Progressives Won’t Win Points from Right on Tax Cuts
As Minnesota's legislature debates another round of tax cuts, progressives must remember one key element: no matter how much they cut taxes, conservatives will never give them credit for it. No tax cut is big enough for the right.
That's not to say progressives should never cut taxes. There are many good reasons to cut taxes, such as reducing the share of public expenses borne by those least able to pay. This was the thrust behind the new Homestead Credit Refund and increases in the renters' property tax refund enacted in 2013, which successfully targeted tax relief to low- and modest-income homeowners and renters.
One month ago, Governor Dayton signed into law the first tax act of the 2014 legislative session, which cut taxes by $443 million in the current biennium (FY 2014-15) and nearly a billion dollars in the next (FY 2016-17).
For the most part, the first 2014 tax act cut taxes in a way that will simplify and improve the efficiency of Minnesota’s tax system. These include federal tax conformity provisions that will provide middle class tax relief while simultaneously making it easier for Minnesotans to fill out their tax returns, elimination of three business-to-business sales taxes which failed the test of tax transparency, and an increase in the Working Family Credit which will reduce tax regressivity by putting dollars into the pockets of low-income working families who desperately need the additional resources. On the non-tax front, the act beefed up the state budget reserve by $150 million and dedicated a portion of future surpluses to the reserve—a move that will enhance state fiscal stability.
On the other hand, the first 2014 tax act also made a large cut to the Minnesota estate tax and eliminated the gift tax. This move will increase the regressivity of the state and local tax system while draining $43 million from the general fund in the current biennium, $144 million in the next, and approximately $200 million per biennium when the higher estate tax exemption is fully phased-in.
The state cut combined estate and gift tax revenue by approximately one-third (when fully phased-in) to avert the feared flight of high income residents to other states. However, a recent Minnesota Revenue Department estate tax study found that the majority of rigorous peer-reviewed tax migration studies failed to find any statistically significant tax flight resulting from estate taxes. This conclusion from non-partisan Revenue Department researchers is reinforced by the fact that Minnesota estate tax revenues increased by nearly 50 percent from 2007 to 2013—four times faster than the rate of growth in other state taxes and three times faster than the rate of inflation. If the estate tax is so easy to avoid by fleeing the state, it is hard to see how estate tax revenue could have increased so dramatically.
So—in response to a massive reduction in Minnesota’s most progressive tax—there was a wave of right wing jubilation, right? Actually, not so much. Conservative senators and representatives complained that the estate tax cut was not deep enough and proposed amendments to the tax bill that would completely eliminate the tax. A recent MinnPost article noted that “…millionaires and their financial advisors want more,” again raising the bugaboo of tax flight if they don’t get it.
The conservative objection to the newly enacted estate tax reduction is that it didn’t go far enough—an assertion supported by claims of dubious merit. An estate tax opponent cited by MinnPost argued that “if you’re in the $1 million-to-$2 million frame, you’ll get a fair amount of tax savings five years from now, but estates above that won’t see any significant savings.” In fact, a $4 million taxable estate will see a 14 percent reduction in estate tax liability, while a $3 million estate will see a 38 percent reduction. (Estates consisting mostly of farm and small business property of less than $5 million continue to be completely exempt.) Since when is a 38 percent tax cut not significant?
Equally challenged is the conservative contention that the estate tax is a middle-class tax. According to the Revenue Department estate tax report, the average annual income of households paying the estate tax (prior to the recently enacted cuts) is $295,000. (This number is based on data from 2002 to 2011; by now the average income of these households has probably risen above $300,000.) According to the Department’s most recent Minnesota Tax Incidence Study, the top one percent of Minnesota households by income paid 92 percent of estate taxes in 2010. It is only by the most tortured of definition of “middle” that the estate tax is a “middle class” tax.
Yet another estate tax proponent cited by MinnPost argued that failure to enact an even larger estate tax cut “just continues the conversation that Minnesota is going to find ways to keep raising revenues from the same core group of people [i.e., high income residents].” So—state policymakers enact a generous tax cut targeted primarily to wealthiest Minnesotans and even this gets spun as an attack on the rich.
The moral of this story is that when it comes to tax cutting, progressives just can’t win. No matter how much taxes are reduced, it will always be spun as paltry by the anti-tax conservatives, who will up the ante by proposing even more draconian cuts. Even a large tax cut that primarily benefits high income households will be framed in the context of “ways to keep raising revenues” from the rich.
From the perspective of progressive state policymakers, the lesson to be learned is that they should focus tax efforts—whether they be tax increases, tax decreases, or revenue neutral reforms—on maintaining and enhancing the state’s ability to fund important public investments, increasing tax efficiency and fairness, and maintaining Minnesota’s economic competitiveness; these are goals which they were, with few exceptions, successful in achieving in the 2013 and first 2014 tax acts. While progressives must be mindful of the level of taxation, attempts to out-cut conservatives will bring little fruit, from either a policy or a political perspective. Something to keep in mind during deliberations on the second tax bill of 2014.