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 But the state's experience may give pause to a crowded field of
Republican presidential hopefuls who largely swear by tax cuts and
small government as a recipe for prosperity.
Judged by those standards this state on the Canadian border should
be a train wreck in process.
Instead, Democratic Governor Mark Dayton's Minnesota could become a
touchstone in the national debate over how to bolster the middle
class - an example of how solid growth and low unemployment can
coexist with some of the highest income and corporate tax rates in
the country.
Born into family wealth but a left-leaning Democrat by temperament,
Dayton said in an interview that, to him, one fix for income
inequality was pretty obvious: take some from the better off and
spread it around.
"The wealthiest pay a smaller percentage of local tax than anyone,
all the way down to the bottom," Dayton told Reuters. "From a tax
equity standpoint I felt an additional two percent on the wealthiest
two percent was appropriate."
 The $2 billion that the state raised by pushing its top income tax
rate to 9.85 percent in 2013 helped wipe out a budget deficit and
fund a tax cut for middle income families. The income tax imposed by
most U.S. states on local residents comes on top of federal taxes,
and the increase in Minnesota made its top tax rate the fourth
highest in the country.(Graphic: the Minnesota formula: http://link.reuters.com/juj25w)
A minimum wage rise approved in 2014 boosted pay for the working
poor and linked future increases to inflation. When the tax hike
generated a surplus, Dayton argued to spend the money on early
childhood education rather than scale back the taxes - and persuaded
a divided state legislature to go along.
The 2016 presidential election is likely to be shaped by debate over
just such policies, and whether they might be an answer to deepening
income inequality and stagnant middle and lower class incomes.
Democratic front runner Hillary Clinton has not laid out an economic
plan yet and most potential Republican contenders oppose income
redistribution and advocate tax and spending cuts.
One of them, Scott Walker, governor of neighboring Wisconsin, has
pushed through $2 billion in tax cuts, weakened unions and is now
proposing more spending cuts in education and health.
Yet so far, Wisconsin has lagged the nation and its neighbor in job
creation and economic growth.
Minnesota's jobless rate has fallen to 3.8 percent, well below the
national average of 5.3 percent. It bounced back quick from the
recession and companies, such as Amazon, have pressed ahead with
expansions plans there.
Analysts on the left have taken note.
The 2016 race "is going to be 'trickle down' versus 'middle out,'"
said David Madland, director of economic policy at the Center for
American Progress, a think tank in Washington with close ties to the
Democratic party. "Minnesota is a perfect example of the middle
class economics story."
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SOLID AND STEADY
Politically, the state is known for its sharp contrasts, its choice
of public officials ranging from the Midwestern social liberalism of
former vice presidents Walter Mondale and Hubert Humphrey to Tea
Party firebrand and former lawmaker Michele Bachmann.
The state's economy, in contrast, has been steady and predictable,
with a solid industrial base, a legacy agricultural sector, and a
prominent group of companies headquartered there. That includes
Target Corp., the national retailer built by Dayton's family. The
unemployment rate since at least the mid-1970s typically runs two
percentage points below the national average. Median family income,
at almost $60,000, is more than 10 percent above the national level.
The state has gone through growth spurts where it outperformed the
country and spells where it has lagged. But high taxes have never
proved a permanent drag.
Still, the national trend in recent years has been in favor of tax
cuts. Over the last decade states have cut income and corporate
taxes twice as often as they hiked them, according to data from the
National Association of State Budget Officers. Those, including
California, that have recently hiked income taxes have typically put
fixed expiry dates on the increase to make them politically
palatable.
At least in recent years, "Minnesota has been the outlier," said
Jared Walczak, a policy analyst at the Tax Foundation.
Beth Kadoun, head of tax policy at the Minnesota Chamber of
Commerce, said the jury on Dayton's policies was still out.
"I don't think we've seen the impact. We had a strong 2013. Look at
2014. Do we continue to outpace?" Kadoun said.
Minnesota's economy grew 1.4 percent last year, above the Midwest
average, but below the 2.2 percent national rate. Wage growth
remains weak despite low unemployment.
The chamber and other business groups have opposed the tax hikes and
continue to push back against parts of the governor's agenda,
including the indexation of the minimum wage.
But Dayton said his state's record at least proves that taxes don't
necessarily destroy growth.
In fact, tax cuts have backfired in Wisconsin and Kansas, where
Republican governor Sam Brownback cut income taxes only to reverse
course and raise other levies as a budget deficit ballooned.
"During this period where other states have been cutting taxes we
have held our own and in the last couple of years have done better,"
Dayton said. "It works for us."
(Reporting by Howard Schneider; Editing by David Chance and Tomasz
Janowski)
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