Growth & Justice Blog

Jousting with the King

(This is a response to the right honorable King Banaian, of SCSU Scholars blog, who has the coolest name in the Minnesota blogosphere, and who also is a fairly responsible adversary.)

Dear King,

You raise some fair points in your critique of our recent post, in which we demonstrate that Minnesota state and local governments actually are taking a smaller share of our income throughout this decade, and in which we further posit that this smaller government and lower tax rates have not delivered the economic boom that anti-tax conservatives promised. (More on this point today in the latest Capitol Report/Legal Ledger.)

As you point out, we do have a more volatile revenue system (bigger surpluses in expansions, bigger deficits in contractions) than most states, and this certainly is a factor in creating more severe budget shortages than in other states. And there is some random evidence, as you point out, that Minnesota's economy very recently is again doing better than the national average. (Big news this week was the #1 Twin Cities ranking in home value appreciation.)

Nevertheless, we don't see how you demonstrate that this volatility can be the main factor that permanently shrunk our revenues as a share of our income.

Revenues as a percentage of income are largely a function of tax rates. The shrinkage came from major and permanent income tax rate cuts, then a refusal to significantly raise state tax rates or impose new state taxes during the immediately ensuing shortfalls. Contrary to your argument, tax policies did make a major difference and Gov. Pawlenty himself takes credit for his policies shrinking government when he preaches to his conservative base. 

But we would also acknowledge that we would have had shortfalls even if we hadn't cut taxes, because the spending base would have been larger, and downturns always create shortages. That's a point you could have raised, but didn't. So give us points for fairness and good faith. 

Second, we think  there is a broad consensus that Minnesota's economic performance this decade, overall and relative to other states and the national averages, is not as impressive as it was in the three previous decades.  In the very same Budget Trends Commission document that you cite in making the point on volatility, this is the second main bullet point: "Despite continuing to rank high among many key social and economic indicators, Minnesota’s economy has underperformed recently relative to the nation."  

That's exactly what we said too, and there's a wealth of statistics in the commission report to back up that assertion.

Third, let me point our readers to G&J fellow Charlie Quimby's answer to your question: "Where has G&J been in the debate to reduce cyclicality of tax receipts?"

We specifically testified [before the governor's tax commission] in favor of reducing or eliminating the corporate franchise tax, of which the legislative report you quote said in the very next paragraph:

"Minnesota’s corporate franchise tax base, which constitutes 7 percent of general fund tax revenue and boasts the highest trend growth rate, is the most volatile of the three major revenue sources, extremely sensitive to economic cycles and thus subject to substantial uncertainty. In fact, the volatility of Minnesota’s corporate franchise tax base is almost four times greater than the volatility of the individual income tax base and nearly six times greater than the volatility of the general sales tax base."

This support was conditioned upon replacing revenue from other sources, including income and sales taxes, that would make the system less regressive as well as less volatile.

The other source you link to says that there are two ways to reduce fiscal distress from recessions. One is to reduce volatility, and the other is to "build savings during booms... (create and properly use a rainy day fund)."

Another measure we have supported.

Finally, the very funny promotional blurb on your blog that condemns your team as "self-absorbed moral cretins'' is really outrageous and unfair. You are among lots of very fine people who are just plain wrong about things once in awhile. 

— Dane Smith

Less Government? We Tried That. It's Not Working.

The Star Tribune's front-page story today finds that "less government'' is the overwhelming consensus "vision'' for Republican gubernatorial candidates. Peggy Lee and most Minnesotans want to know: Is that all there is?   

Leaving aside that this mantra sounds more like hard-right, activist-energizing radio talk than inclusive vision casting — and has to be extremely disappointing to hundreds of thousands of moderate and progressive Republican voters — we need some context here.   

The Price of Government, an official state Minnesota Management and Budget measure, shows that we DO have less government over the last decade, ever since the no-new-taxes religion, like some southern invasive species, got a hold on the North Star State. (See page 13 of the PowerPoint presented at the capitol last week by State Economist Tom Stinson and State Demographer Tom Gillaspy).

The bar graphs clearly show that our governments are using about two percentage points less (15.5 percent in 2008 compared to about 17.5 percent through the 1990s) of our personal income share than those governments were spending when the economy was actually doing better. Huge income tax cuts in 1999 and 2000 left us with chronic  budget crises, and the promised payoff in sustained, tide-rising economic growth didn't materialize, either.  

Wealth concentration at the top got worse, bridge and road conditions deteriorated, public school course offerings were cut, and thousands of working low-income folks lost their health care. And our economy is slumping and beginning to underperform the national average on some key indicators.  

We surely could use some more judicious restructuring and redesign of how we do our government work. But the basic things government provides are essential for our shared prosperity and quality of life.  

NOTE: The Price of Government measure is one of the most comprehensive of all the measures we have to describe the size and role of government. It counts state and local government revenues as a percentage of total income and therefore accounts for inflation, population growth and economic growth. It was instituted at the behest and with the approval of business groups in the late 1980s.

— Dane Smith

Business leaders focus on success in schools, community priorities

Times are tough in the world of commerce these days but the Minnesota Business Partnership put on an uplifting and clever show Tuesday night, highlighted by a very funny Twitterfest orchestrated by partnership director Charlie Weaver. The fictitious tweets that flashed up on the big screen were inspired, including the one ascribed to Gov. Tim Pawlenty, under the name "veer2right'', in a reference to his presidential prospecting.  

Our favorite part, though, was the recognition afforded to two outstanding public schools, King Elementary in Deer River, and Dayton's Bluff Achievement Plus Elementary in St. Paul, for their progress on student achievement. The videos celebrating and explaining their success should be up soon on the partnership website. (The Partnership is comprised of the CEOs of Minnesota's 100 largest companies and obviously is a major player in policy matters.)

Qwest CEO John Stanoch, a valued member of the Growth & Justice Board of Advisers, and a leader of the partnership's education policy team, pointed out in his presentations of $10,000 awards that both schools have high percentages of poor and minority students and that those conditions "do not have to be synonymous" with low test scores. The principals at each school talked about setting goals and focusing constructive and energetic attention on the students and parents who need help.   

The evening's speakers were focused on community building, with relatively little of the dissing of the public sector or tax rates that sometimes occurs in business gatherings. Even Gov. Tim Pawlenty's keynote address was notable for its rather harsh denunciation of private-sector irresponsibility and arrogance, epitomized by General Motors.  

Doug Baker, CEO of Ecolab, Inc., current chairman of the partnership, took aim at Minnesota's corporate income taxes as a problem, and we agree that those rates could come down as part of an overall revenue-positive tax system reform. But Baker's speech also accurately summarized Minnesota's great tradition of community-minded rather than self-interested business leadership, going back to the Dayton's department store decision a half-century ago to donate 5 percent of its profits to the community. Corporate foundations currently invest about a billion dollars a year in Minnesota, Baker said, "and there's a culture here of stewardship.''  

— Dane Smith

After Labor Day, keep working on economic justice

I had the great privilege of delivering the Labor Day Sunday sermon at my church (Unity Church, Unitarian Universalist, in St. Paul). I offered the best I could find from Abraham Lincoln, the Bible, Catholic and Lutheran teachings on social justice, and recent economic studies to make the case that we have an inequality problem in Minnesota and the nation. And it was a treat to get Donna Summer's great song, "She Works Hard for the Money'' into the liturgy as the postlude.  

Here's one point I made about labor and fairness, and democratic and religious traditions.

As Americans we mark our progress by looking back at forms of liberation from exploitation of labor. In our western hemisphere, we look back in horror at the forced conversion and attempted enslavement of aboriginal people to Christendom and efforts to bring them under the English and Spanish or French yoke. We are proud of the American Revolution and our fight against the illegitimate seizure, without representation, of our labor. We are proud of the great fight led by liberal religious founders of our own Unitarian Universalist denomination against the enslavement of African people. Interestingly, southern defenders of slavery used the Bible’s apparent approval or neutrality on the subject to advance their secessionist cause.

In the last century, we’ve made enormous progress against the much more subtle forms of semi-slavery that come with unbridled capitalism and the slanted bargaining table set up between employers and employees: the simple and basic right to organize, child labor laws, the 40-hour work week and overtime compensation, the minimum wage, the civil rights movement and ongoing efforts to finish the Emancipation Proclamation and end the de facto slavery imposed on people of color, the migrant workers’ reforms, and in more recent years but throughout history, hugely important, the oppression of women in the workforce.

I urged the congregation to consider the mountains of evidence that show economic inequality growing once again, after we reached a high-water level of overall economic equality in the 1970s. And I urged folks to do whatever they possibly could to change policies and laws to bring about more equal outcomes, chiefly through more and better investment in human capital.   

The full text of the sermon is available here [PDF]. 

— Dane Smith

Wisconsin, where the venture grass looks greener — so far

The Star Tribune today reports a start-up medical company, which grew out of University of Minnesota research, is considering moving to Wisconsin because of taxes.

No, the decision will not be based on the usual complaint about taxes on the business or its owners. The concern is taxes on high-tech investors in an economic environment where money for research is very difficult to obtain. The company believes investment dollars are greener on the other side of the border because of a Wisconsin law that gives investors in start ups

tax incentives that encourage them to fund risky, early stage companies based in the Badger State. Angel investors there can claim a 25 percent tax credit over two years up to $500,000 per investment; venture capital funds can earn a 25 percent credit over one year up to $2 million per investment.

Research-based medical start ups have ongoing needs for capital as they develop products and get them through the regulatory process. They also may be more mobile than other types of businesses that have already established facilities, suppliers and customers. 

The Governor's Tax Reform Commission proposed similar measures [Download summary PDF] to encourage early-stage investment in Minnesota entrepreneurial and high-tech ventures. There's broad, bipartisan support for change, but this reform is just one of many that must grind through a contentious budget-balancing process.

If the reforms fall through and the company departs to find success next door, Minnesota taxpayers can take cold comfort that they helped fund it. 

— Charlie Quimby

Tax Commission report is reasoned, but...

The Governor's business tax reduction commission — can we dispense with the "21st Century Tax Reform" bit and call a spade a spade? — released its report on Friday, with the lead recommendation of repealing the state corporate franchise (income) tax. Another recommendation would exempt from taxation 20 percent of "pass-through" business income to individuals.

Given the Republican and business tilt of the group, the panel's report [PDF] is not surprising — but predictable is not the same as wrong.

You won't hear complaints from this quarter about its assessment of Minnesota's economy, the need for investment in education and academic research and the importance of business in creating wealth and well-being in the region.

And you won't even get much argument with ending the corporate franchise tax, either. If you have to cut a tax, it's not a bad one to choose. It's regressive, volatile and has a negative — though over-dramatized, in our view — effect on some business decisions.

But as we must learn over and over, not everything that's good for business is unfailingly good for the public.

In good times, the corporate franchise tax contributes a lot of revenue to the state. The recommended cuts would cost the state about $1 billion a year. 

The glossed, the obscured and the skirted

The commission was originally charged to cover the costs of reform in its proposal, but the final report avoids a specific tally of how proposed taxes would counter the cuts — settling for recommendations to expand the sales tax base and increase the tax on cigarettes by up to $1 a pack.

The commission says Minnesota's high corporate income tax rate puts the state at a disadvantage. It seems to acknowledge that our poor business tax climate is more perception than reality, but believes we must address it. (Why the financial types who drive business decisions can't see the difference between a statutory tax rate and actual total tax burden is a subject for another day.)

In support of the competition argument, since 2002, the report says, six states have reduced corporate tax rates or replaced the corporate income tax. We looked up the most recent growth rates for those states and threw in other states with no corporate income tax, plus our business-friendly neighbor, South Dakota. The growth picture for those states is definitely mixed. 

 

To its credit, the commission did not try to oversell the stimulative benefits of its corporate tax cut and other reforms. We believe they are likely to help business. The open question is how much. And the unanswered question is how even revenue-neutral reforms will help address the state's revenue shortfall.

Another point, with which we agree, is Chairman Mike Vekich's "Businesses don't pay taxes. You and I do. Where we tax businesses, we are taxing our own wealth."

But on the other hand, the commission seems reluctant to tax that wealth. Where income flows from businesses to people, the Commission also wants to see a cut. It amounts to a backdoor personal income tax cut for higher earners.

Small businesses would get a special boost -- one-fifth of owners' profits would be exempt from taxation.

House Taxes Committee Chairwoman Ann Lenczewski, DFL-Bloomington, said she was "stunned" by that recommendation.

"What it means is a managing partner at a small law firm will pay a smaller top rate on income than the associate partner who makes less," Lenczewski said. "The boss gets a big tax break because he owns the business, but the secretary doesn't. I agree with some of the commission's recommendations, but this one just confounds me."

And this is really the most disappointing aspect of the report. The commission skirted the issue of fairness to individuals, only acknowledging that replacing a regressive business tax with regressive sales taxes probably wouldn't make the system more regressive.

Fair seems to mean fair for business. Indeed, the word "fairness" appears only three times in the report's 34 pages, always in a list of general principles. The commission's second principle for reform is:

Tied to benefits received. There should be a strong, direct relationship between the nature and level of business taxation in the state and the cost of benefits and services provided to businesses by state and local governments.

This so-called benefits principle is a particular favorite of conservative theorists, but the devil is in the details. It wasn't the commission's charter to think about business tax reform's impact on a single, unemployed mother with a child in public school, but the legislature will.

In all, the commission's report adds another useful, philosophical perspective to the budget discussions. Progressives — and the governor — should open their minds to what it has to say.

—Charlie Quimby

Cut my taxes, or I'll kill this job!

Despite many years of running and growing a company as a bleeding-heart liberal, I can't ever remember getting up in the morning and saying: "Today, I'm going to go forth and create a new job!"

Now, maybe State Senator Geoff Michel (R - Edina) — a logical legislator who must've absorbed a few sound fiscal concepts as an aide to Gov. Arne Carlson — knows some people like that. But more likely here, his thinking is shaped by people who say high taxes prevent them from creating jobs, when they really mean they wish they made more money and cutting their tax rate is the easiest way they know how.

The idea that investment helps create jobs has some truth in it, and so does the notion that if investors can make more money by growing a company than by manipulating the stock market, they will do it. Long term, I might even agree with conservative economists on the main point.

But whether you are a state senator or President of the United States, you lose sight of the following truth at your peril. Investors are interested in making money, not creating jobs. And entrepreneurs are just a crazier version of investors. If they have to create jobs to realize their vision, they will do it. But if they could accomplish the same thing all by their lonesome, they would do that in a heartbeat.

So even though I don't automatically get palpitations when some politician proposes cutting corporate tax rates, I just shake my head when I see them claiming that cutting business taxes will "kick start the economy" and "grow jobs."

Still, when Sen. Michel (R - Edina) issued the tax-cut altar call this week — "Let's send a message today that Minnesota is open for business" — True North's Chief said Halleluiah:

Revenue can not possibly increase if businesses are cutting employees, shutting their doors and moving to Nevada, South Dakota and Texas.

True enough, but a big "if." And he failed to draw the connection between what anti-tax dogma says will happen and what is really going on.

A new analysis from the Center on Budget and Policy Priorities lays out why a corporate tax cut is unlikely to provide an economic stimulus any time soon:

“Increasing the after-tax income of businesses typically does not create an incentive for them to spend more on labor or to produce more, because production depends on the ability to sell output."

There's a fair amount of cutting and door shutting happening in the low-tax states the Chief cites, too. But we've been told they, along with Florida, have been absconding with Minnesota's business wealth. This is largely based on business tax state rankings ginned up by the Tax Foundation — not on actual studies that show an exodus is occurring. (Matt Kane offers a counter-view here.)

In fact, the indicators for those states are doing no better than Minnesota's.

Nevada leads the nation in foreclosures, followed by Florida, and ranked 45th (that's bad) in unemployment rate (Florida is 39th). Texas (27th) and Minnesota (25th) are about even on foreclosures; Minnesota's unemployment rate (31st) is 0.7 points higher than Texas's (19th). Fresh business bankruptcy data is not easily accessible, but Texas had been showing a much worse rate compared to ours.

South Dakota is the outlier, but as far as substantial Minnesota industry shutting down here and moving across the border to create jobs, Brad Pitt is more likely to start making babies with Kathy Bates.

— Charlie Quimby

Cross-posted in an edited version from Across the Great Divide

Minnesota’s Business Taxes, Climate – Not So Bad

Governor Tim Pawlenty in his 2009 state of the state address called for reduced corporate income taxes as a way to help Minnesota recover from the national economic crisis.  According to the governor, Minnesota’s business taxes are out of line.

For the high tax claim, the Pawlenty hangs his hat on a short Tax Foundation write-up that adds U.S. and corporate income tax rates together and compares the rates to those of foreign nations. While this has set off alarm bells in the Pawlenty administration, it’s not a very useful exercise because corporate income tax rates are but a one part of the total picture for business taxes.

The range of taxes on business certainly includes the corporate income tax — for corporations, anyway — but also includes property taxes, sales taxes, individual income taxes for small businesses, license fees, workers compensation taxes and unemployment insurance charges. 

Minnesota is competitive when it comes to business costs and taxes, says the website for Minnesota's Department of Employment and Economic Development. As noted there, a 2004 study by the Federal Reserve Bank of Boston ranked Minnesota 41st for taxes as a share of business profits.

And the private-sector consulting firm Anderson Economic Group, in its latest annual report [download pdf] identified Minnesota as the fourth lowest state for business tax burden using a broad range of business taxes measured against profits earned in the state. Clearly Minnesota's rank would change if other measures of taxes or business earnings were applied, but the AEG report demonstrates the difficulties with blanket statements about high business taxes in the state.

For businesses, of course, it’s more than just taxes that shape the environment. Forbes Magazine recognizes as much in its annual ratings of the best states for business. Of the 50 states, Minnesota ranks 11th. Not bad.

Over the years, Minnesota has been a great place to do business in part because of ample but smart public investments in quality education, transportation and other infrastructure, and quality of life concerns, such as health and the environment.

Corporate income taxes may be an issue — or maybe not, given a total accounting for all of the state’s business taxes. Either way, corporate income tax cuts do not jump out as a key issue for the state to tackle in the midst of a sagging national economy and a massive budget deficit.

— Matt Kane

Business-friendly Minnesota needs higher goals, broader thinking

St. Cloud conservative blogger Gary Gross caught my attention with this lead to a recent post:

When the conversation turns to making Minnesota a business-friendly state, most conservatives rightfully think of cutting taxes and reducing small business's regulatory burden. It's time conservatives started thinking in terms of a well-educated workforce and health care reform as important to making Minnesota business-friendly, too.

While his views on how to address these issues don't precisely square with ours, his larger point — that conservatives should put greater emphasis on them — is well taken... especially if the emphasis involves study and empirically driven reforms focused on strategically important goals.

Progressives should have their own list. For starters, I'd say the party perceived as being government- and labor-friendly should start speaking more favorably of entrepreneurism and system reform.

As the current recession shows, building a business-friendly state is not simply a matter of driving down costs and freeing business to operate with minimal restraints. We'll never get there without a healthy, productive workforce and affordable housing and transportation systems.

The public benefits when policy makers rise above ideologically derived positions and remind each other that Minnesotans have a lot at stake together. Otherwise, one side sees the health care issue as being driven by unsustainable costs to business, so reducing them becomes the goal of reform — while paying lip service to consumer choice and quality care. The other side wants access and a secure safety net, so universal coverage is their goal — while the costs are either wished away or picked up by the ever-popular "rich."

Of course, this sets up an irresolvable conflict between selfish, numbers-driven business interests and clueless, entitlement-driven socialists, each regarding the other as the root of the problem.

Defining the right strategic outcome is critical, because in politics, the ends don't only justify the means — they determine what we're going to achieve .

Competing for (and investing in) high-income jobs

John Wiley, outgoing chancellor of the University of Wisconsin-Madison, was writing about issues in his own state, but his words should be heard across the border. (And not just because he compared Minnesota favorably to Wisconsin.)

Here are a few excerpts from Madison Magazine's "From Crossroads to  Crisis."

If there are any two natural allies in economic development, they are higher education and the business community. So where is the business community on these issues? The high-tech community is vibrant and growing rapidly, yet is largely disorganized. Its members are understandably too preoccupied with developing their products and their markets to become much involved in public policy or lobbying, and most of them aren't big enough--yet--to be players in the political process. I know these entrepreneurs: Nearly four hundred of their companies trace their origins to our laboratories.

[...]

According to 2007 U.S. Census Bureau numbers, Wisconsin currently has the eleventh-highest per capita state tax revenues in the nation, and WMC [Wisconsin Manufacturers and Commerce, a business trade organization] cites the statistic as evidence that Wisconsin is a "tax hell." But look at the ten states with higher per capita taxes than Wisconsin: Hawaii, Wyoming, Connecticut, Minnesota, Delaware, Vermont, Massachusetts, New Jersey, California and New York. Nine of the ten have higher per capita income than Wisconsin. In particular, Minnesota, our demographic twin, has the fourth-highest per capita taxation, and they're knocking our socks off economically. They are currently ninth in the nation in per capita income while Wisconsin has slid to twenty-first. And of the ten states with the lowest per capita taxation in the country--Arizona, Georgia, South Carolina, Tennessee, Missouri, Alabama, New Hampshire, Colorado, South Dakota, and Texas--eight have lower per capita income than Wisconsin.

So which economies should we aspire to: the dynamic, high-income, high-tech, twenty-first-century economies of Minnesota, Delaware and Massachusetts, or the economies of South Carolina, Tennessee and Alabama?

[...]

The high-tech companies that are the future of Wisconsin's economy couldn't care less about hypothetical "minimum-wage" jobs: They don't have any such jobs. And it's been a long time since organized labor was able to negotiate wages exceeding those already set by normal supply-and-demand market forces. Even in the direct consumer service sector, employers who offer only the official state or federal minimum wage are unable to attract or keep employees.

[...]

Don Nichols, an eminent UW economist, conducted a detailed study aimed at understanding the steadily widening gap between per capita incomes in Wisconsin and those in Minnesota (view the report). In a nutshell, Nichols found his answer in the top ten percent of all wage earners. Wisconsin has too few high-income jobs, and those who earn in the top ten percent still make less than their peers in Minnesota. Wisconsin is already extremely competitive in the bottom ninety percent of jobs.

This is partly just a matter of arithmetic. Per capita income is one simple and useful measure (among many) of the overall economic health of an economy. If our current per capita income is $33,565, or about $17/hour, according to the U.S. Census, then we need lots more new jobs paying more than $17/hour than jobs paying less than $17/hour to raise that average. I know there are many tasks in the economy that do not have an economic value exceeding $17/hour. But, while more $9.50/hour jobs may help entry-level workers survive until they can advance to the next rung, it is the new jobs above $17/hour that will enable Wisconsin to thrive, and lift everyone.

— Charlie Quimby