttp://www.mmb.state.mn.us/supporting-documents-nov-12for the most recent Price of Government report, from the November2012 Economic Forecast. 2 Own source revenues: all state and local revenues less “intergovernmental revenues” – grants from one unit of government to another,such as state Local Government Aid given to cities. 3 Testimony before the Legislative Commission on Fiscal Policy, February 22, 2013 meeting. 4 All BEA personal income data in this publication are as of the September 25, 2012 update. Seewww.bea.govfor data.3 No. 0005|April 2013  Proprietor income: income generated by businesses for their owners.  Employer pension and insurance contributions: basically, employers’ costs for fringe benefits, except for SocialSecurity and Medicare.  The final portion represents employees’ and self-employed persons contributions to “social insurance programs” –mainly Social Security and Medicare – and an adjustmentfor net flow of income between Minnesota and otherstates based on commuting patterns. Since more non-residents earn income in Minnesota than Minnesotans earn inother states, the adjustment is negative.As these descriptions make clear, Minnesota’s $238 billion Personal Income amount includes many items that an averageMinnesotan would not think of as income that could be usedto pay taxes. And the average Minnesotan would be right.Personal Income includes non-money benefits and “imputed” income– the market value of selected transactions that don’toccur in the market economy and that cannot be used to paytaxes. Table 2 shows five major non-money income areas.Table 2: Five Major Non-Money Components of BEA Personal Income for Minnesota, CY 2011ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed interest %Imputed rent %Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35, and SA 40 As the table indicates, in 2011 non-money income – essentiallyirrelevant to assessing the tax price of state and localgovernment and evaluating its affordability – represented over 20cents of every dollar of Minnesota Personal Income. Thisis a major departure from the earliest days of Minnesota’s Price of Government. As Table 3 shows; in 1990, these fivepieces of non-money income were a much smaller share – 15.5%– of total Minnesota Personal Income. Most significantly,the share of government sponsored medical benefits has nearlydoubled over 20 years from 3.8% to 7.0% of state PersonalIncome.Table 3: Major Non-Money Components ofBEA Personal Income for Minnesota, CY 1990ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Imputed interest3.33.8%Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed rent0.30.3%Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35 and SA This is the value of investment income earned on life insurance and the value of services that depository institutions providewithoutan explicit charge for doing so. 6 This includes the value of things such as the rental value of owner-occupied housing, the value of farm products consumed at home bythe producers, and pay-in-kind in the form of meals and lodging.1 No. 0005|April 2013 Minnesota’s Troubled “Price of Government” AbstractSince the early 1990’s, the Minnesota Price of Government has been calculated tomeasure and track state and local government’s claim on Minnesota income. However,since its inception, the composition of Minnesota Personal Income – the denominator ofthe POG – has changed dramatically. 20 years ago, five major non-money componentsof Minnesota Personal Income – that taxpayerscannot use to pay taxes or fees or remit inany way to finance government – were roughly 15% of the total. Today those non-money components are over 20% of the total,which represents a shift of approximately$13 billion in Minnesota Personal Income frommoney to non-money income. Moreover,the fastest growing sources of Personal Incomegrowth are government transfer payments– including the value of Medicare and Medicaid benefits – which have grown over 2.5times faster than wages and salaries over the past decade.These findings have major ramifications for theinterpretation of the Price of Governmentmetric and its use in public policy debates. Including Personal Income in the POGunderstates state and local government’s claim on money income – which is 20%-35%higher when substituting the household income measure usedin the state’sTax IncidenceStudy.Moreover, trends in the composition ofPersonal Income and demographic trendssignificantly compromise its common use as ameasure to evaluate affordability orbenchmark a sustainable “level” of spending.If policymakers want to maintain a POG-type measure, the state should modify the current metric by replacing Minnesota PersonalIncome with some measure of money income.Even with this adaptation, we encouragecaution in using the POG to assess the affordability of government or set a “price target”for government because some of the major demographic factors and trends affectingincome will continue for the indefinite future. 2 No. 0005|April 2013 IntroductionFor nearly twenty years, the state’s Department of Management and Budget (MMB) has prepared a Price of Government(POG) report to accompany the November and February economic forecasts and following the conclusion of eachlegislative session. 1 The POG metric measures the ratio of state and local government own source revenues 2 to statewidePersonal Income. MMB staff have described the POG as “the state’s maintransparency method and tool forcommunicating the total cost of state and local government to citizens.” 3 Policymakers created the POG with broad-based political support, including the endorsement of Minnesota’s businesscommunity, because it was seen as a simple, straightforwardmetric to track state and local government’s claim onMinnesotans’ income. Because it is seemingly so easy to understand and interpret, the POG has inevitably served as anevidence point in debates over budgets and acceptable levels of governmenttaxation and spending.However, simple metrics can often mask underlying complexity,rendering interpretations of the metric problematic in theprocess. This is especially true whenmajor changes are taking place in the components of the metric, as has happened withMinnesota’s Price of Government.Specifically, two major trends have transformed MinnesotaPersonal Income since the POG was developed two decadesago. As a result, the use of the POGwith respect to both evaluating taxpayercost of state and local government andproviding time-series comparisons about the level of investment Minnesotans make in state and local government areseverely compromised.Trend #1 – Rapid Growth in Non-Money Incomeas a Share of Total Minnesota Personal Income“Personal Income” as determined by the U.S. Bureau of Economic Analysis (BEA) is an extremely broad measure. BEAeconomists designed it to capture the income associated withparticipating in “production activities” and with transferpayments (largely from the government).Minnesota’s Personal Income for calendar year (CY) 2011 (the most recent yearfor which detailed information is available) was $238.2billion, which can be broken into the following pieces 4 :Table 1: Major Components of BEAPersonal Income for Minnesota, CY 2011ComponentAmount ($000)$ billions% of TotalWages & Salaries %Dividends, Interest, & Rent %Transfer Receipts %Proprietor Income %Employers’ Pension and Insurance Contributions %Employee & Self-Employed Contributions to “Social Insurance”Programs; and Adjustment for Interstate Commuters(9.7)(4.1%)Total % Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment, Table SA04. While “wages and salaries” is self-evident, someof the other components merit further description:  Dividends, interest, and rent: represent income generatedbyassets, but not income from thesale ofassets (thisexcludes capital gains).  Transfer receipts: these are mostly government benefit payments toindividuals – examples include Social Securitypayments, the value of Medicare and Medicaidbenefits, and income maintenance benefits. 1 Seehttp://www.mmb.state.mn.us/supporting-documents-nov-12for the most recent Price of Government report, from the November2012 Economic Forecast. 2 Own source revenues: all state and local revenues less “intergovernmental revenues” – grants from one unit of government to another,such as state Local Government Aid given to cities. 3 Testimony before the Legislative Commission on Fiscal Policy, February 22, 2013 meeting. 4 All BEA personal income data in this publication are as of the September 25, 2012 update. Seewww.bea.govfor data.3 No. 0005|April 2013  Proprietor income: income generated by businesses for their owners.  Employer pension and insurance contributions: basically, employers’ costs for fringe benefits, except for SocialSecurity and Medicare.  The final portion represents employees’ and self-employed persons contributions to “social insurance programs” –mainly Social Security and Medicare – and an adjustmentfor net flow of income between Minnesota and otherstates based on commuting patterns. Since more non-residents earn income in Minnesota than Minnesotans earn inother states, the adjustment is negative.As these descriptions make clear, Minnesota’s $238 billion Personal Income amount includes many items that an averageMinnesotan would not think of as income that could be usedto pay taxes. And the average Minnesotan would be right.Personal Income includes non-money benefits and “imputed” income– the market value of selected transactions that don’toccur in the market economy and that cannot be used to paytaxes. Table 2 shows five major non-money income areas.Table 2: Five Major Non-Money Components of BEA Personal Income for Minnesota, CY 2011ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed interest %Imputed rent %Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35, and SA 40 As the table indicates, in 2011 non-money income – essentiallyirrelevant to assessing the tax price of state and localgovernment and evaluating its affordability – represented over 20cents of every dollar of Minnesota Personal Income. Thisis a major departure from the earliest days of Minnesota’s Price of Government. As Table 3 shows; in 1990, these fivepieces of non-money income were a much smaller share – 15.5%– of total Minnesota Personal Income. Most significantly,the share of government sponsored medical benefits has nearlydoubled over 20 years from 3.8% to 7.0% of state PersonalIncome.Table 3: Major Non-Money Components ofBEA Personal Income for Minnesota, CY 1990ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Imputed interest3.33.8%Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed rent0.30.3%Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35 and SA This is the value of investment income earned on life insurance and the value of services that depository institutions providewithoutan explicit charge for doing so. 6 This includes the value of things such as the rental value of owner-occupied housing, the value of farm products consumed at home bythe producers, and pay-in-kind in the form of meals and lodging.1 No. 0005|April 2013 Minnesota’s Troubled “Price of Government” AbstractSince the early 1990’s, the Minnesota Price of Government has been calculated tomeasure and track state and local government’s claim on Minnesota income. However,since its inception, the composition of Minnesota Personal Income – the denominator ofthe POG – has changed dramatically. 20 years ago, five major non-money componentsof Minnesota Personal Income – that taxpayerscannot use to pay taxes or fees or remit inany way to finance government – were roughly 15% of the total. Today those non-money components are over 20% of the total,which represents a shift of approximately$13 billion in Minnesota Personal Income frommoney to non-money income. Moreover,the fastest growing sources of Personal Incomegrowth are government transfer payments– including the value of Medicare and Medicaid benefits – which have grown over 2.5times faster than wages and salaries over the past decade.These findings have major ramifications for theinterpretation of the Price of Governmentmetric and its use in public policy debates. Including Personal Income in the POGunderstates state and local government’s claim on money income – which is 20%-35%higher when substituting the household income measure usedin the state’sTax IncidenceStudy.Moreover, trends in the composition ofPersonal Income and demographic trendssignificantly compromise its common use as ameasure to evaluate affordability orbenchmark a sustainable “level” of spending.If policymakers want to maintain a POG-type measure, the state should modify the current metric by replacing Minnesota PersonalIncome with some measure of money income.Even with this adaptation, we encouragecaution in using the POG to assess the affordability of government or set a “price target”for government because some of the major demographic factors and trends affectingincome will continue for the indefinite future. 2 No. 0005|April 2013 IntroductionFor nearly twenty years, the state’s Department of Management and Budget (MMB) has prepared a Price of Government(POG) report to accompany the November and February economic forecasts and following the conclusion of eachlegislative session. 1 The POG metric measures the ratio of state and local government own source revenues 2 to statewidePersonal Income. MMB staff have described the POG as “the state’s maintransparency method and tool forcommunicating the total cost of state and local government to citizens.” 3 Policymakers created the POG with broad-based political support, including the endorsement of Minnesota’s businesscommunity, because it was seen as a simple, straightforwardmetric to track state and local government’s claim onMinnesotans’ income. Because it is seemingly so easy to understand and interpret, the POG has inevitably served as anevidence point in debates over budgets and acceptable levels of governmenttaxation and spending.However, simple metrics can often mask underlying complexity,rendering interpretations of the metric problematic in theprocess. This is especially true whenmajor changes are taking place in the components of the metric, as has happened withMinnesota’s Price of Government.Specifically, two major trends have transformed MinnesotaPersonal Income since the POG was developed two decadesago. As a result, the use of the POGwith respect to both evaluating taxpayercost of state and local government andproviding time-series comparisons about the level of investment Minnesotans make in state and local government areseverely compromised.Trend #1 – Rapid Growth in Non-Money Incomeas a Share of Total Minnesota Personal Income“Personal Income” as determined by the U.S. Bureau of Economic Analysis (BEA) is an extremely broad measure. BEAeconomists designed it to capture the income associated withparticipating in “production activities” and with transferpayments (largely from the government).Minnesota’s Personal Income for calendar year (CY) 2011 (the most recent yearfor which detailed information is available) was $238.2billion, which can be broken into the following pieces 4 :Table 1: Major Components of BEAPersonal Income for Minnesota, CY 2011ComponentAmount ($000)$ billions% of TotalWages & Salaries %Dividends, Interest, & Rent %Transfer Receipts %Proprietor Income %Employers’ Pension and Insurance Contributions %Employee & Self-Employed Contributions to “Social Insurance”Programs; and Adjustment for Interstate Commuters(9.7)(4.1%)Total % Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment, Table SA04. While “wages and salaries” is self-evident, someof the other components merit further description:  Dividends, interest, and rent: represent income generatedbyassets, but not income from thesale ofassets (thisexcludes capital gains).  Transfer receipts: these are mostly government benefit payments toindividuals – examples include Social Securitypayments, the value of Medicare and Medicaidbenefits, and income maintenance benefits. 1 Seehttp://www.mmb.state.mn.us/supporting-documents-nov-12for the most recent Price of Government report, from the November2012 Economic Forecast. 2 Own source revenues: all state and local revenues less “intergovernmental revenues” – grants from one unit of government to another,such as state Local Government Aid given to cities. 3 Testimony before the Legislative Commission on Fiscal Policy, February 22, 2013 meeting. 4 All BEA personal income data in this publication are as of the September 25, 2012 update. Seewww.bea.govfor data.3 No. 0005|April 2013  Proprietor income: income generated by businesses for their owners.  Employer pension and insurance contributions: basically, employers’ costs for fringe benefits, except for SocialSecurity and Medicare.  The final portion represents employees’ and self-employed persons contributions to “social insurance programs” –mainly Social Security and Medicare – and an adjustmentfor net flow of income between Minnesota and otherstates based on commuting patterns. Since more non-residents earn income in Minnesota than Minnesotans earn inother states, the adjustment is negative.As these descriptions make clear, Minnesota’s $238 billion Personal Income amount includes many items that an averageMinnesotan would not think of as income that could be usedto pay taxes. And the average Minnesotan would be right.Personal Income includes non-money benefits and “imputed” income– the market value of selected transactions that don’toccur in the market economy and that cannot be used to paytaxes. Table 2 shows five major non-money income areas.Table 2: Five Major Non-Money Components of BEA Personal Income for Minnesota, CY 2011ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed interest %Imputed rent %Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35, and SA 40 As the table indicates, in 2011 non-money income – essentiallyirrelevant to assessing the tax price of state and localgovernment and evaluating its affordability – represented over 20cents of every dollar of Minnesota Personal Income. Thisis a major departure from the earliest days of Minnesota’s Price of Government. As Table 3 shows; in 1990, these fivepieces of non-money income were a much smaller share – 15.5%– of total Minnesota Personal Income. Most significantly,the share of government sponsored medical benefits has nearlydoubled over 20 years from 3.8% to 7.0% of state PersonalIncome.Table 3: Major Non-Money Components ofBEA Personal Income for Minnesota, CY 1990ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Imputed interest3.33.8%Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed rent0.30.3%Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35 and SA This is the value of investment income earned on life insurance and the value of services that depository institutions providewithoutan explicit charge for doing so. 6 This includes the value of things such as the rental value of owner-occupied housing, the value of farm products consumed at home bythe producers, and pay-in-kind in the form of meals and lodging.1 No. 0005|April 2013 Minnesota’s Troubled “Price of Government” AbstractSince the early 1990’s, the Minnesota Price of Government has been calculated tomeasure and track state and local government’s claim on Minnesota income. However,since its inception, the composition of Minnesota Personal Income – the denominator ofthe POG – has changed dramatically. 20 years ago, five major non-money componentsof Minnesota Personal Income – that taxpayerscannot use to pay taxes or fees or remit inany way to finance government – were roughly 15% of the total. Today those non-money components are over 20% of the total,which represents a shift of approximately$13 billion in Minnesota Personal Income frommoney to non-money income. Moreover,the fastest growing sources of Personal Incomegrowth are government transfer payments– including the value of Medicare and Medicaid benefits – which have grown over 2.5times faster than wages and salaries over the past decade.These findings have major ramifications for theinterpretation of the Price of Governmentmetric and its use in public policy debates. Including Personal Income in the POGunderstates state and local government’s claim on money income – which is 20%-35%higher when substituting the household income measure usedin the state’sTax IncidenceStudy.Moreover, trends in the composition ofPersonal Income and demographic trendssignificantly compromise its common use as ameasure to evaluate affordability orbenchmark a sustainable “level” of spending.If policymakers want to maintain a POG-type measure, the state should modify the current metric by replacing Minnesota PersonalIncome with some measure of money income.Even with this adaptation, we encouragecaution in using the POG to assess the affordability of government or set a “price target”for government because some of the major demographic factors and trends affectingincome will continue for the indefinite future. 2 No. 0005|April 2013 IntroductionFor nearly twenty years, the state’s Department of Management and Budget (MMB) has prepared a Price of Government(POG) report to accompany the November and February economic forecasts and following the conclusion of eachlegislative session. 1 The POG metric measures the ratio of state and local government own source revenues 2 to statewidePersonal Income. MMB staff have described the POG as “the state’s maintransparency method and tool forcommunicating the total cost of state and local government to citizens.” 3 Policymakers created the POG with broad-based political support, including the endorsement of Minnesota’s businesscommunity, because it was seen as a simple, straightforwardmetric to track state and local government’s claim onMinnesotans’ income. Because it is seemingly so easy to understand and interpret, the POG has inevitably served as anevidence point in debates over budgets and acceptable levels of governmenttaxation and spending.However, simple metrics can often mask underlying complexity,rendering interpretations of the metric problematic in theprocess. This is especially true whenmajor changes are taking place in the components of the metric, as has happened withMinnesota’s Price of Government.Specifically, two major trends have transformed MinnesotaPersonal Income since the POG was developed two decadesago. As a result, the use of the POGwith respect to both evaluating taxpayercost of state and local government andproviding time-series comparisons about the level of investment Minnesotans make in state and local government areseverely compromised.Trend #1 – Rapid Growth in Non-Money Incomeas a Share of Total Minnesota Personal Income“Personal Income” as determined by the U.S. Bureau of Economic Analysis (BEA) is an extremely broad measure. BEAeconomists designed it to capture the income associated withparticipating in “production activities” and with transferpayments (largely from the government).Minnesota’s Personal Income for calendar year (CY) 2011 (the most recent yearfor which detailed information is available) was $238.2billion, which can be broken into the following pieces 4 :Table 1: Major Components of BEAPersonal Income for Minnesota, CY 2011ComponentAmount ($000)$ billions% of TotalWages & Salaries %Dividends, Interest, & Rent %Transfer Receipts %Proprietor Income %Employers’ Pension and Insurance Contributions %Employee & Self-Employed Contributions to “Social Insurance”Programs; and Adjustment for Interstate Commuters(9.7)(4.1%)Total % Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment, Table SA04. While “wages and salaries” is self-evident, someof the other components merit further description:  Dividends, interest, and rent: represent income generatedbyassets, but not income from thesale ofassets (thisexcludes capital gains).  Transfer receipts: these are mostly government benefit payments toindividuals – examples include Social Securitypayments, the value of Medicare and Medicaidbenefits, and income maintenance benefits. 1 Seehttp://www.mmb.state.mn.us/supporting-documents-nov-12for the most recent Price of Government report, from the November2012 Economic Forecast. 2 Own source revenues: all state and local revenues less “intergovernmental revenues” – grants from one unit of government to another,such as state Local Government Aid given to cities. 3 Testimony before the Legislative Commission on Fiscal Policy, February 22, 2013 meeting. 4 All BEA personal income data in this publication are as of the September 25, 2012 update. Seewww.bea.govfor data.3 No. 0005|April 2013  Proprietor income: income generated by businesses for their owners.  Employer pension and insurance contributions: basically, employers’ costs for fringe benefits, except for SocialSecurity and Medicare.  The final portion represents employees’ and self-employed persons contributions to “social insurance programs” –mainly Social Security and Medicare – and an adjustmentfor net flow of income between Minnesota and otherstates based on commuting patterns. Since more non-residents earn income in Minnesota than Minnesotans earn inother states, the adjustment is negative.As these descriptions make clear, Minnesota’s $238 billion Personal Income amount includes many items that an averageMinnesotan would not think of as income that could be usedto pay taxes. And the average Minnesotan would be right.Personal Income includes non-money benefits and “imputed” income– the market value of selected transactions that don’toccur in the market economy and that cannot be used to paytaxes. Table 2 shows five major non-money income areas.Table 2: Five Major Non-Money Components of BEA Personal Income for Minnesota, CY 2011ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed interest %Imputed rent %Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35, and SA 40 As the table indicates, in 2011 non-money income – essentiallyirrelevant to assessing the tax price of state and localgovernment and evaluating its affordability – represented over 20cents of every dollar of Minnesota Personal Income. Thisis a major departure from the earliest days of Minnesota’s Price of Government. As Table 3 shows; in 1990, these fivepieces of non-money income were a much smaller share – 15.5%– of total Minnesota Personal Income. Most significantly,the share of government sponsored medical benefits has nearlydoubled over 20 years from 3.8% to 7.0% of state PersonalIncome.Table 3: Major Non-Money Components ofBEA Personal Income for Minnesota, CY 1990ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Imputed interest3.33.8%Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed rent0.30.3%Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35 and SA This is the value of investment income earned on life insurance and the value of services that depository institutions providewithoutan explicit charge for doing so. 6 This includes the value of things such as the rental value of owner-occupied housing, the value of farm products consumed at home bythe producers, and pay-in-kind in the form of meals and lodging.1 No. 0005|April 2013 AbstractSince the early 1990’s, the Minnesota Price of Government has been calculated tomeasure and track state and local government’s claim on Minnesota income. However,since its inception, the composition of Minnesota Personal Income – the denominator ofthe POG – has changed dramatically. 20 years ago, five major non-money componentsof Minnesota Personal Income – that taxpayerscannot use to pay taxes or fees or remit inany way to finance government – were roughly 15% of the total. Today those non-money components are over 20% of the total,which represents a shift of approximately$13 billion in Minnesota Personal Income frommoney to non-money income. Moreover,the fastest growing sources of Personal Incomegrowth are government transfer payments– including the value of Medicare and Medicaid benefits – which have grown over 2.5times faster than wages and salaries over the past decade.These findings have major ramifications for theinterpretation of the Price of Governmentmetric and its use in public policy debates. Including Personal Income in the POGunderstates state and local government’s claim on money income – which is 20%-35%higher when substituting the household income measure usedin the state’sTax IncidenceStudy.Moreover, trends in the composition ofPersonal Income and demographic trendssignificantly compromise its common use as ameasure to evaluate affordability orbenchmark a sustainable “level” of spending.If policymakers want to maintain a POG-type measure, the state should modify the current metric by replacing Minnesota PersonalIncome with some measure of money income.Even with this adaptation, we encouragecaution in using the POG to assess the affordability of government or set a “price target”for government because some of the major demographic factors and trends affectingincome will continue for the indefinite future. 2 No. 0005|April 2013 IntroductionFor nearly twenty years, the state’s Department of Management and Budget (MMB) has prepared a Price of Government(POG) report to accompany the November and February economic forecasts and following the conclusion of eachlegislative session. 1 The POG metric measures the ratio of state and local government own source revenues 2 to statewidePersonal Income. MMB staff have described the POG as “the state’s maintransparency method and tool forcommunicating the total cost of state and local government to citizens.” 3 Policymakers created the POG with broad-based political support, including the endorsement of Minnesota’s businesscommunity, because it was seen as a simple, straightforwardmetric to track state and local government’s claim onMinnesotans’ income. Because it is seemingly so easy to understand and interpret, the POG has inevitably served as anevidence point in debates over budgets and acceptable levels of governmenttaxation and spending.However, simple metrics can often mask underlying complexity,rendering interpretations of the metric problematic in theprocess. This is especially true whenmajor changes are taking place in the components of the metric, as has happened withMinnesota’s Price of Government.Specifically, two major trends have transformed MinnesotaPersonal Income since the POG was developed two decadesago. As a result, the use of the POGwith respect to both evaluating taxpayercost of state and local government andproviding time-series comparisons about the level of investment Minnesotans make in state and local government areseverely compromised.Trend #1 – Rapid Growth in Non-Money Incomeas a Share of Total Minnesota Personal Income“Personal Income” as determined by the U.S. Bureau of Economic Analysis (BEA) is an extremely broad measure. BEAeconomists designed it to capture the income associated withparticipating in “production activities” and with transferpayments (largely from the government).Minnesota’s Personal Income for calendar year (CY) 2011 (the most recent yearfor which detailed information is available) was $238.2billion, which can be broken into the following pieces 4 :Table 1: Major Components of BEAPersonal Income for Minnesota, CY 2011ComponentAmount ($000)$ billions% of TotalWages & Salaries %Dividends, Interest, & Rent %Transfer Receipts %Proprietor Income %Employers’ Pension and Insurance Contributions %Employee & Self-Employed Contributions to “Social Insurance”Programs; and Adjustment for Interstate Commuters(9.7)(4.1%)Total % Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment, Table SA04. While “wages and salaries” is self-evident, someof the other components merit further description:  Dividends, interest, and rent: represent income generatedbyassets, but not income from thesale ofassets (thisexcludes capital gains).  Transfer receipts: these are mostly government benefit payments toindividuals – examples include Social Securitypayments, the value of Medicare and Medicaidbenefits, and income maintenance benefits. 1 Seehttp://www.mmb.state.mn.us/supporting-documents-nov-12for the most recent Price of Government report, from the November2012 Economic Forecast. 2 Own source revenues: all state and local revenues less “intergovernmental revenues” – grants from one unit of government to another,such as state Local Government Aid given to cities. 3 Testimony before the Legislative Commission on Fiscal Policy, February 22, 2013 meeting. 4 All BEA personal income data in this publication are as of the September 25, 2012 update. Seewww.bea.govfor data.3 No. 0005|April 2013  Proprietor income: income generated by businesses for their owners.  Employer pension and insurance contributions: basically, employers’ costs for fringe benefits, except for SocialSecurity and Medicare.  The final portion represents employees’ and self-employed persons contributions to “social insurance programs” –mainly Social Security and Medicare – and an adjustmentfor net flow of income between Minnesota and otherstates based on commuting patterns. Since more non-residents earn income in Minnesota than Minnesotans earn inother states, the adjustment is negative.As these descriptions make clear, Minnesota’s $238 billion Personal Income amount includes many items that an averageMinnesotan would not think of as income that could be usedto pay taxes. And the average Minnesotan would be right.Personal Income includes non-money benefits and “imputed” income– the market value of selected transactions that don’toccur in the market economy and that cannot be used to paytaxes. Table 2 shows five major non-money income areas.Table 2: Five Major Non-Money Components of BEA Personal Income for Minnesota, CY 2011ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed interest %Imputed rent %Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35, and SA 40 As the table indicates, in 2011 non-money income – essentiallyirrelevant to assessing the tax price of state and localgovernment and evaluating its affordability – represented over 20cents of every dollar of Minnesota Personal Income. Thisis a major departure from the earliest days of Minnesota’s Price of Government. As Table 3 shows; in 1990, these fivepieces of non-money income were a much smaller share – 15.5%– of total Minnesota Personal Income. Most significantly,the share of government sponsored medical benefits has nearlydoubled over 20 years from 3.8% to 7.0% of state PersonalIncome.Table 3: Major Non-Money Components ofBEA Personal Income for Minnesota, CY 1990ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Imputed interest3.33.8%Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed rent0.30.3%Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35 and SA This is the value of investment income earned on life insurance and the value of services that depository institutions providewithoutan explicit charge for doing so. 6 This includes the value of things such as the rental value of owner-occupied housing, the value of farm products consumed at home bythe producers, and pay-in-kind in the form of meals and lodging. Assessment limitation analysis offers new value added Exploring new “median business” rankings for future editions Incorporated into economic development and tax studies across the nation “Invaluable…the gold standard for comparative property tax analysis” Dr. Donald Boyd, Senior Fellow, Rockefeller Institute of Government Research and Education Publications

6 1/12/ No. 0005|April 2013 Minnesota’s Troubled “Price of Government” AbstractSince the early 1990’s, the Minnesota Price of Government has been calculated tomeasure and track state and local government’s claim on Minnesota income. However,since its inception, the composition of Minnesota Personal Income – the denominator ofthe POG – has changed dramatically. 20 years ago, five major non-money componentsof Minnesota Personal Income – that taxpayerscannot use to pay taxes or fees or remit inany way to finance government – were roughly 15% of the total. Today those non-money components are over 20% of the total,which represents a shift of approximately$13 billion in Minnesota Personal Income frommoney to non-money income. Moreover,the fastest growing sources of Personal Incomegrowth are government transfer payments– including the value of Medicare and Medicaid benefits – which have grown over 2.5times faster than wages and salaries over the past decade.These findings have major ramifications for theinterpretation of the Price of Governmentmetric and its use in public policy debates. Including Personal Income in the POGunderstates state and local government’s claim on money income – which is 20%-35%higher when substituting the household income measure usedin the state’sTax IncidenceStudy.Moreover, trends in the composition ofPersonal Income and demographic trendssignificantly compromise its common use as ameasure to evaluate affordability orbenchmark a sustainable “level” of spending.If policymakers want to maintain a POG-type measure, the state should modify the current metric by replacing Minnesota PersonalIncome with some measure of money income.Even with this adaptation, we encouragecaution in using the POG to assess the affordability of government or set a “price target”for government because some of the major demographic factors and trends affectingincome will continue for the indefinite future. 2 No. 0005|April 2013 IntroductionFor nearly twenty years, the state’s Department of Management and Budget (MMB) has prepared a Price of Government(POG) report to accompany the November and February economic forecasts and following the conclusion of eachlegislative session. 1 The POG metric measures the ratio of state and local government own source revenues 2 to statewidePersonal Income. MMB staff have described the POG as “the state’s maintransparency method and tool forcommunicating the total cost of state and local government to citizens.” 3 Policymakers created the POG with broad-based political support, including the endorsement of Minnesota’s businesscommunity, because it was seen as a simple, straightforwardmetric to track state and local government’s claim onMinnesotans’ income. Because it is seemingly so easy to understand and interpret, the POG has inevitably served as anevidence point in debates over budgets and acceptable levels of governmenttaxation and spending.However, simple metrics can often mask underlying complexity,rendering interpretations of the metric problematic in theprocess. This is especially true whenmajor changes are taking place in the components of the metric, as has happened withMinnesota’s Price of Government.Specifically, two major trends have transformed MinnesotaPersonal Income since the POG was developed two decadesago. As a result, the use of the POGwith respect to both evaluating taxpayercost of state and local government andproviding time-series comparisons about the level of investment Minnesotans make in state and local government areseverely compromised.Trend #1 – Rapid Growth in Non-Money Incomeas a Share of Total Minnesota Personal Income“Personal Income” as determined by the U.S. Bureau of Economic Analysis (BEA) is an extremely broad measure. BEAeconomists designed it to capture the income associated withparticipating in “production activities” and with transferpayments (largely from the government).Minnesota’s Personal Income for calendar year (CY) 2011 (the most recent yearfor which detailed information is available) was $238.2billion, which can be broken into the following pieces 4 :Table 1: Major Components of BEAPersonal Income for Minnesota, CY 2011ComponentAmount ($000)$ billions% of TotalWages & Salaries %Dividends, Interest, & Rent %Transfer Receipts %Proprietor Income %Employers’ Pension and Insurance Contributions %Employee & Self-Employed Contributions to “Social Insurance”Programs; and Adjustment for Interstate Commuters(9.7)(4.1%)Total % Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment, Table SA04. While “wages and salaries” is self-evident, someof the other components merit further description:  Dividends, interest, and rent: represent income generatedbyassets, but not income from thesale ofassets (thisexcludes capital gains).  Transfer receipts: these are mostly government benefit payments toindividuals – examples include Social Securitypayments, the value of Medicare and Medicaidbenefits, and income maintenance benefits. 1 Seehttp://www.mmb.state.mn.us/supporting-documents-nov-12for the most recent Price of Government report, from the November2012 Economic Forecast. 2 Own source revenues: all state and local revenues less “intergovernmental revenues” – grants from one unit of government to another,such as state Local Government Aid given to cities. 3 Testimony before the Legislative Commission on Fiscal Policy, February 22, 2013 meeting. 4 All BEA personal income data in this publication are as of the September 25, 2012 update. Seewww.bea.govfor data.3 No. 0005|April 2013  Proprietor income: income generated by businesses for their owners.  Employer pension and insurance contributions: basically, employers’ costs for fringe benefits, except for SocialSecurity and Medicare.  The final portion represents employees’ and self-employed persons contributions to “social insurance programs” –mainly Social Security and Medicare – and an adjustmentfor net flow of income between Minnesota and otherstates based on commuting patterns. Since more non-residents earn income in Minnesota than Minnesotans earn inother states, the adjustment is negative.As these descriptions make clear, Minnesota’s $238 billion Personal Income amount includes many items that an averageMinnesotan would not think of as income that could be usedto pay taxes. And the average Minnesotan would be right.Personal Income includes non-money benefits and “imputed” income– the market value of selected transactions that don’toccur in the market economy and that cannot be used to paytaxes. Table 2 shows five major non-money income areas.Table 2: Five Major Non-Money Components of BEA Personal Income for Minnesota, CY 2011ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed interest %Imputed rent %Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35, and SA 40 As the table indicates, in 2011 non-money income – essentiallyirrelevant to assessing the tax price of state and localgovernment and evaluating its affordability – represented over 20cents of every dollar of Minnesota Personal Income. Thisis a major departure from the earliest days of Minnesota’s Price of Government. As Table 3 shows; in 1990, these fivepieces of non-money income were a much smaller share – 15.5%– of total Minnesota Personal Income. Most significantly,the share of government sponsored medical benefits has nearlydoubled over 20 years from 3.8% to 7.0% of state PersonalIncome.Table 3: Major Non-Money Components ofBEA Personal Income for Minnesota, CY 1990ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Imputed interest3.33.8%Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed rent0.30.3%Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35 and SA This is the value of investment income earned on life insurance and the value of services that depository institutions providewithoutan explicit charge for doing so. 6 This includes the value of things such as the rental value of owner-occupied housing, the value of farm products consumed at home bythe producers, and pay-in-kind in the form of meals and lodging.1 No. 0005|April 2013 Minnesota’s Troubled “Price of Government” AbstractSince the early 1990’s, the Minnesota Price of Government has been calculated tomeasure and track state and local government’s claim on Minnesota income. However,since its inception, the composition of Minnesota Personal Income – the denominator ofthe POG – has changed dramatically. 20 years ago, five major non-money componentsof Minnesota Personal Income – that taxpayerscannot use to pay taxes or fees or remit inany way to finance government – were roughly 15% of the total. Today those non-money components are over 20% of the total,which represents a shift of approximately$13 billion in Minnesota Personal Income frommoney to non-money income. Moreover,the fastest growing sources of Personal Incomegrowth are government transfer payments– including the value of Medicare and Medicaid benefits – which have grown over 2.5times faster than wages and salaries over the past decade.These findings have major ramifications for theinterpretation of the Price of Governmentmetric and its use in public policy debates. Including Personal Income in the POGunderstates state and local government’s claim on money income – which is 20%-35%higher when substituting the household income measure usedin the state’sTax IncidenceStudy.Moreover, trends in the composition ofPersonal Income and demographic trendssignificantly compromise its common use as ameasure to evaluate affordability orbenchmark a sustainable “level” of spending.If policymakers want to maintain a POG-type measure, the state should modify the current metric by replacing Minnesota PersonalIncome with some measure of money income.Even with this adaptation, we encouragecaution in using the POG to assess the affordability of government or set a “price target”for government because some of the major demographic factors and trends affectingincome will continue for the indefinite future. 2 No. 0005|April 2013 IntroductionFor nearly twenty years, the state’s Department of Management and Budget (MMB) has prepared a Price of Government(POG) report to accompany the November and February economic forecasts and following the conclusion of eachlegislative session. 1 The POG metric measures the ratio of state and local government own source revenues 2 to statewidePersonal Income. MMB staff have described the POG as “the state’s maintransparency method and tool forcommunicating the total cost of state and local government to citizens.” 3 Policymakers created the POG with broad-based political support, including the endorsement of Minnesota’s businesscommunity, because it was seen as a simple, straightforwardmetric to track state and local government’s claim onMinnesotans’ income. Because it is seemingly so easy to understand and interpret, the POG has inevitably served as anevidence point in debates over budgets and acceptable levels of governmenttaxation and spending.However, simple metrics can often mask underlying complexity,rendering interpretations of the metric problematic in theprocess. This is especially true whenmajor changes are taking place in the components of the metric, as has happened withMinnesota’s Price of Government.Specifically, two major trends have transformed MinnesotaPersonal Income since the POG was developed two decadesago. As a result, the use of the POGwith respect to both evaluating taxpayercost of state and local government andproviding time-series comparisons about the level of investment Minnesotans make in state and local government areseverely compromised.Trend #1 – Rapid Growth in Non-Money Incomeas a Share of Total Minnesota Personal Income“Personal Income” as determined by the U.S. Bureau of Economic Analysis (BEA) is an extremely broad measure. BEAeconomists designed it to capture the income associated withparticipating in “production activities” and with transferpayments (largely from the government).Minnesota’s Personal Income for calendar year (CY) 2011 (the most recent yearfor which detailed information is available) was $238.2billion, which can be broken into the following pieces 4 :Table 1: Major Components of BEAPersonal Income for Minnesota, CY 2011ComponentAmount ($000)$ billions% of TotalWages & Salaries %Dividends, Interest, & Rent %Transfer Receipts %Proprietor Income %Employers’ Pension and Insurance Contributions %Employee & Self-Employed Contributions to “Social Insurance”Programs; and Adjustment for Interstate Commuters(9.7)(4.1%)Total % Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment, Table SA04. While “wages and salaries” is self-evident, someof the other components merit further description:  Dividends, interest, and rent: represent income generatedbyassets, but not income from thesale ofassets (thisexcludes capital gains).  Transfer receipts: these are mostly government benefit payments toindividuals – examples include Social Securitypayments, the value of Medicare and Medicaidbenefits, and income maintenance benefits. 1 Seehttp://www.mmb.state.mn.us/supporting-documents-nov-12for the most recent Price of Government report, from the November2012 Economic Forecast. 2 Own source revenues: all state and local revenues less “intergovernmental revenues” – grants from one unit of government to another,such as state Local Government Aid given to cities. 3 Testimony before the Legislative Commission on Fiscal Policy, February 22, 2013 meeting. 4 All BEA personal income data in this publication are as of the September 25, 2012 update. Seewww.bea.govfor data.3 No. 0005|April 2013  Proprietor income: income generated by businesses for their owners.  Employer pension and insurance contributions: basically, employers’ costs for fringe benefits, except for SocialSecurity and Medicare.  The final portion represents employees’ and self-employed persons contributions to “social insurance programs” –mainly Social Security and Medicare – and an adjustmentfor net flow of income between Minnesota and otherstates based on commuting patterns. Since more non-residents earn income in Minnesota than Minnesotans earn inother states, the adjustment is negative.As these descriptions make clear, Minnesota’s $238 billion Personal Income amount includes many items that an averageMinnesotan would not think of as income that could be usedto pay taxes. And the average Minnesotan would be right.Personal Income includes non-money benefits and “imputed” income– the market value of selected transactions that don’toccur in the market economy and that cannot be used to paytaxes. Table 2 shows five major non-money income areas.Table 2: Five Major Non-Money Components of BEA Personal Income for Minnesota, CY 2011ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed interest %Imputed rent %Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35, and SA 40 As the table indicates, in 2011 non-money income – essentiallyirrelevant to assessing the tax price of state and localgovernment and evaluating its affordability – represented over 20cents of every dollar of Minnesota Personal Income. Thisis a major departure from the earliest days of Minnesota’s Price of Government. As Table 3 shows; in 1990, these fivepieces of non-money income were a much smaller share – 15.5%– of total Minnesota Personal Income. Most significantly,the share of government sponsored medical benefits has nearlydoubled over 20 years from 3.8% to 7.0% of state PersonalIncome.Table 3: Major Non-Money Components ofBEA Personal Income for Minnesota, CY 1990ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Imputed interest3.33.8%Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed rent0.30.3%Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35 and SA This is the value of investment income earned on life insurance and the value of services that depository institutions providewithoutan explicit charge for doing so. 6 This includes the value of things such as the rental value of owner-occupied housing, the value of farm products consumed at home bythe producers, and pay-in-kind in the form of meals and lodging.1 No. 0005|April 2013 Minnesota’s Troubled “Price of Government” AbstractSince the early 1990’s, the Minnesota Price of Government has been calculated tomeasure and track state and local government’s claim on Minnesota income. However,since its inception, the composition of Minnesota Personal Income – the denominator ofthe POG – has changed dramatically. 20 years ago, five major non-money componentsof Minnesota Personal Income – that taxpayerscannot use to pay taxes or fees or remit inany way to finance government – were roughly 15% of the total. Today those non-money components are over 20% of the total,which represents a shift of approximately$13 billion in Minnesota Personal Income frommoney to non-money income. Moreover,the fastest growing sources of Personal Incomegrowth are government transfer payments– including the value of Medicare and Medicaid benefits – which have grown over 2.5times faster than wages and salaries over the past decade.These findings have major ramifications for theinterpretation of the Price of Governmentmetric and its use in public policy debates. Including Personal Income in the POGunderstates state and local government’s claim on money income – which is 20%-35%higher when substituting the household income measure usedin the state’sTax IncidenceStudy.Moreover, trends in the composition ofPersonal Income and demographic trendssignificantly compromise its common use as ameasure to evaluate affordability orbenchmark a sustainable “level” of spending.If policymakers want to maintain a POG-type measure, the state should modify the current metric by replacing Minnesota PersonalIncome with some measure of money income.Even with this adaptation, we encouragecaution in using the POG to assess the affordability of government or set a “price target”for government because some of the major demographic factors and trends affectingincome will continue for the indefinite future. 2 No. 0005|April 2013 IntroductionFor nearly twenty years, the state’s Department of Management and Budget (MMB) has prepared a Price of Government(POG) report to accompany the November and February economic forecasts and following the conclusion of eachlegislative session. 1 The POG metric measures the ratio of state and local government own source revenues 2 to statewidePersonal Income. MMB staff have described the POG as “the state’s maintransparency method and tool forcommunicating the total cost of state and local government to citizens.” 3 Policymakers created the POG with broad-based political support, including the endorsement of Minnesota’s businesscommunity, because it was seen as a simple, straightforwardmetric to track state and local government’s claim onMinnesotans’ income. Because it is seemingly so easy to understand and interpret, the POG has inevitably served as anevidence point in debates over budgets and acceptable levels of governmenttaxation and spending.However, simple metrics can often mask underlying complexity,rendering interpretations of the metric problematic in theprocess. This is especially true whenmajor changes are taking place in the components of the metric, as has happened withMinnesota’s Price of Government.Specifically, two major trends have transformed MinnesotaPersonal Income since the POG was developed two decadesago. As a result, the use of the POGwith respect to both evaluating taxpayercost of state and local government andproviding time-series comparisons about the level of investment Minnesotans make in state and local government areseverely compromised.Trend #1 – Rapid Growth in Non-Money Incomeas a Share of Total Minnesota Personal Income“Personal Income” as determined by the U.S. Bureau of Economic Analysis (BEA) is an extremely broad measure. BEAeconomists designed it to capture the income associated withparticipating in “production activities” and with transferpayments (largely from the government).Minnesota’s Personal Income for calendar year (CY) 2011 (the most recent yearfor which detailed information is available) was $238.2billion, which can be broken into the following pieces 4 :Table 1: Major Components of BEAPersonal Income for Minnesota, CY 2011ComponentAmount ($000)$ billions% of TotalWages & Salaries %Dividends, Interest, & Rent %Transfer Receipts %Proprietor Income %Employers’ Pension and Insurance Contributions %Employee & Self-Employed Contributions to “Social Insurance”Programs; and Adjustment for Interstate Commuters(9.7)(4.1%)Total % Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment, Table SA04. While “wages and salaries” is self-evident, someof the other components merit further description:  Dividends, interest, and rent: represent income generatedbyassets, but not income from thesale ofassets (thisexcludes capital gains).  Transfer receipts: these are mostly government benefit payments toindividuals – examples include Social Securitypayments, the value of Medicare and Medicaidbenefits, and income maintenance benefits. 1 Seehttp://www.mmb.state.mn.us/supporting-documents-nov-12for the most recent Price of Government report, from the November2012 Economic Forecast. 2 Own source revenues: all state and local revenues less “intergovernmental revenues” – grants from one unit of government to another,such as state Local Government Aid given to cities. 3 Testimony before the Legislative Commission on Fiscal Policy, February 22, 2013 meeting. 4 All BEA personal income data in this publication are as of the September 25, 2012 update. Seewww.bea.govfor data.3 No. 0005|April 2013  Proprietor income: income generated by businesses for their owners.  Employer pension and insurance contributions: basically, employers’ costs for fringe benefits, except for SocialSecurity and Medicare.  The final portion represents employees’ and self-employed persons contributions to “social insurance programs” –mainly Social Security and Medicare – and an adjustmentfor net flow of income between Minnesota and otherstates based on commuting patterns. Since more non-residents earn income in Minnesota than Minnesotans earn inother states, the adjustment is negative.As these descriptions make clear, Minnesota’s $238 billion Personal Income amount includes many items that an averageMinnesotan would not think of as income that could be usedto pay taxes. And the average Minnesotan would be right.Personal Income includes non-money benefits and “imputed” income– the market value of selected transactions that don’toccur in the market economy and that cannot be used to paytaxes. Table 2 shows five major non-money income areas.Table 2: Five Major Non-Money Components of BEA Personal Income for Minnesota, CY 2011ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed interest %Imputed rent %Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35, and SA 40 As the table indicates, in 2011 non-money income – essentiallyirrelevant to assessing the tax price of state and localgovernment and evaluating its affordability – represented over 20cents of every dollar of Minnesota Personal Income. Thisis a major departure from the earliest days of Minnesota’s Price of Government. As Table 3 shows; in 1990, these fivepieces of non-money income were a much smaller share – 15.5%– of total Minnesota Personal Income. Most significantly,the share of government sponsored medical benefits has nearlydoubled over 20 years from 3.8% to 7.0% of state PersonalIncome.Table 3: Major Non-Money Components ofBEA Personal Income for Minnesota, CY 1990ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Imputed interest3.33.8%Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed rent0.30.3%Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35 and SA This is the value of investment income earned on life insurance and the value of services that depository institutions providewithoutan explicit charge for doing so. 6 This includes the value of things such as the rental value of owner-occupied housing, the value of farm products consumed at home bythe producers, and pay-in-kind in the form of meals and lodging.1 No. 0005|April 2013 Minnesota’s Troubled “Price of Government” AbstractSince the early 1990’s, the Minnesota Price of Government has been calculated tomeasure and track state and local government’s claim on Minnesota income. However,since its inception, the composition of Minnesota Personal Income – the denominator ofthe POG – has changed dramatically. 20 years ago, five major non-money componentsof Minnesota Personal Income – that taxpayerscannot use to pay taxes or fees or remit inany way to finance government – were roughly 15% of the total. Today those non-money components are over 20% of the total,which represents a shift of approximately$13 billion in Minnesota Personal Income frommoney to non-money income. Moreover,the fastest growing sources of Personal Incomegrowth are government transfer payments– including the value of Medicare and Medicaid benefits – which have grown over 2.5times faster than wages and salaries over the past decade.These findings have major ramifications for theinterpretation of the Price of Governmentmetric and its use in public policy debates. Including Personal Income in the POGunderstates state and local government’s claim on money income – which is 20%-35%higher when substituting the household income measure usedin the state’sTax IncidenceStudy.Moreover, trends in the composition ofPersonal Income and demographic trendssignificantly compromise its common use as ameasure to evaluate affordability orbenchmark a sustainable “level” of spending.If policymakers want to maintain a POG-type measure, the state should modify the current metric by replacing Minnesota PersonalIncome with some measure of money income.Even with this adaptation, we encouragecaution in using the POG to assess the affordability of government or set a “price target”for government because some of the major demographic factors and trends affectingincome will continue for the indefinite future. 2 No. 0005|April 2013 IntroductionFor nearly twenty years, the state’s Department of Management and Budget (MMB) has prepared a Price of Government(POG) report to accompany the November and February economic forecasts and following the conclusion of eachlegislative session. 1 The POG metric measures the ratio of state and local government own source revenues 2 to statewidePersonal Income. MMB staff have described the POG as “the state’s maintransparency method and tool forcommunicating the total cost of state and local government to citizens.” 3 Policymakers created the POG with broad-based political support, including the endorsement of Minnesota’s businesscommunity, because it was seen as a simple, straightforwardmetric to track state and local government’s claim onMinnesotans’ income. Because it is seemingly so easy to understand and interpret, the POG has inevitably served as anevidence point in debates over budgets and acceptable levels of governmenttaxation and spending.However, simple metrics can often mask underlying complexity,rendering interpretations of the metric problematic in theprocess. This is especially true whenmajor changes are taking place in the components of the metric, as has happened withMinnesota’s Price of Government.Specifically, two major trends have transformed MinnesotaPersonal Income since the POG was developed two decadesago. As a result, the use of the POGwith respect to both evaluating taxpayercost of state and local government andproviding time-series comparisons about the level of investment Minnesotans make in state and local government areseverely compromised.Trend #1 – Rapid Growth in Non-Money Incomeas a Share of Total Minnesota Personal Income“Personal Income” as determined by the U.S. Bureau of Economic Analysis (BEA) is an extremely broad measure. BEAeconomists designed it to capture the income associated withparticipating in “production activities” and with transferpayments (largely from the government).Minnesota’s Personal Income for calendar year (CY) 2011 (the most recent yearfor which detailed information is available) was $238.2billion, which can be broken into the following pieces 4 :Table 1: Major Components of BEAPersonal Income for Minnesota, CY 2011ComponentAmount ($000)$ billions% of TotalWages & Salaries %Dividends, Interest, & Rent %Transfer Receipts %Proprietor Income %Employers’ Pension and Insurance Contributions %Employee & Self-Employed Contributions to “Social Insurance”Programs; and Adjustment for Interstate Commuters(9.7)(4.1%)Total % Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment, Table SA04. While “wages and salaries” is self-evident, someof the other components merit further description:  Dividends, interest, and rent: represent income generatedbyassets, but not income from thesale ofassets (thisexcludes capital gains).  Transfer receipts: these are mostly government benefit payments toindividuals – examples include Social Securitypayments, the value of Medicare and Medicaidbenefits, and income maintenance benefits. 1 Seehttp://www.mmb.state.mn.us/supporting-documents-nov-12for the most recent Price of Government report, from the November2012 Economic Forecast. 2 Own source revenues: all state and local revenues less “intergovernmental revenues” – grants from one unit of government to another,such as state Local Government Aid given to cities. 3 Testimony before the Legislative Commission on Fiscal Policy, February 22, 2013 meeting. 4 All BEA personal income data in this publication are as of the September 25, 2012 update. Seewww.bea.govfor data.3 No. 0005|April 2013  Proprietor income: income generated by businesses for their owners.  Employer pension and insurance contributions: basically, employers’ costs for fringe benefits, except for SocialSecurity and Medicare.  The final portion represents employees’ and self-employed persons contributions to “social insurance programs” –mainly Social Security and Medicare – and an adjustmentfor net flow of income between Minnesota and otherstates based on commuting patterns. Since more non-residents earn income in Minnesota than Minnesotans earn inother states, the adjustment is negative.As these descriptions make clear, Minnesota’s $238 billion Personal Income amount includes many items that an averageMinnesotan would not think of as income that could be usedto pay taxes. And the average Minnesotan would be right.Personal Income includes non-money benefits and “imputed” income– the market value of selected transactions that don’toccur in the market economy and that cannot be used to paytaxes. Table 2 shows five major non-money income areas.Table 2: Five Major Non-Money Components of BEA Personal Income for Minnesota, CY 2011ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed interest %Imputed rent %Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35, and SA 40 As the table indicates, in 2011 non-money income – essentiallyirrelevant to assessing the tax price of state and localgovernment and evaluating its affordability – represented over 20cents of every dollar of Minnesota Personal Income. Thisis a major departure from the earliest days of Minnesota’s Price of Government. As Table 3 shows; in 1990, these fivepieces of non-money income were a much smaller share – 15.5%– of total Minnesota Personal Income. Most significantly,the share of government sponsored medical benefits has nearlydoubled over 20 years from 3.8% to 7.0% of state PersonalIncome.Table 3: Major Non-Money Components ofBEA Personal Income for Minnesota, CY 1990ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Imputed interest3.33.8%Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed rent0.30.3%Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35 and SA This is the value of investment income earned on life insurance and the value of services that depository institutions providewithoutan explicit charge for doing so. 6 This includes the value of things such as the rental value of owner-occupied housing, the value of farm products consumed at home bythe producers, and pay-in-kind in the form of meals and lodging.1 No. 0005|April 2013 Minnesota’s Troubled “Price of Government” AbstractSince the early 1990’s, the Minnesota Price of Government has been calculated tomeasure and track state and local government’s claim on Minnesota income. However,since its inception, the composition of Minnesota Personal Income – the denominator ofthe POG – has changed dramatically. 20 years ago, five major non-money componentsof Minnesota Personal Income – that taxpayerscannot use to pay taxes or fees or remit inany way to finance government – were roughly 15% of the total. Today those non-money components are over 20% of the total,which represents a shift of approximately$13 billion in Minnesota Personal Income frommoney to non-money income. Moreover,the fastest growing sources of Personal Incomegrowth are government transfer payments– including the value of Medicare and Medicaid benefits – which have grown over 2.5times faster than wages and salaries over the past decade.These findings have major ramifications for theinterpretation of the Price of Governmentmetric and its use in public policy debates. Including Personal Income in the POGunderstates state and local government’s claim on money income – which is 20%-35%higher when substituting the household income measure usedin the state’sTax IncidenceStudy.Moreover, trends in the composition ofPersonal Income and demographic trendssignificantly compromise its common use as ameasure to evaluate affordability orbenchmark a sustainable “level” of spending.If policymakers want to maintain a POG-type measure, the state should modify the current metric by replacing Minnesota PersonalIncome with some measure of money income.Even with this adaptation, we encouragecaution in using the POG to assess the affordability of government or set a “price target”for government because some of the major demographic factors and trends affectingincome will continue for the indefinite future. 2 No. 0005|April 2013 IntroductionFor nearly twenty years, the state’s Department of Management and Budget (MMB) has prepared a Price of Government(POG) report to accompany the November and February economic forecasts and following the conclusion of eachlegislative session. 1 The POG metric measures the ratio of state and local government own source revenues 2 to statewidePersonal Income. MMB staff have described the POG as “the state’s maintransparency method and tool forcommunicating the total cost of state and local government to citizens.” 3 Policymakers created the POG with broad-based political support, including the endorsement of Minnesota’s businesscommunity, because it was seen as a simple, straightforwardmetric to track state and local government’s claim onMinnesotans’ income. Because it is seemingly so easy to understand and interpret, the POG has inevitably served as anevidence point in debates over budgets and acceptable levels of governmenttaxation and spending.However, simple metrics can often mask underlying complexity,rendering interpretations of the metric problematic in theprocess. This is especially true whenmajor changes are taking place in the components of the metric, as has happened withMinnesota’s Price of Government.Specifically, two major trends have transformed MinnesotaPersonal Income since the POG was developed two decadesago. As a result, the use of the POGwith respect to both evaluating taxpayercost of state and local government andproviding time-series comparisons about the level of investment Minnesotans make in state and local government areseverely compromised.Trend #1 – Rapid Growth in Non-Money Incomeas a Share of Total Minnesota Personal Income“Personal Income” as determined by the U.S. Bureau of Economic Analysis (BEA) is an extremely broad measure. BEAeconomists designed it to capture the income associated withparticipating in “production activities” and with transferpayments (largely from the government).Minnesota’s Personal Income for calendar year (CY) 2011 (the most recent yearfor which detailed information is available) was $238.2billion, which can be broken into the following pieces 4 :Table 1: Major Components of BEAPersonal Income for Minnesota, CY 2011ComponentAmount ($000)$ billions% of TotalWages & Salaries %Dividends, Interest, & Rent %Transfer Receipts %Proprietor Income %Employers’ Pension and Insurance Contributions %Employee & Self-Employed Contributions to “Social Insurance”Programs; and Adjustment for Interstate Commuters(9.7)(4.1%)Total % Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment, Table SA04. While “wages and salaries” is self-evident, someof the other components merit further description:  Dividends, interest, and rent: represent income generatedbyassets, but not income from thesale ofassets (thisexcludes capital gains).  Transfer receipts: these are mostly government benefit payments toindividuals – examples include Social Securitypayments, the value of Medicare and Medicaidbenefits, and income maintenance benefits. 1 Seehttp://www.mmb.state.mn.us/supporting-documents-nov-12for the most recent Price of Government report, from the November2012 Economic Forecast. 2 Own source revenues: all state and local revenues less “intergovernmental revenues” – grants from one unit of government to another,such as state Local Government Aid given to cities. 3 Testimony before the Legislative Commission on Fiscal Policy, February 22, 2013 meeting. 4 All BEA personal income data in this publication are as of the September 25, 2012 update. Seewww.bea.govfor data.3 No. 0005|April 2013  Proprietor income: income generated by businesses for their owners.  Employer pension and insurance contributions: basically, employers’ costs for fringe benefits, except for SocialSecurity and Medicare.  The final portion represents employees’ and self-employed persons contributions to “social insurance programs” –mainly Social Security and Medicare – and an adjustmentfor net flow of income between Minnesota and otherstates based on commuting patterns. Since more non-residents earn income in Minnesota than Minnesotans earn inother states, the adjustment is negative.As these descriptions make clear, Minnesota’s $238 billion Personal Income amount includes many items that an averageMinnesotan would not think of as income that could be usedto pay taxes. And the average Minnesotan would be right.Personal Income includes non-money benefits and “imputed” income– the market value of selected transactions that don’toccur in the market economy and that cannot be used to paytaxes. Table 2 shows five major non-money income areas.Table 2: Five Major Non-Money Components of BEA Personal Income for Minnesota, CY 2011ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed interest %Imputed rent %Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35, and SA 40 As the table indicates, in 2011 non-money income – essentiallyirrelevant to assessing the tax price of state and localgovernment and evaluating its affordability – represented over 20cents of every dollar of Minnesota Personal Income. Thisis a major departure from the earliest days of Minnesota’s Price of Government. As Table 3 shows; in 1990, these fivepieces of non-money income were a much smaller share – 15.5%– of total Minnesota Personal Income. Most significantly,the share of government sponsored medical benefits has nearlydoubled over 20 years from 3.8% to 7.0% of state PersonalIncome.Table 3: Major Non-Money Components ofBEA Personal Income for Minnesota, CY 1990ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Imputed interest3.33.8%Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed rent0.30.3%Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35 and SA This is the value of investment income earned on life insurance and the value of services that depository institutions providewithoutan explicit charge for doing so. 6 This includes the value of things such as the rental value of owner-occupied housing, the value of farm products consumed at home bythe producers, and pay-in-kind in the form of meals and lodging.1 No. 0005|April 2013 Minnesota’s Troubled “Price of Government” AbstractSince the early 1990’s, the Minnesota Price of Government has been calculated tomeasure and track state and local government’s claim on Minnesota income. However,since its inception, the composition of Minnesota Personal Income – the denominator ofthe POG – has changed dramatically. 20 years ago, five major non-money componentsof Minnesota Personal Income – that taxpayerscannot use to pay taxes or fees or remit inany way to finance government – were roughly 15% of the total. Today those non-money components are over 20% of the total,which represents a shift of approximately$13 billion in Minnesota Personal Income frommoney to non-money income. Moreover,the fastest growing sources of Personal Incomegrowth are government transfer payments– including the value of Medicare and Medicaid benefits – which have grown over 2.5times faster than wages and salaries over the past decade.These findings have major ramifications for theinterpretation of the Price of Governmentmetric and its use in public policy debates. Including Personal Income in the POGunderstates state and local government’s claim on money income – which is 20%-35%higher when substituting the household income measure usedin the state’sTax IncidenceStudy.Moreover, trends in the composition ofPersonal Income and demographic trendssignificantly compromise its common use as ameasure to evaluate affordability orbenchmark a sustainable “level” of spending.If policymakers want to maintain a POG-type measure, the state should modify the current metric by replacing Minnesota PersonalIncome with some measure of money income.Even with this adaptation, we encouragecaution in using the POG to assess the affordability of government or set a “price target”for government because some of the major demographic factors and trends affectingincome will continue for the indefinite future. 2 No. 0005|April 2013 IntroductionFor nearly twenty years, the state’s Department of Management and Budget (MMB) has prepared a Price of Government(POG) report to accompany the November and February economic forecasts and following the conclusion of eachlegislative session. 1 The POG metric measures the ratio of state and local government own source revenues 2 to statewidePersonal Income. MMB staff have described the POG as “the state’s maintransparency method and tool forcommunicating the total cost of state and local government to citizens.” 3 Policymakers created the POG with broad-based political support, including the endorsement of Minnesota’s businesscommunity, because it was seen as a simple, straightforwardmetric to track state and local government’s claim onMinnesotans’ income. Because it is seemingly so easy to understand and interpret, the POG has inevitably served as anevidence point in debates over budgets and acceptable levels of governmenttaxation and spending.However, simple metrics can often mask underlying complexity,rendering interpretations of the metric problematic in theprocess. This is especially true whenmajor changes are taking place in the components of the metric, as has happened withMinnesota’s Price of Government.Specifically, two major trends have transformed MinnesotaPersonal Income since the POG was developed two decadesago. As a result, the use of the POGwith respect to both evaluating taxpayercost of state and local government andproviding time-series comparisons about the level of investment Minnesotans make in state and local government areseverely compromised.Trend #1 – Rapid Growth in Non-Money Incomeas a Share of Total Minnesota Personal Income“Personal Income” as determined by the U.S. Bureau of Economic Analysis (BEA) is an extremely broad measure. BEAeconomists designed it to capture the income associated withparticipating in “production activities” and with transferpayments (largely from the government).Minnesota’s Personal Income for calendar year (CY) 2011 (the most recent yearfor which detailed information is available) was $238.2billion, which can be broken into the following pieces 4 :Table 1: Major Components of BEAPersonal Income for Minnesota, CY 2011ComponentAmount ($000)$ billions% of TotalWages & Salaries %Dividends, Interest, & Rent %Transfer Receipts %Proprietor Income %Employers’ Pension and Insurance Contributions %Employee & Self-Employed Contributions to “Social Insurance”Programs; and Adjustment for Interstate Commuters(9.7)(4.1%)Total % Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment, Table SA04. While “wages and salaries” is self-evident, someof the other components merit further description:  Dividends, interest, and rent: represent income generatedbyassets, but not income from thesale ofassets (thisexcludes capital gains).  Transfer receipts: these are mostly government benefit payments toindividuals – examples include Social Securitypayments, the value of Medicare and Medicaidbenefits, and income maintenance benefits. 1 Seehttp://www.mmb.state.mn.us/supporting-documents-nov-12for the most recent Price of Government report, from the November2012 Economic Forecast. 2 Own source revenues: all state and local revenues less “intergovernmental revenues” – grants from one unit of government to another,such as state Local Government Aid given to cities. 3 Testimony before the Legislative Commission on Fiscal Policy, February 22, 2013 meeting. 4 All BEA personal income data in this publication are as of the September 25, 2012 update. Seewww.bea.govfor data.3 No. 0005|April 2013  Proprietor income: income generated by businesses for their owners.  Employer pension and insurance contributions: basically, employers’ costs for fringe benefits, except for SocialSecurity and Medicare.  The final portion represents employees’ and self-employed persons contributions to “social insurance programs” –mainly Social Security and Medicare – and an adjustmentfor net flow of income between Minnesota and otherstates based on commuting patterns. Since more non-residents earn income in Minnesota than Minnesotans earn inother states, the adjustment is negative.As these descriptions make clear, Minnesota’s $238 billion Personal Income amount includes many items that an averageMinnesotan would not think of as income that could be usedto pay taxes. And the average Minnesotan would be right.Personal Income includes non-money benefits and “imputed” income– the market value of selected transactions that don’toccur in the market economy and that cannot be used to paytaxes. Table 2 shows five major non-money income areas.Table 2: Five Major Non-Money Components of BEA Personal Income for Minnesota, CY 2011ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed interest %Imputed rent %Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35, and SA 40 As the table indicates, in 2011 non-money income – essentiallyirrelevant to assessing the tax price of state and localgovernment and evaluating its affordability – represented over 20cents of every dollar of Minnesota Personal Income. Thisis a major departure from the earliest days of Minnesota’s Price of Government. As Table 3 shows; in 1990, these fivepieces of non-money income were a much smaller share – 15.5%– of total Minnesota Personal Income. Most significantly,the share of government sponsored medical benefits has nearlydoubled over 20 years from 3.8% to 7.0% of state PersonalIncome.Table 3: Major Non-Money Components ofBEA Personal Income for Minnesota, CY 1990ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Imputed interest3.33.8%Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed rent0.30.3%Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35 and SA This is the value of investment income earned on life insurance and the value of services that depository institutions providewithoutan explicit charge for doing so. 6 This includes the value of things such as the rental value of owner-occupied housing, the value of farm products consumed at home bythe producers, and pay-in-kind in the form of meals and lodging.1 No. 0005|April 2013 Minnesota’s Troubled “Price of Government” AbstractSince the early 1990’s, the Minnesota Price of Government has been calculated tomeasure and track state and local government’s claim on Minnesota income. However,since its inception, the composition of Minnesota Personal Income – the denominator ofthe POG – has changed dramatically. 20 years ago, five major non-money componentsof Minnesota Personal Income – that taxpayerscannot use to pay taxes or fees or remit inany way to finance government – were roughly 15% of the total. Today those non-money components are over 20% of the total,which represents a shift of approximately$13 billion in Minnesota Personal Income frommoney to non-money income. Moreover,the fastest growing sources of Personal Incomegrowth are government transfer payments– including the value of Medicare and Medicaid benefits – which have grown over 2.5times faster than wages and salaries over the past decade.These findings have major ramifications for theinterpretation of the Price of Governmentmetric and its use in public policy debates. Including Personal Income in the POGunderstates state and local government’s claim on money income – which is 20%-35%higher when substituting the household income measure usedin the state’sTax IncidenceStudy.Moreover, trends in the composition ofPersonal Income and demographic trendssignificantly compromise its common use as ameasure to evaluate affordability orbenchmark a sustainable “level” of spending.If policymakers want to maintain a POG-type measure, the state should modify the current metric by replacing Minnesota PersonalIncome with some measure of money income.Even with this adaptation, we encouragecaution in using the POG to assess the affordability of government or set a “price target”for government because some of the major demographic factors and trends affectingincome will continue for the indefinite future. 2 No. 0005|April 2013 IntroductionFor nearly twenty years, the state’s Department of Management and Budget (MMB) has prepared a Price of Government(POG) report to accompany the November and February economic forecasts and following the conclusion of eachlegislative session. 1 The POG metric measures the ratio of state and local government own source revenues 2 to statewidePersonal Income. MMB staff have described the POG as “the state’s maintransparency method and tool forcommunicating the total cost of state and local government to citizens.” 3 Policymakers created the POG with broad-based political support, including the endorsement of Minnesota’s businesscommunity, because it was seen as a simple, straightforwardmetric to track state and local government’s claim onMinnesotans’ income. Because it is seemingly so easy to understand and interpret, the POG has inevitably served as anevidence point in debates over budgets and acceptable levels of governmenttaxation and spending.However, simple metrics can often mask underlying complexity,rendering interpretations of the metric problematic in theprocess. This is especially true whenmajor changes are taking place in the components of the metric, as has happened withMinnesota’s Price of Government.Specifically, two major trends have transformed MinnesotaPersonal Income since the POG was developed two decadesago. As a result, the use of the POGwith respect to both evaluating taxpayercost of state and local government andproviding time-series comparisons about the level of investment Minnesotans make in state and local government areseverely compromised.Trend #1 – Rapid Growth in Non-Money Incomeas a Share of Total Minnesota Personal Income“Personal Income” as determined by the U.S. Bureau of Economic Analysis (BEA) is an extremely broad measure. BEAeconomists designed it to capture the income associated withparticipating in “production activities” and with transferpayments (largely from the government).Minnesota’s Personal Income for calendar year (CY) 2011 (the most recent yearfor which detailed information is available) was $238.2billion, which can be broken into the following pieces 4 :Table 1: Major Components of BEAPersonal Income for Minnesota, CY 2011ComponentAmount ($000)$ billions% of TotalWages & Salaries %Dividends, Interest, & Rent %Transfer Receipts %Proprietor Income %Employers’ Pension and Insurance Contributions %Employee & Self-Employed Contributions to “Social Insurance”Programs; and Adjustment for Interstate Commuters(9.7)(4.1%)Total % Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment, Table SA04. While “wages and salaries” is self-evident, someof the other components merit further description:  Dividends, interest, and rent: represent income generatedbyassets, but not income from thesale ofassets (thisexcludes capital gains).  Transfer receipts: these are mostly government benefit payments toindividuals – examples include Social Securitypayments, the value of Medicare and Medicaidbenefits, and income maintenance benefits. 1 Seehttp://www.mmb.state.mn.us/supporting-documents-nov-12for the most recent Price of Government report, from the November2012 Economic Forecast. 2 Own source revenues: all state and local revenues less “intergovernmental revenues” – grants from one unit of government to another,such as state Local Government Aid given to cities. 3 Testimony before the Legislative Commission on Fiscal Policy, February 22, 2013 meeting. 4 All BEA personal income data in this publication are as of the September 25, 2012 update. Seewww.bea.govfor data.3 No. 0005|April 2013  Proprietor income: income generated by businesses for their owners.  Employer pension and insurance contributions: basically, employers’ costs for fringe benefits, except for SocialSecurity and Medicare.  The final portion represents employees’ and self-employed persons contributions to “social insurance programs” –mainly Social Security and Medicare – and an adjustmentfor net flow of income between Minnesota and otherstates based on commuting patterns. Since more non-residents earn income in Minnesota than Minnesotans earn inother states, the adjustment is negative.As these descriptions make clear, Minnesota’s $238 billion Personal Income amount includes many items that an averageMinnesotan would not think of as income that could be usedto pay taxes. And the average Minnesotan would be right.Personal Income includes non-money benefits and “imputed” income– the market value of selected transactions that don’toccur in the market economy and that cannot be used to paytaxes. Table 2 shows five major non-money income areas.Table 2: Five Major Non-Money Components of BEA Personal Income for Minnesota, CY 2011ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed interest %Imputed rent %Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35, and SA 40 As the table indicates, in 2011 non-money income – essentiallyirrelevant to assessing the tax price of state and localgovernment and evaluating its affordability – represented over 20cents of every dollar of Minnesota Personal Income. Thisis a major departure from the earliest days of Minnesota’s Price of Government. As Table 3 shows; in 1990, these fivepieces of non-money income were a much smaller share – 15.5%– of total Minnesota Personal Income. Most significantly,the share of government sponsored medical benefits has nearlydoubled over 20 years from 3.8% to 7.0% of state PersonalIncome.Table 3: Major Non-Money Components ofBEA Personal Income for Minnesota, CY 1990ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Imputed interest3.33.8%Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed rent0.30.3%Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35 and SA This is the value of investment income earned on life insurance and the value of services that depository institutions providewithoutan explicit charge for doing so. 6 This includes the value of things such as the rental value of owner-occupied housing, the value of farm products consumed at home bythe producers, and pay-in-kind in the form of meals and lodging.1 No. 0005|April 2013 Minnesota’s Troubled “Price of Government” AbstractSince the early 1990’s, the Minnesota Price of Government has been calculated tomeasure and track state and local government’s claim on Minnesota income. However,since its inception, the composition of Minnesota Personal Income – the denominator ofthe POG – has changed dramatically. 20 years ago, five major non-money componentsof Minnesota Personal Income – that taxpayerscannot use to pay taxes or fees or remit inany way to finance government – were roughly 15% of the total. Today those non-money components are over 20% of the total,which represents a shift of approximately$13 billion in Minnesota Personal Income frommoney to non-money income. Moreover,the fastest growing sources of Personal Incomegrowth are government transfer payments– including the value of Medicare and Medicaid benefits – which have grown over 2.5times faster than wages and salaries over the past decade.These findings have major ramifications for theinterpretation of the Price of Governmentmetric and its use in public policy debates. Including Personal Income in the POGunderstates state and local government’s claim on money income – which is 20%-35%higher when substituting the household income measure usedin the state’sTax IncidenceStudy.Moreover, trends in the composition ofPersonal Income and demographic trendssignificantly compromise its common use as ameasure to evaluate affordability orbenchmark a sustainable “level” of spending.If policymakers want to maintain a POG-type measure, the state should modify the current metric by replacing Minnesota PersonalIncome with some measure of money income.Even with this adaptation, we encouragecaution in using the POG to assess the affordability of government or set a “price target”for government because some of the major demographic factors and trends affectingincome will continue for the indefinite future. 2 No. 0005|April 2013 IntroductionFor nearly twenty years, the state’s Department of Management and Budget (MMB) has prepared a Price of Government(POG) report to accompany the November and February economic forecasts and following the conclusion of eachlegislative session. 1 The POG metric measures the ratio of state and local government own source revenues 2 to statewidePersonal Income. MMB staff have described the POG as “the state’s maintransparency method and tool forcommunicating the total cost of state and local government to citizens.” 3 Policymakers created the POG with broad-based political support, including the endorsement of Minnesota’s businesscommunity, because it was seen as a simple, straightforwardmetric to track state and local government’s claim onMinnesotans’ income. Because it is seemingly so easy to understand and interpret, the POG has inevitably served as anevidence point in debates over budgets and acceptable levels of governmenttaxation and spending.However, simple metrics can often mask underlying complexity,rendering interpretations of the metric problematic in theprocess. This is especially true whenmajor changes are taking place in the components of the metric, as has happened withMinnesota’s Price of Government.Specifically, two major trends have transformed MinnesotaPersonal Income since the POG was developed two decadesago. As a result, the use of the POGwith respect to both evaluating taxpayercost of state and local government andproviding time-series comparisons about the level of investment Minnesotans make in state and local government areseverely compromised.Trend #1 – Rapid Growth in Non-Money Incomeas a Share of Total Minnesota Personal Income“Personal Income” as determined by the U.S. Bureau of Economic Analysis (BEA) is an extremely broad measure. BEAeconomists designed it to capture the income associated withparticipating in “production activities” and with transferpayments (largely from the government).Minnesota’s Personal Income for calendar year (CY) 2011 (the most recent yearfor which detailed information is available) was $238.2billion, which can be broken into the following pieces 4 :Table 1: Major Components of BEAPersonal Income for Minnesota, CY 2011ComponentAmount ($000)$ billions% of TotalWages & Salaries %Dividends, Interest, & Rent %Transfer Receipts %Proprietor Income %Employers’ Pension and Insurance Contributions %Employee & Self-Employed Contributions to “Social Insurance”Programs; and Adjustment for Interstate Commuters(9.7)(4.1%)Total % Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment, Table SA04. While “wages and salaries” is self-evident, someof the other components merit further description:  Dividends, interest, and rent: represent income generatedbyassets, but not income from thesale ofassets (thisexcludes capital gains).  Transfer receipts: these are mostly government benefit payments toindividuals – examples include Social Securitypayments, the value of Medicare and Medicaidbenefits, and income maintenance benefits. 1 Seehttp://www.mmb.state.mn.us/supporting-documents-nov-12for the most recent Price of Government report, from the November2012 Economic Forecast. 2 Own source revenues: all state and local revenues less “intergovernmental revenues” – grants from one unit of government to another,such as state Local Government Aid given to cities. 3 Testimony before the Legislative Commission on Fiscal Policy, February 22, 2013 meeting. 4 All BEA personal income data in this publication are as of the September 25, 2012 update. Seewww.bea.govfor data.3 No. 0005|April 2013  Proprietor income: income generated by businesses for their owners.  Employer pension and insurance contributions: basically, employers’ costs for fringe benefits, except for SocialSecurity and Medicare.  The final portion represents employees’ and self-employed persons contributions to “social insurance programs” –mainly Social Security and Medicare – and an adjustmentfor net flow of income between Minnesota and otherstates based on commuting patterns. Since more non-residents earn income in Minnesota than Minnesotans earn inother states, the adjustment is negative.As these descriptions make clear, Minnesota’s $238 billion Personal Income amount includes many items that an averageMinnesotan would not think of as income that could be usedto pay taxes. And the average Minnesotan would be right.Personal Income includes non-money benefits and “imputed” income– the market value of selected transactions that don’toccur in the market economy and that cannot be used to paytaxes. Table 2 shows five major non-money income areas.Table 2: Five Major Non-Money Components of BEA Personal Income for Minnesota, CY 2011ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed interest %Imputed rent %Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35, and SA 40 As the table indicates, in 2011 non-money income – essentiallyirrelevant to assessing the tax price of state and localgovernment and evaluating its affordability – represented over 20cents of every dollar of Minnesota Personal Income. Thisis a major departure from the earliest days of Minnesota’s Price of Government. As Table 3 shows; in 1990, these fivepieces of non-money income were a much smaller share – 15.5%– of total Minnesota Personal Income. Most significantly,the share of government sponsored medical benefits has nearlydoubled over 20 years from 3.8% to 7.0% of state PersonalIncome.Table 3: Major Non-Money Components ofBEA Personal Income for Minnesota, CY 1990ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Imputed interest3.33.8%Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed rent0.30.3%Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35 and SA This is the value of investment income earned on life insurance and the value of services that depository institutions providewithoutan explicit charge for doing so. 6 This includes the value of things such as the rental value of owner-occupied housing, the value of farm products consumed at home bythe producers, and pay-in-kind in the form of meals and lodging.1 No. 0005|April 2013 Minnesota’s Troubled “Price of Government” AbstractSince the early 1990’s, the Minnesota Price of Government has been calculated tomeasure and track state and local government’s claim on Minnesota income. However,since its inception, the composition of Minnesota Personal Income – the denominator ofthe POG – has changed dramatically. 20 years ago, five major non-money componentsof Minnesota Personal Income – that taxpayerscannot use to pay taxes or fees or remit inany way to finance government – were roughly 15% of the total. Today those non-money components are over 20% of the total,which represents a shift of approximately$13 billion in Minnesota Personal Income frommoney to non-money income. Moreover,the fastest growing sources of Personal Incomegrowth are government transfer payments– including the value of Medicare and Medicaid benefits – which have grown over 2.5times faster than wages and salaries over the past decade.These findings have major ramifications for theinterpretation of the Price of Governmentmetric and its use in public policy debates. Including Personal Income in the POGunderstates state and local government’s claim on money income – which is 20%-35%higher when substituting the household income measure usedin the state’sTax IncidenceStudy.Moreover, trends in the composition ofPersonal Income and demographic trendssignificantly compromise its common use as ameasure to evaluate affordability orbenchmark a sustainable “level” of spending.If policymakers want to maintain a POG-type measure, the state should modify the current metric by replacing Minnesota PersonalIncome with some measure of money income.Even with this adaptation, we encouragecaution in using the POG to assess the affordability of government or set a “price target”for government because some of the major demographic factors and trends affectingincome will continue for the indefinite future. 2 No. 0005|April 2013 IntroductionFor nearly twenty years, the state’s Department of Management and Budget (MMB) has prepared a Price of Government(POG) report to accompany the November and February economic forecasts and following the conclusion of eachlegislative session. 1 The POG metric measures the ratio of state and local government own source revenues 2 to statewidePersonal Income. MMB staff have described the POG as “the state’s maintransparency method and tool forcommunicating the total cost of state and local government to citizens.” 3 Policymakers created the POG with broad-based political support, including the endorsement of Minnesota’s businesscommunity, because it was seen as a simple, straightforwardmetric to track state and local government’s claim onMinnesotans’ income. Because it is seemingly so easy to understand and interpret, the POG has inevitably served as anevidence point in debates over budgets and acceptable levels of governmenttaxation and spending.However, simple metrics can often mask underlying complexity,rendering interpretations of the metric problematic in theprocess. This is especially true whenmajor changes are taking place in the components of the metric, as has happened withMinnesota’s Price of Government.Specifically, two major trends have transformed MinnesotaPersonal Income since the POG was developed two decadesago. As a result, the use of the POGwith respect to both evaluating taxpayercost of state and local government andproviding time-series comparisons about the level of investment Minnesotans make in state and local government areseverely compromised.Trend #1 – Rapid Growth in Non-Money Incomeas a Share of Total Minnesota Personal Income“Personal Income” as determined by the U.S. Bureau of Economic Analysis (BEA) is an extremely broad measure. BEAeconomists designed it to capture the income associated withparticipating in “production activities” and with transferpayments (largely from the government).Minnesota’s Personal Income for calendar year (CY) 2011 (the most recent yearfor which detailed information is available) was $238.2billion, which can be broken into the following pieces 4 :Table 1: Major Components of BEAPersonal Income for Minnesota, CY 2011ComponentAmount ($000)$ billions% of TotalWages & Salaries %Dividends, Interest, & Rent %Transfer Receipts %Proprietor Income %Employers’ Pension and Insurance Contributions %Employee & Self-Employed Contributions to “Social Insurance”Programs; and Adjustment for Interstate Commuters(9.7)(4.1%)Total % Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment, Table SA04. While “wages and salaries” is self-evident, someof the other components merit further description:  Dividends, interest, and rent: represent income generatedbyassets, but not income from thesale ofassets (thisexcludes capital gains).  Transfer receipts: these are mostly government benefit payments toindividuals – examples include Social Securitypayments, the value of Medicare and Medicaidbenefits, and income maintenance benefits. 1 Seehttp://www.mmb.state.mn.us/supporting-documents-nov-12for the most recent Price of Government report, from the November2012 Economic Forecast. 2 Own source revenues: all state and local revenues less “intergovernmental revenues” – grants from one unit of government to another,such as state Local Government Aid given to cities. 3 Testimony before the Legislative Commission on Fiscal Policy, February 22, 2013 meeting. 4 All BEA personal income data in this publication are as of the September 25, 2012 update. Seewww.bea.govfor data.3 No. 0005|April 2013  Proprietor income: income generated by businesses for their owners.  Employer pension and insurance contributions: basically, employers’ costs for fringe benefits, except for SocialSecurity and Medicare.  The final portion represents employees’ and self-employed persons contributions to “social insurance programs” –mainly Social Security and Medicare – and an adjustmentfor net flow of income between Minnesota and otherstates based on commuting patterns. Since more non-residents earn income in Minnesota than Minnesotans earn inother states, the adjustment is negative.As these descriptions make clear, Minnesota’s $238 billion Personal Income amount includes many items that an averageMinnesotan would not think of as income that could be usedto pay taxes. And the average Minnesotan would be right.Personal Income includes non-money benefits and “imputed” income– the market value of selected transactions that don’toccur in the market economy and that cannot be used to paytaxes. Table 2 shows five major non-money income areas.Table 2: Five Major Non-Money Components of BEA Personal Income for Minnesota, CY 2011ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed interest %Imputed rent %Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35, and SA 40 As the table indicates, in 2011 non-money income – essentiallyirrelevant to assessing the tax price of state and localgovernment and evaluating its affordability – represented over 20cents of every dollar of Minnesota Personal Income. Thisis a major departure from the earliest days of Minnesota’s Price of Government. As Table 3 shows; in 1990, these fivepieces of non-money income were a much smaller share – 15.5%– of total Minnesota Personal Income. Most significantly,the share of government sponsored medical benefits has nearlydoubled over 20 years from 3.8% to 7.0% of state PersonalIncome.Table 3: Major Non-Money Components ofBEA Personal Income for Minnesota, CY 1990ComponentAmount$ billions% of TotalEmployers’ Pension and Insurance Contributions %Imputed interest3.33.8%Value of government sponsored medical benefits(mainly Medicare and Medicaid) %Imputed rent0.30.3%Transfers to nonprofit institutions %Total % Note: Numbers may not add due to rounding.Source: Bureau of Economic AnalysisAnnual State Personal Income and Employment;Tables SA 04, SA 35 and SA This is the value of investment income earned on life insurance and the value of services that depository institutions providewithoutan explicit charge for doing so. 6 This includes the value of things such as the rental value of owner-occupied housing, the value of farm products consumed at home bythe producers, and pay-in-kind in the form of meals and lodging. I Research and Education Publications Lincoln Institute of Land Policy Working Paper Series: “Evaluating the Accuracy of American Community Survey Data on Housing Values and Property Taxes”

7 1/12/2012 Analysis and Commentary Fiscal Focus features have included: Why Minnesota’s tax policy demands a very healthy budget reserve A look at the stability and balance of the state and local revenue system post 2013 How Minnesota’s health and human service safety net compares to other states How a $17 billion pension deficit came into existence An examination of the economic status and performance of rural Minnesota Plus: Session analysis and recaps Tax practitioner features on inversions and federal conformity

8 1/12/2012 Session Information Five editions issued bi-weekly during this past session Bill introductions, session commentary, and updates on tax and fiscal committee developments

9 1/12/2012 Advocacy and Public Communications Legislative testimony Radio features Newspaper editorials and opinion pages State Tax Notes Public and professional presentations including COST Tax Executives Institute Institute for Professionals in Taxation MN Government Finance Officers Association

10 1/12/2012 Almost 8,000 unique visitors over half of which return; over a quarter regularly Over 33,000 page views

11 1/12/2012 “Coming Attractions” in “Framing the 2015 Budget Debate” A series of articles, blog posts and op-eds examining various reports and analyses which heavily influence public perception of budgets and budget trends Recommendations for upgrading Minnesota’s “Price of Government” report Use and misuse of price indexes in examining real revenue and spending trends Questions that deserve to be answered before putting inflation formally back in the forecast. Fully Revamped “Understanding your Property Taxes” based on our government transparency work Anticipated Releases in 2015 Session K-12 finance and cost trends since the Big Plan Examination of value capture strategies for transportation finance Examination of Minnesota’s “Local Price of Government” Examination of interest arbitration history

12 1/12/2012 Looking Forward Multistate individual income tax comparison study – the nation’s only effective individual income tax rate study -- capturing effects of 2013 changes Updating our 2013 study on state competitiveness

13 1/12/2012 Looking Forward – Key Administrative Initiatives Continue to build up the MCFE membership base Continue to seek ways to strengthen MCFE activities and services supporting tax professionals Reinforce organizational relationships to extend the reach of our work Reinvest in the Minnesota Foundation for Fiscal Excellence Expand the MCFE Operations and Strategy Committee Help Set the Agenda for Your Organization

14 1/12/2012 QUESTIONS? Thank you for your continuing support of Sound Tax Policy, Efficient Spending, and Accountable Government in our state


Download ppt "1/12/2012 Executive Director’s Report 88 TH ANNUAL MEETING OF MEMBERS 10.8.14."

Similar presentations


Ads by Google