Minnesota Could be a Guide to Solving Income Inequality

March 2nd 2015

Ashley Nicole Black

Minnesota is in great shape lately, and the state could provide a national blueprint for dealing with income inequality. Minnesota Gov. Mark Dayton's actions are very similar to the plan for growth suggested in the President's economic report, which argued for investments in education and infrastructure, cutting taxes on middle class families, and increasing taxes on higher earners. And it seems to be working pretty well.

When Dayton took office, Minnesota was in rough shape. Under his predecessor, Gov. Tim Pawlenty, who prided himself on never raising taxes, the state had a 7 percent unemployment rate, a $6.2 billion budget deficit, and added only 6,200 jobs between 2003 and 2010. When Dayton took office in 2011, he raised the state income tax on people making more than $150,000 a year and raised the minimum wage (and also passed a law guaranteeing women equal pay). 

Dayton's results speak for themselves. Between 2011 and 2015, the unemployment rate dropped to 3.6 percent, Minnesota now has a $1 billion budget surplus, and the state has added 172,000 new jobs. Minnesota's economy is the fifth fastest growing in the U.S. -- with the fourth highest tax rate and the fifth lowest unemployment rate.

The Atlantic's Derek Thompson points out that in 2014 economists at Harvard and Berkeley found Minneapolis to be one of the top 10 cities for intergenerational mobility (the ability for a child born into a low-income family to move into the middle class or above). Minnesota had two laws in place that lead to its long-term economic success. In 1971, Minnesota implemented what is called "fiscal equalization." Half of each local government's tax revenues are put into a regional pool and redistributed to tax-poor municipalities. The state also passed a law in 1976 requiring local governments to create affordable, low-income housing. These two laws combined with Dayton's policies created an environment very friendly to the middle class. They are able to find good jobs and affordable housing in a variety of neighborhoods. This allows them to build wealth, which, in turn, makes the Twin Cities attractive to businesses because there is a good pool of employees available. 

Thompson's colleague at The Atlantic, Jessica Nickrand, wrote a follow up article adding the caveat that Minnesota has one of the largest racial poverty gaps in the nation. Black residents of the Twin Cities are three times more likely than whites to live below the poverty line, and high income black residents are four times more likely than poor white residents to receive subprime loans. Of course, these two stats are very much related: discrimination in housing and lending (as well as labor and land theft) has been a prime factor in communities of color having difficulty building and keeping generational wealth.

Whether Minnesota can make up for these disparities remains to be seen. So far, the state seems to have been set on a good path by Gov. Dayton, but we'll observing whether he can smooth out the disparities that create poverty in minority communities. This will be especially important as Minnesota's strong economy attracts more workers.