Growth & Justice Blog

Been there, dumped that: Colorado's lessons lost on Pawlenty

As both a Minnesota and Colorado taxpayer, I've watched in dismay as my adopted state slouches closer to my home state in matters of budgets and taxation. So far, I've kept my residence and income taxes here, but if the gap closes further, I'll have less reason to resist the tug of family, mountains and milder weather in the west.

Only this week, voters in two states looked at the carnage wrought by constitutional budgetary handcuffs and rejected a ballot measure similar to Colorado's TABOR.

But that didn't dissuade Gov. Pawlenty. Today, he made official his aspirations to turn out the lights after he leaves the governor's office.

His proposed a constitutional amendment to limit future biennium spending to the past biennium's revenues is TABOR in spirit, if not in structure. (Minnesota Budget Project's Christina Wessel says it's actually more restrictive.)

As I wrote earlier this year about the allure of limits:

Colorado went furthest in imposing what the state’s Bell Policy Center calls “the most restrictive tax and spending limitation in the country” — TABOR, the Taxpayer's Bill of Rights. Designed to hold down taxes and shrink government, TABOR requires voters to approve tax increases that exceed a certain formula of growth. About 90 percent of revenues are dedicated, leaving little room to deal with changing conditions. Fed up with how the state was shortchanging education and transportation, Coloradoans have twice voted to loosen TABOR’s revenue straightjacket.

Among those Coloradoans calling for TABOR's suspension was then-Gov. Bill Owens (R), who had helped push through the amendment and then was forced to run the state under the limits it imposed.

Our governor, however, conveniently offers his amendment as he heads out the door. As Senate DFLers have already pointed out [PDF], it's a "do as I say, not as I did" moment.

And the proposed amendment does nothing to address the shift of spending from state government to local governments, which has been one hallmark of Gov. Pawlenty's purported fiscal discipline.

House Majority Leader and candidate for governor Rep. Margaret Kelliher Anderson also saw the parallels with the Colorado experience. She cited a report [PDF] from the Center on Budget and Policy Priorities that charts the state's decline under TABOR.

It's breathtaking how a state that is one of the most well-educated and prosperous has raced to the bottom in so many measures. Colorado has fallen:

• from 35th to 49th in the nation in K-12 spending as a percentage of personal income.
• from 30th to 50th in average teacher salary compared to average pay in other occupations
• from 35th to 48th in college and university funding as a share of personal income 
• from 20th to 48th for the percentage of low-income non-elderly adults covered under health insurance
• to 49th in the percentage of both low-income non-elderly adults and low-income children covered by Medicaid
• to dead last in share of low-income children lacking health insurance.

Mark Dayton, another candidate who'd be stuck with Pawlenty's measure if elected, calls it the "Destroy Minnesota Amendment" and challenges him to prove he truly believes it would work — by limiting his presidential campaign spending for the next two years to what he has raised during the previous biennium.

History is instructive and ridicule is tempting. But the best response to this amendment will come from legislators doing their job each session — and not wasting their time on stunts.

— Charlie Quimby

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

The subsidy game: Slouching toward Wisconsin

The Star Tribune's Thomas Lee reports that "Another Minnesota company leaves for Wisconsin."

Dr. Joseph Ward, vice president of Marketing, said: “RJA Dispersions chose John Wold’s River Bluffs Business Center not only for its attractive location and economics, but also for the availability of industrial level power. Bill Rubin, director of the St Croix Economic Development Corporation coordinated key resources including availability of financial support from Char Gurney and the West Central Wisconsin Regional Planning Commission which is making our expansion plans possible in this difficult financing climate.”

Emphasis mine.

Hey, I get why a manufacturer might covet "availability of industrial level power," even though it's a mystery to me why the company could find better power in Hudson, Wisconsin, than is available in 3M's backyard. Just a hunch, but I think the "availability of financial support" probably played a bigger role.

Hudson is also home of the long-vacant St. Croix Meadows dog track, which promised big crowds, fancy restaurants and an influx of high-rolling tourism when it opened in 1991. You'd think communities would learn, but maybe the weeds growing up in the cracks in the parking lot aren't enough of a reminder.

This move is hardly on the same scale, but it brought to mind that only last week, Dell Inc. announced that it will shut down its state-of-the-art desktop computer manufacturing plant in Winston-Salem, N.C. facility by January, with the loss of 905 jobs.

Dell was promised more than $300 million in state and local incentives to open the [$130 million] plant. But it was required to invest $100 million, create 1,700 jobs by September 2010 and maintain those jobs for 10 more years. If those terms weren't met, the company would forfeit the incentive package.

Dell owed the state another 800 jobs in less than a year. Folding the state-of-the-art tent seems almost honorable.

Dell says it "will absolutely continue to comply with and honor all agreements with various governmental entities," which means it will pay back at least some of the help it received to locate there. As required.

[Winston-Salem Mayor Allen] Joines said he was assured by Kip Thompson, vice president for facilities, that Dell will honor its commitment to repay the $15.56 million the city has provided since Dell agreed to build the plant.

But millions of dollars won't be returned. Public agencies paid to prepare the Dell site for construction, widen roads leading to the plant, and equip community colleges to train company workers before the plant opened.

Our friends at Good Jobs First remind us that Dell was more aggressor than suitor. Greg Leroy's chapter on corporate tax dodges [PDF] details how Thompson ran the negotiations:

“Here’s what it’ll take,” Dell vice president Kip Thompson told Commerce Secretary Jim Fain in May 2004, according to Fain’s notes. “1) free land; 2) free bldg.; 3) no taxes; 4) training at $5m; 5) participation in creation of future value in the community.” The
following month, Thompson said to Fain: “[I am] not wowed here—not sure the state’s stepping up here ...If a state like N.C. can’t get after this, I’m worried for our country — there’s a certain amount of patriotism here.”

Meanwhile, Dell has announced that it would move its Irish operations to Poland in exchange for a 54 million Euro ($80 million) subsidy. The Poles are grateful, but say they are undeluded about the way the subsidy game works.

[W]ith wage costs rising, people here know they may have just a decade to make the most of the “Dell Effect” before the company vanishes again.

Although there's no specific talk of tax concessions in the brief story about the Minnesota company leaving for Wisconsin, the "another" in the headline implies it is part of a trend, and it may be tempting for readers to assume that our supposed unfriendly business tax climate is to blame.

But Wisconsin's total taxes as percent of income is now about 12.2 percent, ranking 13th, compared to 11.8 percent and a 19th ranking for Minnesota.

Let's hope Wisconsin doesn't decide to become Minnesota's Poland. Then, who will be Wisconsin's China?

— Charlie Quimby

What's the Matter with Alaska?

SEWARD, AK — So the very conservative Alaska Legislature, too often prone to bashing government and the federal government in particular, did the right thing last week and overrode former Gov. Sarah Palin’s veto of some $28 million in federal stimulus money. This provoked the erstwhile governor to say on her Facebook page that she had vetoed the energy assistance part of the stimulus because it would "further tie Alaska to the federal government."    

Nosirree, wouldn’t want that, even though the federal government has been very, very, very good for Alaska and Alaskans throughout 50 years as a state, and long before that, going back to the federal purchase of the Great Land in 1867.     

Despite this fairly obvious reality, far too many Alaskans are infected with a libertarian self-righteousness and a contempt for government in general. The vastness of the place feeds an illusion of individuality and self-reliant independence, but no state is a bigger per capita net beneficiary of federal spending, and this despite the state’s preponderance of revenue from royalties on oil extraction. Per-capita federal spending in Alaska amounted to more than $12,200 per person in fiscal 2003.

This government action has mostly been for good.

[View from the state-run Alaska Railroad]

The government built the Alaskan Highway and the Alaska Railroad (taking over the latter from a failing private effort a century ago), without which habitation and economic development would have been impossible. The state government now runs the railroad at public expense and it’s a pretty impressive operation. For decades, the state's lifeblood has come from federal investment in defense and military installations and natural resource stewardship, plus construction of all manner of infrastructure from airports to harbors to sewer service.  

Growing up in Anchorage in the 1950s and 1960s, I remember having to fill out a "federal impact statement" every September. Since statehood (I remember the bonfire in Anchorage when Congress approved it), this largesse has flowed to the state far out of proportion to its population.

And the pipeline is still open. Remember the infamous Bridge to Nowhere, which became the emblem for earmark abuse, was destined for Ketchikan, Alaska.

Alaska might actually benefit from a less dictatorial federal bureaucracy and from placing a little more of its land and resources in private hands. But its long-term economic health also depends primarily on the appeal of its magnificent public wilderness to tourists from around the world.

The captains of industry do not have a sterling record of preserving and investing in that resource. A fascinating account by Alfred O. Quinn, "Iron Rails to Alaskan Copper," documents how the Guggenheim interests extracted $200 million worth of copper from Alaska between 1912 and 1938, and then deserted the state when profits declined. Native tribes and communities in Prince William Sound are still waiting for delivery on the promise to make them "whole" after the Exxon Valdez spill 20 years ago. 

The federal government doesn’t work that way, thankfully. It’s here for good and does good for the most part.

As a proud former Alaskan, I’m also proud of my federal government’s responsible and far-sighted tending of this great land and its people, no matter how obtuse some of them are about the good their government does.

 — Dane Smith

Healthcare reform lessons from small town America

“Any plan that relies on the sheep to negotiate with the wolves is doomed to failure.”

— "The Cost Conundrum: What a Texas town can teach us about health care," The New Yorker

We know health care cost growth must be contained. It's hampering our competitiveness, bankrupting families and hamstringing state and federal budgets. But any hope for a systems solution gets tangled in the political struggle that pits free marketry against creeping socialism in every area of community life.

But what if the free market chose something that looked more like "socialized medicine" — and it worked?

That's one intriguing possibility found in surgeon Atul Gawande's New Yorker article, which looks at high-cost and low-cost health care systems around the country. In light of the evidence, none of the leading theories about why costs grow out of control account for dramatic health care cost and quality differences among otherwise similar communities.

Looking at McAllen, Texas, one of the most costly healthcare markets in the nation, Gawande found that "the primary cause of McAllen’s extreme costs was, very simply, the across-the-board overuse of medicine." What's more, overutilization was not producing better outcomes there or elsewhere.

Two economists working at Dartmouth, Katherine Baicker and Amitabh Chandra, found that the more money Medicare spent per person in a given state the lower that state’s quality ranking tended to be. In fact, the four states with the highest levels of spending—Louisiana, Texas, California, and Florida—were near the bottom of the national rankings on the quality of patient care.
[...]
In an odd way, this news is reassuring. Universal coverage won’t be feasible unless we can control costs. Policymakers have worried that doing so would require rationing, which the public would never go along with. So the idea that there’s plenty of fat in the system is proving deeply attractive. “Nearly thirty per cent of Medicare’s costs could be saved without negatively affecting health outcomes if spending in high- and medium-cost areas could be reduced to the level in low-cost areas,” Peter Orszag, the President’s budget director, has stated.

But what, exactly, accounts for the fat?

Gawande looks at, but finds little evidence to indict, the usual suspects: Government, consumers with little skin in the game, greedy hospitals and insurance companies, unhealthy habits and skewed provider incentives. Instead, he points to a culture shift in the culture of medical practice that mirrors a change in society.

A focus on money, not healthy communities.

The article suggests that physicians are not equipped — with training or data — to focus on the financial considerations of their decisions, while the business orientation of hospitals and insurance companies requires them to focus on

whether they are losing money or making money. They know that if their doctors bring in enough business—surgery, imaging, home-nursing referrals—they make money; and if they get the doctors to bring in more, they make more. But they have only the vaguest notion of whether the doctors are making their communities as healthy as they can, or whether they are more or less efficient than their counterparts elsewhere.

According to Gawande, Stanford sociologist Woody Powell — studying why certain regions became leaders in biotechnology while similar centers did not — has formulated a theory of economic development which holds that "anchor tenants" define the character of an economic community, just as anchor tenants in a mall do. By setting certain collaborative community norms, anchor tenants encouraged successful communities, while those aiming to dominate did not.

Powell suspects that anchor tenants play a similarly powerful community role in other areas of economics, too, and health care may be no exception. About fifteen years ago, it seems, something began to change in McAllen. A few leaders of local institutions took profit growth to be a legitimate ethic in the practice of medicine. Not all the doctors accepted this. But they failed to discourage those who did. So here, along the banks of the Rio Grande, in the Square Dance Capital of the World, a medical community came to treat patients the way subprime-mortgage lenders treated home buyers: as profit centers.

The difference between McAllen and Grand Junction, Colorado, one of the nation's lowest-cost markets with some of the highest quality-of-care scores, may be the difference between a culture focused on money versus one focused on a healthy community.

[Y]ears ago the doctors agreed among themselves to a system that paid them a similar fee whether they saw Medicare, Medicaid, or private-insurance patients, so that there would be little incentive to cherry-pick patients. They also agreed, at the behest of the main health plan in town, an H.M.O., to meet regularly on small peer-review committees to go over their patient charts together. They focussed on rooting out problems like poor prevention practices, unnecessary back operations, and unusual hospital-complication rates. Problems went down. Quality went up. Then, in 2004, the doctors’ group and the local H.M.O. jointly created a regional information network—a community-wide electronic-record system that shared office notes, test results, and hospital data for patients across the area. Again, problems went down. Quality went up. And costs ended up lower than just about anywhere else in the United States.

Grand Junction’s medical community was not following anyone else’s recipe. But, like Mayo, it created what Elliott Fisher, of Dartmouth, calls an accountable-care organization. The leading doctors and the hospital system adopted measures to blunt harmful financial incentives, and they took collective responsibility for improving the sum total of patient care.

It almost sounds like socialism, except Grand Junction is politically a very conservative community. Go figure.

— Charlie Quimby

Shauxing what we knaux from Caux, on the value of "Social Capital''

The Caux (pronounced "ko") Round Table is an intriguing non-profit group  — based in St. Paul  but with a strong international presence — that advances the principles of enlightened and ethical capitalism.   It recently released its country rankings for Social Capital Achievement.  Like many such comprehensive measures of overall quality-of-life AND competitiveness, the Caux ranking places the U.S at an unimpressive 15th place, and  below other prosperous democracies with more and smarter public investments in education, health-care and other forms of human capital.  

At Growth & Justice, we often make the same case at the national and state level, arguing for Minnesota's need to invest in human capital and infrastructure, pointing out that it has been the secret to our business success.

Even more useful than the ranking itself is the articulation Caux provides for the idea of a progressive business climate.  Here are excerpts from the 2009 ranking report.  

Economic development does not occur independently from social,  cultural and political institutions. Wealth creation is not an isolated, autonomous, self-referential process within communities; it is a dependent variable, subordinate to the dictates of prior conditions.   Markets are organic phenomena; they grow strong and vibrant only in facilitating environments [...] Countries with high levels of social capital achievement are more economically prosperous and provide a higher quality of life for those who live in them.

The report is co-authored by Stephen B. Young, global executive director of Caux, a former dean of the Hamline University Law School and a significant figure in MInnesota public policy circles for three decades. Young frequently draws on the classics and Cicero for inspiration, and for this report he cited the Second Vatican Council's definition of the "common good'' as "the sum of those conditions of social life which enable groups and (italics mine) individuals to achieve their fulfillment more completely and readily.''

Good stuff.

— Dane Smith

Minnesota compared: Colorado and the allure of limits

As the Minnesota Legislature struggles to close a gaping revenue shortfall, I'm in Colorado watching how another set of lawmakers attacks the same problem.

The two states are similar in size, ethnic makeup and per capita personal income. They are weathering the recession better than many others, but are dealing with the harsh fact that a contracting economy shrinks revenue at the same time it increases demand for government services.

So it’s not surprising some of their budget-balancing efforts look similar, too.

They’ve both searched out one-time infusions beyond federal stimulus dollars. (Colorado is testing whether it can draw upon reserves in the state-founded workers comp insurance company, and Minnesota has proposed borrowing backed by tobacco settlement revenues.) Lawmakers in both places consider rescinding hundreds of millions of dollars in tax credits and exemptions — called tax expenditures — that divert money that would otherwise flow into the tax system.

And, Democratic Gov. Bill Ritter, like Minnesota Gov. Pawlenty, has been raising fees, which may look like taxes but — like all these other measures — don’t constitutionally quack like them.

In fact, the greatest similarity may be this urgent pantomime of raising enough revenue without appearing to raise taxes. The main difference? Colorado is constrained by constitutional amendment; Minnesota, by a tax-averse governor.

Strict revenue limits and no-tax pledges were enabled by a growing economy that supplied sufficient public dollars without the states having to face severe consequences… until later.

Colorado went furthest in imposing what the state’s Bell Policy Center calls “the most restrictive tax and spending limitation in the country” — TABOR, the Taxpayer's Bill of Rights. Designed to hold down taxes and shrink government, TABOR requires voters to approve tax increases that exceed a certain formula of growth. About 90 percent of revenues are dedicated, leaving little room to deal with changing conditions. Fed up with how the state was shortchanging education and transportation, Coloradoans have twice voted to loosen TABOR’s revenue straightjacket.

An inflexible, rule-based approach appeals to those who want the pre-emptive accountability of a bathtub-sized limited government. But it has little to offer the majority who have a broader definition of accountable government. They want the overall tax burden to be distributed fairly and expect spending programs and tax breaks to deliver their promised benefits.

On paper, Minnesota’s more flexible accountability framework looks pretty good.

The Legislature enacted a law in 2008 to revive the Minnesota Milestones established by Gov. Arne Carlson in the 1990s that mark progress against long-term goals for the state, and now there’s an Accountability Minnesota website that reports on the milestones by category and agency. Many legislators from both parties also have initiated goal-setting and accountability initiatives in the Legislature.

But reporting on progress against long-term goals and high-level priorities is only part of holding government accountable for results. The real test of these principles comes at budget time when dollars are scarce and choices must be made.

The scrutiny forced by scarcity can be healthy. For example, both states are finally taking a serious look at whether tax expenditures actually achieve their intent, and how they tend to benefit businesses and higher-income taxpayers over those whose benefits must go through the appropriations process.

According to a recent Public Strategies Group report, “Minnesota’s Bottom Line,” [Download pdf] regular legislative review is already required to evaluate the cost, effectiveness and fairness of this $11 billion in “hidden spending.” Yet cost is the only aspect publicly reported by the Department of Revenue.

And that’s a general shortcoming. Measuring cost is relatively easy, since expenses are routinely captured in the system. Determining effectiveness is more difficult and costly, particularly when the greatest payoffs come from education, health care and transportation systems that deliver value over the long term.

Minnesota needs to know what works as well as what things cost. It’s the most fiscally responsible way to govern and the only way to ensure government can deliver what we expect. 

The apparent simplicity of rules that limit revenue and formulas that disperse money has some appeal in a complicated and changing world. But it’s not the way to manage for results. Maddening as it may be to muddle through this year and push some problems into the next, Minnesota is on a better path  — provided we continue to emphasize fairness and effectiveness, guided by facts and a long-term vision for Minnesota.

— Charlie Quimby 

Consumer demand isn't the only reason to put public records online

The Sunshine Week 2009 Survey of State Government Information found that for 20 types of records it deemed of broad interest to the public, Minnesota made 13 available for free online [Download list by type], putting the state slightly above average. Texas was the only state that provided all 20 types of information and Mississippi ranked last, with four.

The Star Tribune's headline on a story about the survey — "Survey: 65 percent of Minnesota government records online" — is misleading, since the sponsors certainly did not measure all types of records, and 100 percent of all records would hardly be a desirable goal. As Doug Neville, a spokesman for the Minnesota Department of Public Safety, said, "If we were to take everything we do and put it online, it would be harder to find that information."

Most Minnesota consumers might not feel left in the dark by the state's failure to post gas pump overcharge records or by the lack of a state database of consumer complaints. Availability of child care center inspection reports may be of intense interest to a few taxpayers and of no value to many others.

But taxpayers should care that we can't yet access an online database of state expenditures — or, as a previous study by Good Jobs First found, that Minnesota ranked “dead last” on public disclosure of state contracts. Since we have to make choices about where to invest public resources and staff time, it should be in the comprehensive systems that make government more accountable overall. 

We're getting there, but as I wrote when the Good Jobs First study came out:

Making information more accessible to the public is only a small aspect of developing a culture of fiscal discipline and accountability. The really hard work, which no state does very well, is ensuring that public dollars are spent to achieve specific outcomes and holding government bodies accountable for what we expect them to achieve.

Sunshine Week is not the end of sunshine activities in Minnesota. The Minnesota Coalition on Government Information will be the host for the 2009 Freedom of Information Summit in Minneapolis June 5 and 6.

— Charlie Quimby

LGA and tax rankings can be deceptive

Real disparities among communities will be a major topic of discussion as legislators and the governor wrangle over local government aid (LGA) in the coming months. Some cities will no doubt be held up as poorly managed and leaching off more "successful" communities.

A story this weekend illustrates why it's not helpful to the debate to simplify the issue down to "Chaska, frugal" and "Minneapolis, profligate."

Chaska residents paid the least per capita in city taxes — $184, compared with the Minnesota-wide city average of about $500 per resident, according to a story in the Star Tribune. My own suburb, Golden Valley, ranked in the bottom 10 in the state, at $746 per capita. The costs were figured by combining the cities' tax levies and LGA and dividing by number of residents.

Since the two cities are roughly the same size, both well-governed, good places to live and receive essentially no LGA, I thought I'd take a quick tour of their financial statements to see what accounts for the disparity. (I compared 2006 numbers on revenues and expenses, since those reports were most immediately accessible, so these comparisons won't align precisely with the 2008 data reported in the Strib. [Golden Valley PDF] [Chaska PDF])

The story quotes Lena Gould, a policy analyst for the League of Minnesota Cities, as saying the per capita figure is an indicator of local government efficiency. Well, maybe. Though this is hardly a deep analysis, it's fair to say that this ranking should not be taken as the story's headline suggests: "Chaska, thy name is frugal, in city taxes list."

It's true that Golden Valley raises more than twice the amount of revenue from property taxes that Chaska does, but its tax base is 27.2% commercial and industrial compared to 15.8% in the more rural suburb, so the impact on households is muted. (Both cities have higher than average commercial/industrial development to diversify the tax base.) Chaska benefits considerably more from restricted operating grants and capital grants that are often attached to development activity.

Chaska has a median age ten years younger, with larger average households, which means more of those "capitas" are children, not tax payers. And it has other advantages. Some of its success may be traced back to continuing some of the vision from the planned community of Jonathon and its relative lack of legacy costs that go with being a still-growing community. Chaska also has a revenue stream from its city-owned electric utility that contributed more than $2 million in "franchise taxes."

Golden Valley, as a first-ring suburb, is built up and hemmed in. Its homes have a higher average market value.

When you compare expenses, the two cities had essentially the same total costs for government activities in 2006, with Golden Valley expending more for public safety and public works for the year and Chaska spending more on economic development; it was also carrying more debt.

All these factors make the straight levy/LGA comparisons deceiving — not just between the two suburbs, but any cities on the list.

A new website called Thank LGA has just launched to weigh in on the side of maintaining LGA.

Another useful comparison in the Citizen League's 2008 Residential Homestead Property Tax Profile, which calculates the effective tax rate on a community's average value home. By that measure, Golden Valley's 1.272% ranked 7th out of 117 metro-area communities and Chaska's 1.131% ranked 33rd out of 117 — lower, but hardly the best in the state.

— 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