Growth & Justice Blog

Voters again reject anti-government TABOR formulas

Overlooked  in much of the analysis in this off-year election results were the latest defeats of anti-government "TABOR" (an acronym derived from "Taxpayers Bill of Rights,'' a frequently used title for such efforts) initiatives in two states, Washington and Maine. TABOR formulas are designed to impose arbitrary limits on growth of taxes and appropriations, and most mainstream policy experts dismiss them as unwise and inflexible.    

As the national Center for Budget and Policy Priorities noted :    

Yesterday’s votes in Maine and Washington show clearly that TABOR’s crippling and arbitrary spending limits remain unpopular around the country. Anti-government groups have made serious efforts to enact TABORs in 20 states since 2004 — and they have failed every time. While these groups will likely target other states in 2010, there is little reason to believe they will have more success.

Minnesota has escaped these TABOR initiatives, although efforts to get them on the ballot as constitutional questions have been mounted. Unfortuneately, too many of our elected officials, including Gov. Tim Pawlenty, unwisely got themselves cornered  into signing "no new taxes'' pledges earlier in the decade and Minnesota has been in a state of fiscal  paralysis every since. 

It's reassuring to see that ordinary voters in most states do not fall for the enticing promises of simplistic and arbitrary limits on public resources.  

— Dane Smith

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

Funding transportation through "value capture"

After the bruising battle over the 2008 transportation bill, the Legislature requested a study of "value capture" as a potential way to raise revenue for future infrastructure investments in Minnesota. The University of Minnesota's Center for Transportation Studies has released its analysis of eight potential strategies for funding transportation based on the concept.

Currently, transportation improvements are funded by general revenue (based on the assumption that all benefit indirectly from the transportation network) and user fees, such as gas taxes and transit fares. The rationale for value capture is based on the relationship between transportation networks and urban land value. [See diagram.]

Investment in transportation infrastructure — ranging from new roads and freeway interchanges to light rail lines and transit stops — improves accessibility to desirable locations such as jobs, shopping and entertainment. Property thus made more accessible tends to become more valuable. Developers and landowners benefit from this higher land value.

Value capture mechanisms seek to harvest a payback from the value created by the public investment. The revenue is then directed to pay off the improvements or finance new ones.

The study is quite lucid in spelling out the pros and cons of eight potential value capture approaches based on four criteria — economic efficiency, equity, sustainability, and perhaps most important for the Legislature, feasibility.

It will come as no surprise to students of tax policy that the most feasible measures have relatively low visibility to general taxpayers.

Perhaps the most intriguing of the eight approaches is Transportation Utility Fees (TUFs). TUFs treat transportation networks like other utilities and can be based on factors related to transportation demand, such as parking, square footage or type of facility. They are simple to administer and generate a stable revenue stream. But, as with any new "fee," there are drawbacks to getting them authorized in the first place.

The 12-page policy summary, "Harnessing Value for Transportation Investment," is worth a look by anyone interested in finding new ways to raise money for transportation. [Download Policy Summary]

— Charlie Quimby

Hollowing out the public sector affects public safety

Our continuing and increasingly dubious experiment with starving the public sector in Minnesota is producing almost daily reports of questionable budget cuts.   A Star Tribune front-page story on disappearing lifeguards at public beaches is the latest manifestation of our increasingly penurious fiscal policy.    Anti-government conservatives like to claim that much or most of government investment is unnecesssary or superfluous, and that all we really need are military forces, courts and police to protect property.   But it turns out that a relentless ratcheting down of public investment affects public safety in myriad ways:  crumbling bridges, less attention to mesothelioma incidence in northern Minnesota miners, Local Government Aid cuts that force police and emergency service layoffs, hospital reimbursement cuts that hamper emergency rooms in the midst of an ongoing swine flu pandemic, and on and on.    Public safety is a primary responsibility of our entirely legitimate and mostly effective state-and-local government systems.    Most of the things those governments do eventually have something to do with public safety and providing for the "General Welfare," an often overlooked primary goal that is spelled out in the United States Constitution.    And these systems can't be funded without fair and ample tax revenues.

Dane Smith

Take care in reading the Tax Incidence Report findings

Jim Robins is a former Minnesota Senate Majority researcher assigned to taxes, metropolitan and local government, and transportation issues. He currently operates www.ScooterMaxi.com.

Every two years, one of the most-impressive bureaucratic endeavors undertaken in Minnesota is carried out. This week we eagerly anticipate receiving the 2009 Tax Incidence Study. [The report will be available here this week.] This report has a sterling national reputation and should be celebrated by everyone who treasures the use of empirical data in developing fair and progressive tax policy.

However, it is a challenging document for the casual reader, and the potential is great for abusing one or two statistical estimates out of the tens of thousands reported. Take note that the Tax Incidence Study necessarily contains a four-year black hole between measured historical data and forecasting estimates. For 2009, that means we have no data reported for 2007-2011 — an important time frame considering the huge economic swing Minnesota and the nation are currently experiencing.

Although mine is only an educated guess, you can safely assume that the Minnesota tax system is more regressive (taxing the poor at a higher rate than the rich) right now than it will show in the boom-time 2006 results, or the 2011 estimates when at least some level of economic recovery is anticipated. In down times, the tax system is most regressive.

The volatility of progressive tax sources, particularly revenue from the income tax, is the key factor in determining changes in the Suits index — used as a summary measure of overall progressivity or  regressivity. Suits measures from +1 (100 percent progressive) to -1 (100 percent regressive). Minnesota had an essentially neutral system in 1990, but has trended somewhat more regressive ever since. 

We headed in the wrong direction throughout the 1990s, dipping to a hefty 4 percent overall regressivity in 1998. Boom times at the start of the current decade partially masked regressivity, but we have been heading downward again in recent years (1). It is particularly important to keep in mind these extended trend lines over many years rather than focus on just one or two new Suits index numbers unveiled in the 2009 study.

Finally, we should think about the Tax Incidence Study findings in the context of the current political discussions. We have the opportunity to enact substantial overall tax reform this year, and it appears that business taxes will be a key factor in debate. Although we intuitively assume state business taxes are progressive, the 2007 measurement (based on 2004 data) indicated that they are 16 percent regressive (2).

However, the much-maligned corporation franchise tax is 47 percent exported out of Minnesota as measured in both the 2007 and 2005 reports (3), and that means we would be giving nearly half the tax relief to non-residents. Perhaps we can find better ways to provide business tax breaks without sending so much of the relief to people who don’t live in Minnesota. As I have documented in a past posting, our state has done particularly poor job of generating outside revenue compared to other states. We shouldn’t make things even worse.

[According to a 2002 report by the Center on Budget and Policy Priorities, "only a handful of states systematically assess the impact of tax changes on families at different income levels [and] only three states (Maine, Minnesota, and Texas) now require such analyses of major state tax legislation by either the legislative or executive branch."]

Without sounding too wonkish, it will be exciting to get our hands on this year’s Tax Incidence Study. Let’s hope our state policy makers make the most of the data, and put together the kind of proposals that will result in tax fairness at a time when we need it most.

1) 2007 Minnesota Tax Incidence Study, p. 3 Download PDF

2) 2007 Minnesota Tax Incidence Study, p. 13

3) 2007 Minnesota Tax Incidence Study, p. 83; 2005 Minnesota Tax Incidence Study, p. 85 Download PDF

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

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