MN2020: Fiscal Policy

“No-new-tax” Property Tax Increase

Tue, 25 Oct 2011 12:00:31 +0000

By Matt Entenza, Senior Fellow and Founder

All other factors being held equal, property taxes will increase by 3.4 percent by eliminating Minnesota’s Homestead Credit—a policy conservatives successfully pushed during the 2011 special legislative session. The worst hit properties will be in greater Minnesota. Particularly hard hit will be farmers.

These findings are based upon a recent analysis conducted by the non-partisan House Research Department. This analysis is based on 2011 data and assumes no increase or decrease in local government levies. Because local levies are held constant, local spending decisions cannot be blamed for the resulting property tax increases. Rather, the increases are entirely due to the conservative plan to eliminate the forty-year-old Homestead Credit and replace it with a homestead “value exclusion.”

Conservative policymakers pushed this plan and incorporated it in their regular session tax bill that Governor Dayton vetoed. In the absence of a budget agreement, a state government shutdown ensued. In order to end the shutdown, conservatives insisted on a variety of cuts to property tax relief programs, including the elimination of the Homestead Credit. Governor Dayton worked to refund some of the proposed cuts, but signed the legislation to limit the shutdown’s cost and harm.

All Minnesotans who own and live in homes valued under $413,800 receive the Homestead Credit. Its elimination led to an annual reduction of $260 million in state-paid property tax relief. In an attempt to soften the Credit elimination’s blow, conservatives offered a homestead “value exclusion.” This “exclusion” reduced the portion of homestead value that was subject to taxation.

Unfortunately, there is no way of removing $260 million in property tax relief without causing property tax increases. The value exclusion reduced the tax base of Minnesota local governments, thereby forcing tax rates higher even if local governments did not increase their levies. The result was higher property taxes not only for homeowners, but for all other classes of property.

Click here for the Minnesota Department of Revenue explanation of how the Homestead Credit elimination and value exclusion translates into higher property taxes.

Total statewide residential homestead property taxes will increase by 3.2 percent as a result of the Homestead Credit elimination and value exclusion, all other things being equal. Ironically, however, other classes of property will see much higher property tax increases. The hardest hit class of property is agricultural, which will see a statewide property tax increase 6.6 percent. Statewide property tax increases will be 4.6 percent for rental properties, 3.8 percent for seasonal-recreational properties, and 2.6 percent for business properties.*

We've provided analysis of the property tax increases that will result for every city and township in the state as a result of the Homestead Credit elimination and value exclusion. The information in this analysis is grouped by House legislative district and Senate legislative district—sorted by the last name of each representative. The information is based on the House Research Department simulation referenced above.

The resulting property tax increases will hit greater Minnesota harder than the seven-county metropolitan area. The total property tax increase in greater Minnesota resulting from the Homestead Credit elimination and value exclusion will by 5.3 percent. The residential homestead property tax increase in greater Minnesota will be 4.8 percent.

This analysis does not take into account reductions to city Local Government Aid, County Program Aid, and other property tax relief programs pushed by conservatives during the 2011 regular and special legislative sessions. Total property tax increases in 2012 as a result of the tax bill passed during the 2011 special session are anticipated to be $376 million or 4.6 percent based on a recent House Research Department analysis. This analysis is summarized in a recent Minnesota 2020 report.

Once again, “no-new-tax” policies are producing property tax increases, as conservative lawmakers push the state’s budget problems on to the backs of property taxpayers and local governments. Sadly, the “no tax policy” applies only to state taxes, such as the progressive individual income tax, which is based on the ability to pay. As shown repeatedly in the past, conservative policymakers are more than willing to compel regressive property tax increases by slashing property tax relief programs. The elimination of the Homestead Credit is the most recent example.

*Due to a complex interaction between the Homestead Credit elimination/value exclusion and the fiscal disparity tax base sharing program, the long-term tax increase for business property will actually be somewhat greater than 2.6 percent.

Hemorrhaging Homesteads: Projecting 2012 Property Tax Increases

Mon, 17 Oct 2011 14:00:58 +0000

By Matt Entenza, Senior Fellow and Founder

Download full report (pdf)
View online at Scribd

Homeowners, renters, business owners, and farmers, nearly everyone should expect to pay more in property taxes next year, despite conservatives’ “no-new-tax” promise.

Conservative-crafted fiscal policy, enacted during Minnesota’s 2011 Special Legislative Session, cut more than $630 million in property tax aids and credits, including eliminating the Homestead credit, which provides property tax relief for middle-class Minnesotans.

As a result, local property taxes are projected to rise statewide by $376 million dollars in 2012, or about 4.6 percent, according to nonpartisan House research. The Twin Cities, suburban middle- and working-class communities and much of greater Minnesota will be hardest hit, with many seeing property tax hikes near 6 percent, according to House research projections.

For a detailed look at the property tax impacts in your particular region of the state, go to the online supplement of this report.

Respected Minnesota economists echoed progressive policy advocates in calling for a fair and balanced approached to solving the budget deficit. Instead, the conservative-controlled legislature shifted the state’s deficit burden to the state’s middle-class to protect Minnesota’s richest.

These cuts continue a long-term trend, where conservatives have slashed aid to Minnesota cities and counties, forcing local leaders to cut services and raise property taxes and fees, giving the state a more regressive tax system.

By fiscal year 2013, the state will have cut $3 billion in aids and credits to local governments, using constant 2011 dollars.

To restore Minnesota’s fiscal fairness, MN2020 calls for policymakers to:

Abandon failed “no-new-tax” policy pledges that protect the richest Minnesotans from paying an effective tax rate more in line with middle-class Minnesotans. Restore the Homestead Credit. Return to a fair and balanced approach in solving our state’s budget deficits.

download online supplement here

VIDEO: How Many Cuts Can Communities Survive?

Mon, 17 Oct 2011 11:00:13 +0000

By Tom Niemisto, {related_entries id="article_author_blogger"}Tom Niemisto, Video Production Specialist

When you cut more than $630 million in aid to local governments, it's going to sting many Minnesota communities. This year's round of cuts includes the elimination of the Homestead Credit, which will hit nearly every community. Greater Minnesota, the Twin Cities and middle-class metro suburbs, will take the brunt of the cuts.

Tax Migration Myth Exposed

Mon, 29 Aug 2011 11:00:48 +0000

By John Van Hecke, {related_entries id="article_author_blogger"}John Van Hecke, Executive Director & Fellow

A new study from the Center for Budget and Policy Priorities (CBPP)* dispels conservatives’ myth that increases in state income taxes cause significant out-migration of high income households and lost tax revenue.

People are tied to their residences by jobs, family, social contacts, and the stress and hassle involved in relocating. As a result, interstate moves are rare. During the last decade, only about 1.7% of U.S. residents per year moved from one state to another and some of these moves were within metropolitan areas that straddle the borders between two or more states.

The CBPP report examines five states and identifies several factors that appear to be more important drivers of migration than taxes.

Likely the most important single economic factor driving the decision to migrate from one state to the next is housing prices. The CBPP report notes that:

A family might be able to cut its taxes by a few percentage points by moving from one state to another, but housing costs are far more variable. The difference between housing costs in two different states is often many times greater than the difference in taxes. So what might look like migration in search of lower taxes is really often migration for cheaper housing.

Other factors that are apt to influence the propensity to migrate are:

Family structure. Married couples are more likely to migrate if it will enable both spouses to find work, although they are less likely to migrate once they have found it. In addition, families with children are less likely than others to migrate. Homeownership. The cost of selling a home and buying a new one is a powerful incentive for homeowners to stay put. (With the collapse of housing prices, many homeowners may be reluctant to relocate because they do not want to sell their home at the bottom of the market or—even worse—sell their homes for less than they paid for it.) Age. People from the age of 18 to 24 have the greatest propensity to migrate either for educational opportunities or to find employment. People of this age are often more mobile because they have yet to start a family. Employment status. Unemployed people are four times more likely to migrate from state to state than are other people.

Newly available data from multiple sources have enabled researchers to examine the impact of state income taxes on the migration of high income households. Most of the studies that have examined this issue in a “rigorous and thoughtful manner” have found little or no tax impact on migration.

For example, an examination of data from 1970 to 2000 found that “differences in average income tax rates did not affect interstate migration of high-income elderly households” (Conway and Rork, 2011). Another study “failed to find conclusive evidence that differences in state income taxes affect the location of the rich” (Slemrod and Bakija, 2004).

One of the most rigorous (and frequently cited) studies examined the impact of the 2004 New Jersey income tax increase on filers with incomes in excess of $500,000 (Young and Varner, 2011). As summarized in the CBPP report:

[Young and Varner] found that while the net out-migration rate of this income group accelerated after the tax increase went into effect, so did the net out-migration rate of filers with incomes between $200,000 and $500,000 [who were not affected by the tax increase], and by virtually the same amount. At most, the authors estimated, 70 filers earning more than $500,000 might have left New Jersey between 2004 and 2007 because of the tax increase, costing the state an estimated $16.4 million in tax revenue. The revenue gain from the tax increase over those years was an estimated $3.77 billion, meaning that out-migration — if there was any at all — reduced the estimated revenue gain by a mere 0.4 percent.

In short, the impact of the New Jersey income tax increase on out-migration was tiny to non-existent and did not have a significant effect on the amount of new revenue gained from the tax.

Finally, claims from anti-tax proponents on the impact of taxes on migration fail to take into account the positive impact that public investments—paid for with tax dollars—can have upon migration.

As noted in the CBPP report:

Moreover, low taxes are a double-edged sword when it comes to attracting mobile households. Studies show that such amenities as cultural facilities, recreational opportunities, and good public services are powerful attractions for potential migrants. Many of those services are financed with tax dollars. Therefore, while low taxes decrease the cost of living, they might also prevent states from preserving or improving valued public services, which would discourage potential migrants.

In addition, investment of tax dollars in education, workforce development, and infrastructure can encourage job growth that would not occur in the absence of this investment. As noted above, employment opportunity is a powerful migration incentive. Thus, the prudent use of tax dollars could actually stimulate in-migration to a state.

Income tax rates are only one of many factors that influence migration patterns—and a rather insignificant one at that. The CBPP report concludes that the “effects of tax increases on migration are, at most, small—so small that states that raise income taxes on the most affluent households can be assured of a substantial net gain in revenue.”

* "Tax Flight is a Myth: HigheIr State Taxes Bring More Revenue, Not More Migration,” Robert Tannenwald, Jon Shure, and Nicholas Johnson; August 4, 2011. Published by Center for Budget and Policy Priorities.

VIDEO: Cuts and Shift Budgets Move Minnesota Backwards

Mon, 25 Jul 2011 11:59:40 +0000

By Tom Niemisto, {related_entries id="article_author_blogger"}Tom Niemisto, Video Production Specialist

Now that we're passed the state shutdown, educators and health care providers will soon find new obstacles from the cuts and shift budget. At a time when we should be investing in Minnesota, the K-12 shifts and inadequate health care dollars put the well being of Minnesota's most vulnerable at risk.

Preparing for a 2013 Shutdown

Mon, 18 Jul 2011 11:00:57 +0000

By Tyler Hanson, Undergraduate Research Fellow

With an agreement to enact more school aid shifts and issue tobacco bonds, it looks as though the state shutdown will end without any new and permanent revenue sources.

These one-time budget fixes likely mean the state will face a deficit in the FY 2014 – FY 2015 biennium, meaning that policymakers will once again be debating reductions and revenue in 2013.

Despite what conservatives say, Minnesota has a revenue problem, not a spending problem:

During the four biennia from FY 2000-01 to FY 2006-07, annual current resources hovered around $3,500 per capita. Then enter the Great Recession and the great revenue nose dive. Real per capita current resources plunged by about 17 percent over the next two biennia. Projected annual resources for the three biennia from FY 2010-11 to FY 2014-15 will hover around $2,900 per capita—or about $600 per capita less than a decade earlier.

How big the deficit will be, and whether or not it will lead to another shutdown, remains to be seen. However, there are some things we do know about the budget shortfall the state will be facing in two years.

Additional shifts to school aid payments look like they will save state government $700 million this time, but they came on top of a $1.8 billion shift from FY 2010 - FY 2011 biennium.

If the state plans to restore a normal schedule of school payments, it will cost more than $2 billion in the next biennium’s budget. An extension of the shifts would be unsurprising, considering it was one of the first things agreed to during this year’s budget negotiations.

Continuing the shifts, however, will force schools to borrow money year after year to make up for the dramatic split in payments between years, costing them thousands of dollars in interest payments—money they could be spending elsewhere.
The state will also borrow $700 million through tobacco bonds. Considering inflation, the rising cost of health care and population growth, these shifts will put policymakers a few billion behind whatever projected revenues might be for FY 2014 - FY 2015.

This will leave lawmakers with many of the same questions they faced this year, but it won’t necessarily lead to a shutdown. Two major unknowns still remain for 2013: the economy and elections.

The economic picture doesn’t look like it’s going to rebound enough to overcome these one-time shifts and our steep revenue decline—which is due in part to the Great Recession and what have proven to be unsustainable tax cuts from a decade ago.
We balanced the FY 2010 – FY 2011 budget with more than $2 billion in stimulus money. But with the federal debt crisis and no political will for more stimulus, federal help isn’t likely.

Add to that thousands of public workers at all levels of government likely to be out of jobs and state funding for important projects slashed, and Minnesota’s economy could remain stalled, despite private sector gains.

Fortunately, Governor Dayton was able to block a proposal that would have reduced the state workforce by 15 percent, preventing even more Minnesotans from losing work. Another silver lining is his bargaining for a $500 million bonding bill that will put more construction workers on the job. That could help augment other gains in the private sector, or at least stabilize the economy.

This budget also puts conservatives on the hot seat. They protected millionaires from paying their fair share to balance the budget in a progressive and more sustainable manner, claiming “we can’t tax job creators.” This conservative economic policy, which we’ve followed the last eight years, has failed to produce a more prosperous Minnesota for all Minnesotans, and there’s no reason to believe it will produce significant job growth and economic development as we head into the FY 2012- FY 2013 biennium.

This brings us to the 2013 budget negations. Divided government and a conservative legislatures’ failure to compromise on progressive revenue has left us with the possibility of a similar budget battle in 2013.

Two years is a long time, though. In the interim, policymakers will hopefully learn an important lesson from this year’s failure: that the budget isn’t a one-time problem, and deserves more than a one-time solution.

Despite Conservative Rhetoric, Spending Down

Mon, 11 Jul 2011 11:00:50 +0000

By Jeff Van Wychen, Minnesota 2020 Contributor

General fund spending trends over time can be difficult to analyze due to a number of factors. For example, from a superficial perspective, state general fund spending appears to have grown from $26.6 billion in FY 2002-03 to $30.2 billion in FY 2010-11—a growth rate of 13.2 percent. However, this simplistic conclusion is misleading because it ignores the impact of inflation, population growth, state takeovers, funding shifts, and one-time federal dollars.

Each of these factors needs to be adjusted for in order to provide a true “apples-to-apples” comparison over time. (The accompanying box provides the rationale for these adjustments.)

After making these adjustments, state general fund spending has actually declined by 14 percent from FY 2002-03 to FY 2010-11. The decline in real per capita state general fund spending over this period tracks fairly closely with the decline in real per capita state general fund revenue (17 percent).

These facts contradict the right wing claim of “out of control” growth in government. When properly adjusted, state general fund spending is much less than it was eight years ago. In fact, we would have to return to the 1990s to find the last biennium in which general fund spending—properly adjusted—was lower than the FY 2010-11 level.

Just as past growth in general fund spending has been exaggerated, so to has projected future growth. Conservatives in the state legislature claim that their proposed budget will actually increase state general fund spending by either 6 percent or 12 percent in the next biennium. Both figures are misleading because they ignore the impact of one-time dollars, discussed above. Non-partisan Minnesota Management & Budget stated in its February forecast that “to more accurately compare biennium to biennium spending, it is necessary to mitigate the effects of these one-time factors.”

Based on an apples comparison, general fund spending under the Republican end-of-session budget for FY 2012-13 would actually be about $400 million less than in FY 2010-11. Legislative Republicans are in fact cutting spending below the FY 2010-11 level, which—properly adjusted—was already 14 percent less than the level of spending eight years earlier.

In order to keep pace with inflation and population growth, state general fund spending will have to increase to $36.4 billion in FY 2012-13. If projections of general fund spending under the GOP budget are accurate (and they probably are not, because of the statutory requirement to willfully ignore the impact of inflation on most parts of the state budget), it will be over $2 billion short of this mark.

Anti-tax zealots like to rant about rampant growth in state government revenues and expenditures. In fact, properly adjusted there has been no real per capita general revenue or expenditure growth in the last decade. To the contrary, there has been a sharp decline. The proposed GOP budget continues this decline. A partial list of the consequences of this approach are:

Nearly 140,000 Minnesotans will lose access to health insurance Thousands of elderly and disabled people would be forced to move from home and community-based services into more expensive nursing homes Cuts in funding for 129,000 special education students Reductions in medical research and education funding Reduced transit options and increased fares Delayed issuance of business permits due to staff reductions More cuts in higher education funding Over $1.2 billion in property tax increases by 2014 (including cuts to the renters’ property tax refund) Cuts in public safety and other local services and infrastructure Reduced funding for clean water activities No funding for smart investments like early childhood education Pink slips for thousands of public employees and an unknown number of private sector employees, resulting in reduced consumer demand and further weakening the economy.

Some might attempt to justify these harms on the grounds that they will be “good for business.” However, under the “no new tax” regime of the last eight years—during which Minnesota lead the nation in cutting real per capita own-source revenue—Minnesota’s economic performance relative to other states deteriorated.

The proposed conservative budget would continue these failed policies by forcing yet another round of spending reductions on state government and inflicting more harm on Minnesota’s economy, property taxpayers, students, and most vulnerable residents. It is time for the legislature to accept the fact that Minnesota’s deficit is largely a revenue problem and that revenues must be part of the solution.

An “Apples to Apples” Comparison of General Fund Spending

A meaningful “apples to apples” comparison of general fund spending over time requires that adjustments be made to remove fluctuations that are the result of factors other than actual growth in real public expenditures. The adjustments made in this analysis include the following:

Inflation. The things that government purchases—from gasoline to nursing home care—has grown in cost over the last eight years. Like consumer purchases, government purchases need to take into account erosion in the purchasing power of the dollar to provide meaningful comparisons over time. This analysis adjusts for inflation using the implicit price deflator for state and local government purchases, which is the appropriate inflation index for adjusting general fund finances according to the State Council of Economic Advisors. Population growth. The more people living in a state, the greater the demand for public services. This increased demand can be adjusted for by examining expenditures on a per capita basis. State takeovers. Occasionally the state takes over a major public function from local government. The most notable example of this in the last decade was the shift of general education funding off of local property taxes and into the state general fund. The resulting growth in general fund spending was not the result of “more government,” but rather how existing government functions were paid for. A more valid comparison over time can be made by including the full cost of general education in the general fund expenditure total of each biennia. School funding shifts. The state occasionally postpones aid payments to school districts until after the end of the biennium in order to balance a budget within the biennium. In the past, these aid shifts were later “bought back.” General fund spending is artificially deflated in the biennium when the shift occurs and artificially inflated in the biennium in which it is bought back. The impact of these shifts can be adjusted for using data from state forecasts. One-time federal dollars. In the FY 2010-11, state general fund spending was artificially lowered due to receipt of $2.3 billion of federal stimulus dollars. The spending was still occurring—it just wasn’t showing up in the state general fund because it was being paid for with federal dollars. The impact of these one-time dollars can be adjusted for using data from the February forecast.

Arguably, other adjustments could be made to provide an even more valid comparison over time of general fund spending levels. For example, the growth rate in Minnesota’s elderly population—which is projected to be five times greater than the growth rate for the non-elderly population over the FY 2012-13 biennium—will create an additional demand for state health care and nursing home expenditures. However, making this adjustment would be extremely complicated. This analysis is limited to adjustments that are relatively uncomplicated and straightforward.

VIDEO: Shutdown’s Uncertainty Bad for Business

Mon, 11 Jul 2011 11:00:15 +0000

By Tom Niemisto, {related_entries id="article_author_blogger"}Tom Niemisto, Video Production Specialist

There is no good timing for a shutdown. Halting services and revenue sources after a tough recession risks hurting an already fragile state economy.

Businesses face a time of uncertainty, with services cut and revenue on hold. There's less investment, fewer hires, and less crucial work on infrastructure projects around the state.

Still photos by Michael Kuchta, AFSCME

The Great Revenue Nose Dive

Thu, 07 Jul 2011 13:00:56 +0000

By Jeff Van Wychen, Minnesota 2020 Contributor

Listening to conservative legislators, one would think that state revenues have been growing like crazy—that the current state budget deficit is the result of spending run amuck. In fact, the state’s budget debacle is primarily the result of plummeting revenue.

To be more specific, during the FY 2010-11 biennium, real per capita state revenue will be at its lowest ebb in well over a decade.

“Current resources” are a measure of the total revenue coming into the state general fund over the course of a biennium from tax and non-tax sources, including dedicated revenues and transfers. During the FY 2010-11 biennium, current resources in constant dollars* were at their lowest point so far this century.

The figure below shows the trend in per capita state general fund revenue from the FY 2000-01 biennium through the FY 2014-15 biennium (projected), assuming no changes to current law. The amounts shown represent the average annual level of current resources for both years of each biennium in constant FY 2010-11 dollars per capita.

The last time that real per capita general fund current resources were as low as in FY 2010-11 was in FY 1990-91. From the perspective of the general fund, a lot has changed over this period. For example, funding for general education, income maintenance, court administration, and operating transit have all been shifted off of the property tax and into the general fund.† In other words, the state is expected to pay for over a billion dollars of new funding obligations with less revenue than it had two decades ago.

In this context, let’s examine the conservative rally cry of “live within our means.” In effect, this means two things. First, it means cutting—not just curtailing the level of growth—in the level of public services and infrastructure. It means poorer maintenance for roads. It means dramatically higher transit cost. It means fewer elderly who can afford to live in their own homes due to cuts in state assistance. It means fewer Minnesotans without affordable health care. It means less funding for education. It means cuts in these and other public investments that help make Minnesota a great state.

The second thing that “living within our means” signifies is, ironically, new revenue—but gotten in such a way so as to protect “no new tax” ideologues from having to take responsibility for it. By reducing revenue sharing with local governments, the conservative tax plan will again shift more public costs on to regressive property taxes, which are borne disproportionately by low and middle income Minnesotans. Analysis from the House of Representatives’ own research department shows that the conservatives’ tax plan will result in $400 million (five percent statewide) in property tax increases in 2012. Including cuts in property tax refunds, it will result in over $1.2 billion in property tax increases by 2014.

So there you have “living within our means” in a nutshell: real reductions in public services and real tax increases for Minnesotans with the least ability to pay. All this is done so that the wealthiest households can continue to pay a smaller percentage of their income for state and local services than less well-off families who are struggling to make ends meet.

A 17 percent reduction in real per capita state resources is not living within our means, but well below our means. Our “means” should include asking the state’s wealthiest residents to pay a level of taxes closer to what other far less fortunate Minnesotans are paying so as to avoid the sharp reduction in the public investments that make Minnesota a prosperous, livable, and humane state.

*All inflation adjustments in this analysis are based on the implicit price deflator for state and local government purchases, which is the appropriate measure of inflation for the general fund according to the State Council of Economic Advisors.

†Actually, some of the costs the state has taken over have already been shifted back on to the property tax. For example, in order to address past deficits, the state has cut real per pupil state aid to Minnesota school districts, resulting in a significant shift of general education costs out of the state general fund and back on to the property tax.

VIDEO: Temporarily Out of Service

Fri, 01 Jul 2011 19:52:22 +0000

By Joe Sheeran, {related_entries id="article_author_blogger"}Joe Sheeran, Communications Director

Hundreds of state workers from around Minnesota packed the Capitol steps in a show of solidarity, asking for a compromise to avoid the state government shutdown. Chants of "We are One," "We Want to Work," and "Tax the Rich" echoed through the St. Paul summer night.

VIDEO: Workers Face a Shutdown

Thu, 16 Jun 2011 11:00:14 +0000

By Tom Niemisto, {related_entries id="article_author_blogger"}Tom Niemisto, Video Production Specialist

Starting last week, thousands of state employees received layoff notices in the mail. Major agencies of state government will shut down if no budget is reached by July 30th, and those that depend on state services, like students and patients, might be turned away.

Instead of arguing over what is or isn't a "critical service" for the near future, Minnesotans need to focus on a balanced approach to a budget solution to move Minnesota forward for the long haul.

VIDEO: 2% vs the Rest of Us

Thu, 02 Jun 2011 11:00:36 +0000

By Tom Niemisto, {related_entries id="article_author_blogger"}Tom Niemisto, Video Production Specialist

It's time to move forward on the budget deficit and address fiscal policy fairly for all Minnesotans. Conservatives want to protect Minnesota's richest two percent while slashing services for the rest of the state to balance the budget. There's one flaw in their "no new taxes" theory, it will wind up pushing property taxes even higher for all Minnesotans.

VIDEO: Workers React to Budget Stalemate

Thu, 26 May 2011 13:41:13 +0000

By Tom Niemisto, {related_entries id="article_author_blogger"}Tom Niemisto, Video Production Specialist

Minnesota’s budget stalemate gives those concerned with the state’s fragile economy an uneasy feeling. A government shutdown will put thousands of workers on the sidelines and slow business development when economic engines should be churning to drive us back to prosperity. It’s not a path worth traveling to protect Minnesota’s richest two percent.

Saying it with Conviction Doesn’t Make it Correct

Wed, 25 May 2011 11:00:23 +0000

By John Van Hecke, {related_entries id="article_author_blogger"}John Van Hecke, Executive Director & Fellow

Just because a statement is made with great certainty and conviction does not mean that it is correct. Rep. King Banaian’s commentary regarding the impact of Governor Dayton’s income tax proposal is a case in point.

Rep. Banaian is mistaken when he asserts that “almost half of all S-corporations and partnerships file at the top individual income tax rate.” Nowhere near half of these filers are affected by the current top tier rate. Moreover, individuals file individual income tax returns; businesses do not. Only six percent of tax returns for individuals that report positive income from owning or investing in S-corporations, partnerships, and sole proprietorships would be affected by the Governor’s proposed fourth tier income tax. Even for these individuals, only the portion of taxable income in excess of $250,000 (married joint filers) would be subject to the tax increase.

The cry of “class warfare” is a standard bugaboo that conservatives trot out when they are losing a policy argument. Under Governor Dayton’s proposal, the wealthiest Minnesotans will still be paying a smaller share of their income in state and local taxes than middle-income families. Dayton’s proposal reduces the advantage that the wealthiest households enjoy relative to other Minnesotans in regard to state and local taxes. This is not class warfare, but simple tax fairness.

In attempting to justify conservatives’ large cuts to Local Government Aid, Rep. Banaian argues that these revenue sharing cuts will not contribute to property tax increases. He’s wrong. Research from non-partisan House, Senate, and Revenue Department staff concludes that for every dollar cut from Local Government Aid, property taxes will increase by about 50 cents and funding for public safety, street maintenance, snow removal, and other city services will be cut by 50 cents.

The history of the last decade confirms the conclusions of these non-partisan researchers. Real per capita city property taxes have soared since 2002, despite the fact that real per capita city spending has fallen. How can this be? In response to huge local aid cuts, local governments have been compelled to both increase property taxes and cut local budgets.

Rep. Banaian is right about one thing: “Our state, and in particular the areas outside of the metro area, are undergoing demographic change. We will need to attract smart, skilled workers to further grow the St. Cloud economy.” How will St. Cloud or other regional centers grow their economy when funding for state colleges and universities, K-12 education, public safety, and public infrastructure are all being cut? These are the fruits of the conservative “all cut” budget, which Governor Dayton avoids through a balanced approach that combines spending reductions with a tax increase upon the wealthiest two percent of Minnesotans.

Last week, representatives of Chambers of Commerce from across greater Minnesota told Governor Dayton that more LGA decreases will result in property tax increases; these property tax increases, they said, will be harmful to Minnesota businesses, especially those located in greater Minnesota where LGA is essential to holding down property taxes. These business leaders support an increase in state taxes over the conservative plan of more LGA cuts and more local property tax increases.

Since 2002, Minnesota has followed the conservative approach to balancing the state budget. During that period, Minnesota has been among the top ten states in the nation in cutting real per capita state revenue. All we have to show after nearly a decade of the “no new state tax” agenda are soaring local property taxes and a rate of job and income growth that is well below the national average. The “all cut/no new tax” approach has failed.

Governor Dayton offers a smarter way forward. We can mitigate further cuts to education, transportation, public safety, infrastructure, services to the disabled and elderly, and other public services simply by asking the wealthiest two percent to pay state and local taxes at a rate closer to what other Minnesotans are paying. This approach will be better for Minnesota businesses and fairer for Minnesota taxpayers.

We are Better Than That

Tue, 24 May 2011 12:02:20 +0000

By John Wayne Barker, Guest Commentary

Sitting in a policy stalemate that could shut down Minnesota’s government reminds me of former Vice President Walter Mondale’s admonition in a recent Washington Post Op-Ed. He said:

“I am troubled by cuts in infrastructure investments, which enjoy the support from business and labor as a source of jobs and future economic prosperity. I am ashamed that America leads affluent democracies in the number of people (including children) who live in poverty. I am perplexed by the shortsightedness of reducing support for smart, hard-working college students. And where is our decency when we cut back on medical care for the ill? ... We are better than that.”

That got me thinking about ways to, as Mondale said, find a fiscally responsible solution “while showing mercy and justice for the most vulnerable.” Is Governor Dayton’s approach the right one? Should we raise taxes on the richest two percent of Minnesotans to help pay for vital state services like education, infrastructure and medical resources for the poor and disabled?

On the same day the Post ran Mondale’s Op-Ed, the Pioneer Press ran the results of a national McClatchy-Maris poll, which found: “Americans clearly don’t want the government to cut Medicare.”

A few days earlier, an AP poll found “54 percent of taxpayers believe their tax bills are fair.” It went on to say that “…voters by a margin of 2-1, support raising taxes on incomes above $250,000, with 64 percent in favor and 33 percent opposed.”

Yet, a vocal segment of Minnesotans take every opportunity to say: “Don’t raise my taxes, I already pay too much.” Many of the newest elected policymakers seem to feel they were elected specifically to prevent any tax hike.

So what is the fair way to raise revenue for these services?

Having just completed my 2010 income taxes, I decided to examine my own situation for any insights on this issue. To compute my cost of living in Dakota County and the State of Minnesota, I added my county and state taxes before dividing the total by 2 (my wife and I), then by 365 days, and finally by 24 to get to an hourly cost. I pay 48 cents an hour in taxes. Unfortunately, this does not answer the question: I am paying too much?

I then considered what I have access to as a Minnesota citizen and came up with a quick list of public services that included: roadways, railways, mass transit, and river transportation; education; beautiful parks and trails; social, human, and long-term care services; police and fire protection; local jails and state prisons; and local and state courts, just to name the those most widely known.

It seemed like a “good deal,” but is it?

I then identified my top nondiscretionary living expenses: my home, healthcare, and transportation and ran these totals through the same calculation. I pay 94 cents an hour for my home mortgage and insurance, 63 cents an hour for my health care copayments and deductible expenses, and 26 cents an hour for my car payment and insurance. Comparing my hourly tax expense against these other three hourly expenses answered my question: I am not paying too much in taxes.

A May 5th McClatchy News story, citing nonpartisan Congressional Budget Office (CBO) data, confirmed my tax conclusion. What a relief! Here it goes:

“all income classes paid lower effective tax rates in 2007, the last year of complete IRS data, than they did in 2000;” “the highest 20 percent of tax filers saw their total average federal effective tax rate fall from 28 percent in 2000 to 25.1 percent in 2007;” and “for the wealthiest 1 percent of filers, the effective tax rate fell from 33 percent in 2000 to 29.5 percent in 2007.”

The article provides another perspective from the Commerce Department's Bureau of Economic Analysis that goes back to 1929. Under this calculation “Americans on average saw 17.3 percent of their income go to federal taxes in 2009 and 2010. The last time the percentage was this low was 1975, and during the late 1960s. If you exclude social insurance taxes on wages—for Medicare and Social Security—the share of taxes as a percentage of income drops to 9.4 percent in 2009 and 9.3 percent in 2010, the lowest since 1950.”

Governor Dayton’s proposed tax increase creates a fourth-tier rate that would apply to about 42,000 tax returns (two percent). Because the wealthy can buy anything they need or want, isn’t it time we focus on the other five million citizens that live in the state and stop making them do with less?

It seems most of my fellow citizens agree. In a Star Tribune poll and accompanying reports by Baird Helegson, 63 percent of the respondents favored a blend of higher taxes and service reductions to tackle the budget deficit with only 27 percent wanting the budget balanced solely through cuts.

Governor Dayton’s budget counts on approximately $1.8 billion from the new fourth-tier tax rate and the data earlier in this editorial validates this is clearly warranted. To this, I would be happy to kick-in an additional two cents an hour ($175 a year), bringing me to an even 50 cents an hour for being a citizen of this great state. If every Minnesotan 18 – 65 years old did the same, we could raise another $585 million and, together with Dayton’s plan, account for nearly $2.4 billion of the budget gap, leaving $1.2 billion to come from budget cuts.

Seems like an appropriately balanced solution to me.

It is time for the legislature to listen to the citizens and fairly consider the facts so that a balanced solution can be negotiated and the budget passed without an extended special session and/or government shutdown. I believe that a safe home, sufficient food, adequate health care, and a decent education or meaningful work are essential aspects in people’s lives that no one would voluntarily give up and should not be denied to others. As Mondale said—“We are better than that”—and we have a choice to either make those who are most disenfranchised pay the price or consider this a moment of grace in considering the needs of fellow human beings that live in our state.

John Wayne Barker is executive director at Merrick, Inc, a private, nonprofit service provider empowering adults with disabilities through vocational and social opportunities. This is a revised version of Barker’s full editorial, which appeared on Merrick’s website.

Getting What You Pay For: A Case for Balance

Tue, 17 May 2011 11:00:14 +0000

By Lee Egerstrom, Economic Development Fellow

Step back three paces, take a deep breath, and look again at linkages between the economy and taxes, public services and employment, and the general well-being of Minnesotans and their counterparts in other states and nations.

The Minnesota Legislature is now inside what is supposed to be the final week of its current session. While a special session now appears highly likely, it would be constructive for legislative leaders to pause and consider the impact of their work on the economy and what messages, if sometimes mixed, they are hearing from their constituents.

First up, all lawmakers have to be aware at this point that the Star Tribune Minnesota Poll on Sunday showed Minnesotans strongly favor a balanced approach of program cuts and increased revenues to keep Minnesota afloat, as advocated by Governor Dayton. According to the Star Tribune article with the poll, 63 percent of Minnesotans favor a mix of higher taxes and service reductions, to 39 percent favoring a cuts-only approach to dealing with the state’s revenue problems.

Newly elected conservative lawmakers assume they received a mandate in the past election to rein in state spending. But they didn’t campaign on pledges to kick 100,000 fellow citizens off publicly-funded health care, squeeze quality out of education from kindergarten through graduate school, and raise regressive local and school district property taxes.

Where any mandate assumption falls on its face comes from Minnesota voters electing Dayton as governor in the same election. He didn’t conceal his beliefs that the state needs to raise revenue. Minnesotans recognize we have to pay for good schools, robust infrastructure and quality health care. For the most part, we’re willing pick up that tab. It’s a reality that is consistent with the 2008 election in which Minnesotans passed the Legacy Amendment that dedicates a tax increase to support the environment and arts.

Minnesotans seem to recognize that myths about taxes and economic performance don’t square with results when Minnesota is measured against the other 49 U.S. states, or when the U.S. is measured against the performance of other developed countries.

First, let’s look at Minnesota’s place in the political economy. Minnesota 2020 released a January report, “Minnesota’s Tax Fairness Retreat: A 50-State Study,” authored by former colleague Jeff Van Wychen. While Minnesota’s diverse economy is out-performing the national economy slightly, that report found Minnesota was slipping in its tax fairness relative to the nation.

Essentially, Minnesota is relying less on progressive revenue, such as income tax, which is based on salary, and more on property and sales taxes, which tend to fall harder on low-income and middle-class Minnesotans. It’s a trend that is expected to continue with legislative proposals that shove more community service costs on to local governments and property taxpayers.

Updated analysis of that report’s data further helps debunk the myth that lower taxes result in economic growth. In general terms, higher tax states, with less regressive tax systems, have generally higher median household incomes. In a real sense, we get what we pay for.

So how do these findings square with international comparisons of nations? There, the Organization for Economic Cooperation and Development (OECD) finds similar results, although differences among nations are even greater than domestic comparisons of U.S. states.

In a Feb. 17 report, (Tax Reform Trends in the OECD Countries) the Paris-based OECD research organization for the industrialized countries found that only Mexico and Chile raise less tax revenue as a percentage of Gross Domestic Product (GDP) than did the United States in 2009, the last year for which data are available.

In ascending order, the percentage of tax revenue to GDP starts with Mexico, at 17.5 percent, followed by Chile, 18.2 percent; the U.S., 24 percent; Turkey, 24.6 percent; Korea, 25.6 percent; Ireland, 27.8 percent; the Slovak Republic, 29.3 percent; and Greece, 29.4 percent.

In descending order from the other end of the scale are Denmark, 48.2 percent; Sweden, 46.4 percent; Italy, 43.6 percent; Finland, 43.1 percent; Belgium, 43.2 percent; Austria, 42.8 percent; France, 41.9 percent; and Norway, 41 percent.
Taxes vary greatly across the developed world in terms of progressive and regressive systems. But generally, most countries have more progressive taxes than do the loophole-ridden U.S. and state tax systems that have been manipulated by special interests and protected classes.

Going forward:

As we head into the session's final week, Minnesota legislators should seriously consider what kind of businesses a low tax, low-wage state would attract. What would our state look like were that to come true? Is that the quality of life Minnesotans really want?

Some communities, states and nations are looking ahead at what damage their lawmakers may be doing to protect the richest at the expense of the whole. Consider these examples:

By some measures, Minnesota’s current conservative budget proposal is expected to cause a loss of 5,000 jobs directly, with about 30,000 jobs lost due to the spillover impact. In Oregon, business and community leaders are now worrying about public sector layoffs. Even though the American Recovery and Reinvestment Act helped Oregon retain about 4,900 jobs last year, there still were many state and local public job losses. The business community worries that severe cuts will undercut Oregon’s economic recovery, wrote Diane Dietz in Eugene’s Register-Guard newspaper. She quoted a Eugene banker as saying, “Government jobs are the wild card.” And in western New York, a group of business, labor, government, higher education and charitable foundations have formed a group to assess the harm to the Town of Dickinson, near Binghamton, as it copes with losing 400 schoolteachers at area public schools. Areas of concern include loss of intellectual capital as people move away, the impact on the local tax base, quality of education in the area and the impact on culture and climate of schools. Internationally, British austerity measures could wind up disproportionately impacting female workers. In other places, there have been economic gains without major public service cuts. The Toronto Glove and Mail reported May 6 that Canadian enterprises created 58,300 jobs in April, cutting Canadian unemployment to 7.6 percent, back to pre-global recession levels. France added 125,000 jobs last year, after 300,000 were “destroyed” in 2009, according to Dow Jones Newswires, and that 2011 will be stronger. France expects two percent GDP growth this year, according to French Economy Minister Christine Lagarde.

While private job growth is starting to improve, net job gains aren’t likely to continue as policymakers slash public payrolls. When seasonal adjustments are made, government employment is now down 416,000 jobs from January 2009.

Mark Zandi, chief economist for Moody’s Analytics Inc. and the former economics adviser for presidential candidate Sen. John McCain, warned in February (Bloomberg BusinessWeek, Feb. 4) that the ripple effect of public job losses and cuts in federal programs could lead to 600,000 job losses throughout the economy starting in July this year. This could have a devastating impact on local communities.

As we debate an all cuts budget or a balanced approach that includes revenue increases, policymakers should look at where Minnesota sits in comparison to similar U.S. states and world economies. The Star Tribune Minnesota Poll shows how Minnesotans want to move forward compared to others; our policymakers should take heed.

Job Creation by the Wealthy Mostly a Myth

Mon, 09 May 2011 11:00:44 +0000

By Myles Spicer, Minnesota 2020 Contributor

We hear this conservative mantra continually: “We must give tax breaks to the wealthy so they can create more jobs because the rich are the job creators.” Even now, as Minnesota works toward a balanced budget solution—where many agree that revenue is needed—conservatives are holding firm to their policy that “higher taxes will stifle economic growth.”

There is only one thing wrong with this premise and theory. It is not true! Broadly providing tax breaks to high-income earners simply because conservative policy says the rich will turn around and create jobs with the extra revenue has been proven to be false economics many times over.

So why keep insisting these policies are valid? It gives conservatives cover in avoiding the charge that they are merely attempting to make the rich richer. It also permits them to focus on deficit reduction through smaller government, concentrating more public services to fewer people. It excuses them from having to find a revenue solution to fund the broad public services that have made Minnesota a great state.

Granted, some targeted tax credits and tax breaks do stimulate growth. But they aren’t just blindly given to the wealthiest. Policymakers provide these tax incentives for specific job creation, research or innovation based on evidence or economic reasoning that they will strengthen the economy. Yes, some rich people receive the benefits but many go to middle and working-class Americans.

There is no correlation, however, in economic growth and blindly lowering taxes for the rich. In fact, some economists have found the opposite to be true.

Let’s take a national look. Since 1945, the federal deficit increased 4.2 percent under progressive administrations and 36.4 percent under conservative presidents, according to the Congressional Budget Office.

Even more relevant is the fact that these deficit increases coincided with conservative leaders who reduced taxes—most notably Reagan (11.2 and 5.9 percent deficit increases in his two terms); George H. W. Bush (6.5 percent); and George W. Bush (9 and 10.7 percent).

While it may be argued this is not necessarily related to “job creation,” it is related to increases in GDP (debt/GDP ratio) or relative economic robustness. These presidents cut taxes and increased debt but the economy did not grow accordingly. In short, as with historical “trickle down” strategies, it failed.

Minnesotans saw the same deflated numbers in economic growth under Pawlenty’s “no new tax” era.

Minnesota ranks 32nd in percentage growth in employment (Jan. 2002 to Nov. 2010) Minnesota ranks 36th in the percentage growth in per capita personal income (2002 to 2009) Minnesota ranks 42nd in the percentage growth in median household income (2002 to 2009)

Minnesota can’t keep coasting on the foresight of past generations. We must have new investments in education, health care and infrastructure.

Moving back to the wider economic perspective on tax cuts, University of Michigan professor and Harvard Ph.D. Joel Slemrod has noted that judging by the political scene in Washington, one would think that low taxes were the main source of economic growth in the United States and around the world…even most Democrats dare not demand that President Bush’s tax cuts be rescinded…but there is no compelling evidence that high taxes impede economic growth.

According to Slemrod’s findings:

“there is no supportive evidence for the claim that low taxes guarantee prosperity. In fact, if you just plot out the points (internationally), you will find a clear, positive correlation between high tax rates and prosperity, and that is because developed countries are the ones with the high tax ratios.”

The premise and the promise that giving substantial tax breaks to the very wealthy will stimulate the economy and “create new jobs” simply has no basis in fact or reality. What it has done, factually is increase deficits, like the $5 billion hole Minnesota is currently in and series budget gaps it has had to close under Pawlenty’s no new tax policy.

This further confirms the failure of trickledown economics and it has made the already wealthy, wealthier both in Minnesota and nationwide. While, “no new taxes” makes for snappy sound bites in conservative news conferences, it’s bad economic policy when it comes to creating new jobs, educating Minnesota’s students, providing health care, and building roads and infrastructure.

VIDEO: State Revenue Sharing and Public Safety

Mon, 09 May 2011 11:00:01 +0000

By Tom Niemisto, {related_entries id="article_author_blogger"}Tom Niemisto, Video Production Specialist

As conservatives aim to cut budgets and reduce public service across Minnesota, deep cuts to state revenue sharing will impact more than just property taxes. Police and fire safety services rely on local goverment aid to keep a staff on-call 24-7 to maintain public safety.

Proposed cuts to LGA in St. Paul could cut even more staff and result in longer response times to emergencies around the city.

VIDEO: Why Taxes Are Important

Mon, 18 Apr 2011 12:00:43 +0000

By Tom Niemisto, {related_entries id="article_author_blogger"}Tom Niemisto, Video Production Specialist

There is plenty of debate over our tax system. From creating a more progressive rate to where our public dollars go, we all want fiscal policy that moves Minnesota forward. Here's what some average Minnesota taxpayers think about tax fairness.

Minnesota 2020 Journal: Chewing on the Numbers

Fri, 18 Mar 2011 11:02:28 +0000

By John Van Hecke, {related_entries id="article_author_blogger"}John Van Hecke, Executive Director & Fellow

Three recent reports should give Minnesotans pause and Minnesota policymakers direction. Consumer debt is down as are state housing starts while Minnesota continues sliding toward greater tax regressivity. Conservative “no new taxes” policy is failing Minnesota.

Last week, the U.S. Federal Reserve Board released its G.19 consumer credit report. Consumers now have more credit capacity because they’re carrying, on the average, less consumer debt. This turnaround was achieved through debt discharge; in other words, personal bankruptcy. People have less debt because they walked away from debt-ladened mortgages, leaving homes worth considerably less than the mortgage loan amount.

On paper, this means that increased credit capacity should presage increased consumer spending. Think about it. If I’m paying a $2500 monthly mortgage when my home’s value should put that payment at $1250 and I walk away from the loan, assuming that I haven’t been laid off and can continue paying a mortgage, I’ve just freed $1250 in additional consumer credit capacity.

Under most circumstances, people with an extra twelve hundred bucks a month in their pockets will find a way to spend it. Assuming they could afford the $2500 mortgage in the first place. These are not, however, most circumstances. People—consumers—remain insecure about the economy despite the stock market’s rebound. Accumulating corporate cash reserves aren’t translating into job growth. Without job growth, people still don’t feel good about borrowing and spending money.

Traditionally, people borrow to purchase homes but that’s not happening to the degree expected. According to recent U.S. Department of Commerce figures for February newly issued home construction permits—better known as “housing starts”—are down. Significantly, the total number of issued February permits failed to match same-month projections gleaned from a Bloomberg News survey.

Fewer people building new homes tells us that consumer insecurity remains pretty strong. The recent collective experience with the sub-prime mortgage housing crisis legitimately makes potential home purchasers nervous. Compounding this feeling, the mortgage lending community, reacting to increased regulatory oversight, demands a higher level of lending scrutiny and loan security confidence. Slow job growth combined with consumer insecurity means that we shouldn’t be surprised that people aren’t borrowing money to build new houses.

Except, that’s exactly what needs to happen for sustained economic recovery and growth.

As consumer credit availability data reveal, people have more credit capacity because they’ve reduced consumer debt through bankruptcy and debt discharge. That same phenomenon further informs the low new housing starts because home inventory remains strong. In other words, all of those homes that people left are still there, waiting to be resold. Excess inventory, even if tied up in foreclosure snarls, acts as an additional damper on new construction.

Roughly seventy percent of America’s economy and, by extension, Minnesota’s economy, is driven by consumer spending. That’s the consequence of creating the largest, wealthiest middle class in history. It also means that our economy is especially susceptible to consumer insecurity. While everyone agrees we need to spend less and save more, we still need to spend regularly. If we don’t, recovery slows. And, if conservative public policymakers succeed in laying off 15 percent of Minnesota’s public workers, we could very well tip back into recession because unemployed workers don’t spend remotely as much money as employed workers.

Adding to the sense of Minnesota disquiet is the annual tax incidence study, based on 2008 tax data and the 2011 economic forecast. Issued by the Minnesota Department of Revenue’s Tax Research Division, it finds that “lower- and middle-income households paid a substantially higher percentage of income in state and local taxes than high-income households.” Meanwhile, Minnesota’s highest income earners pay a lower percentage of their income in taxes than lower- and middle-income earners.

Did you catch that? If you earn more than a $130,000 per year, you’ll pay a lower percentage of your income than if you earn less than $130,000 per year. Households earning over $130,000 pay an effective tax rate of 10.3 percent. Households earning less than $130,000—90 percent of Minnesota households—pay 12.3 percent. That’s a pretty good deal for the highest income earners; for the other 90 percent of Minnesota? Not so much.

The conservative public policy solution is to preserve this policy while creating regular legislative distractions, hoping that the 90 percent of Minnesotans don’t notice that whole “better deal for high income earners” policy. It’s not fair and it needs to change.

Linking these three studies suggests that Minnesota public policy functions best when it focuses on the needs of middle-income earning Minnesotans. Getting the economy moving, growing jobs and investing in long-term infrastructure creates a path forward. Minnesota needs Minnesotans working good jobs, saving regularly and spending wisely. We need people borrowing money to buy correctly-priced homes. We need strong schools, affordable healthcare, robust transportation infrastructure and effective economic development. Fair, responsible public policy creates a rosy Minnesota future; conservative “no new taxes” policy fails Minnesota. The numbers bear it out.