Growth & Justice Blog

Tax enforcement is up, but are results?

A recent article in Forbes Small Business suggests pressure to speed up the resolution of IRS audits may be reducing the amount of money recovered — while increasing the stresses on compliant small businesses.

The IRS recently made an inexplicable decision to increase audits of small companies while easing up on large firms. In fact, the smallest companies saw the taxman 41% more often in 2007 than in 2005, and companies with $10 million to $50 million in assets were 29% more likely to be investigated, according to a new study from the Transactional Records Access Clearinghouse at Syracuse University.

Meanwhile, companies with more than $250 million in assets were almost 40% less likely to be audited than in previous years - even though an average audit hour of large firms earned the IRS about $7,500, the Syracuse study found, while a similar hour directed at smaller companies turned up $474.

Going after more small companies didn't produce that much more revenue, but it did enable the Bush Administration to tell the public it was going after more companies. In fact, the number of non-productive audits of small companies — meaning no change in tax liability was recommended after the audit — is growing. And now the administration is seeking a court order to bar future access to agency statistics that are essential for the Syracuse report that exposed this shift.

In Minnesota, the Department of Revenue compliance initiatives include identifying non-filers and collecting delinquent sales taxes as well as individual and corporate income tax audits, so it's hard to compare directly with the IRS. However, in the report the Department makes to the Legislature, it is clear that Minnesota taxpayers see a pretty good return on the money spent.

Here's a table from the Department's report [pdf] showing the revenue realized from compliance and enforcement. Dollars spent on corporate tax matters show a much higher rate of return, and recovering sales and use taxes produces the most revenue dollars.

Lately, the Department has published a monthly list of businesses that are delinquent in paying sales taxes they've collected. Of the 64 entities listed for June, all appear to be small companies (including one that owned several truck stop-related businesses). Smaller towns outstate accounted for 24 of the companies, with the remainder split between metro/larger outstate cities and suburban addresses.

It's wrong to use tax money to prop up a business's cash flow, of course, but if small businesses around the state do account for the bulk of tax collection problems, it also could be a sign that they need help. Perhaps in the form of simplified tax laws and reporting requirements, but also in developing the management skills that can head off problems that lead a small business down the slippery slope of using tax money to keep a business afloat.

— Charlie Quimby

Weighing factors in Twin Cities and South Dakota corporate expansions

Here's some more grist for the taxes-hurt-the-business-climate debate.

The Twin Cities metro area ranks 5th on Site Selection Magazine's 2007 list of top metro areas for corporate expansion. With 74 projects, it was one expansion away from tying for 4th with the Houston metroplex. Last year, the Twin Cities ranked 15th among metro areas with populations larger than one million, about in line with its rank as the 16th largest U.S. metropolitan statistical area.

We'll offer our usual cautions about the validity of such state comparisons, and note that the rankings are based on numbers of projects, not type of industry, dollars of investment or number of quality jobs added. Still, Minnesota clearly had a better than average year.

The magazine also publishes a state business climate ranking that put Minnesota in 22nd place. That list is based on new projects, including number adjusted for state size and population, plus a survey of corporate real estate execs. The site selection criteria ranked most important by the real estate execs are shown in the sidebar. Workforce skills rank first.

The survey respondents rank the state much lower (30th) than actual expansion activity indicates, resulting in Minnesota's lower "business climate" standing. In previous years, the planners also scored the state lower than it has performed on the projects index.

Those who like to cite South Dakota as "proof" that low taxes attract business growth will also find something positive in the annual ranking. The Sioux City area ranked 1st among under-200,000 metros for the second straight year. Note, however, that the region includes communities in Iowa, Nebraska and South Dakota.

A Site Selection story said the Sioux City area is looking forward in 2008 to the construction of a giant oil refinery proposed by Hyperion Energy.

The company said it selected the Union County site because it "has a unique combination of characteristics that make it ideal" for the project. "Geographically, it is in the Canadian crude oil corridor, close to good rail and highway transport, in the vicinity of many major markets and has an abundance of water," Hyperion noted on its Web site.

The company also mentioned the pro-business attitude of South Dakota government officials and its low-tax climate.

With its biggest 2007 deals coming from ethanol, beef processing and other ag-related industries, it's clear the region's growth is based on more than workforce and tax considerations.

Debi Durham, president of both the chamber and the Siouxland Initiative, says it's no accident that the Sioux City area is being considered by major corporations. "You have to go back to a decade ago when the Siouxland Initiative stepped forward with a strategic plan for intermodal transportation, education, health care, quality of life and building our infrastructure," she says. "We worked on getting many industrial sites in our broader region certified. The fruit of that effort is the number one ranking in Site Selection."

That sounds like a familiar formula.

— Charlie Quimby

Why is Minnesota a donor state?

Oklahoma blogger Derek Baker did a red/blue analysis of the Tax Foundation's list of states and their ratio of federal aid to federal taxes paid. Looking at the top 10 and bottom 10 (which includes Minnesota), he found that states with a Republican-leaning Congressional delegation tended to receive more money back.

He admits that other factors besides party affiliation come into play, but concludes:

[I]t does seem to further belie the claim that the GOP is the party in favor of "fiscal responsibility" and against "the redistribution of wealth."

We might suggest the average incomes of the 10 donor states — which rank in the top 21 nationally — could have a lot to do with it. After all, to be a donor, you have to be healthy.

— Charlie Quimby

Accentuating the positive about taxes

Over the last several decades, anti-tax terminology has moved from political play books and partisan rhetoric into everyday discourse. For example, "death tax" was introduced into official language in 1982 by President Reagan during a speech in Minnesota. Now, I routinely find it embedded in government web sites and budget line items.

Since death tax is a term championed by those who seek to abolish the estate tax, such use by revenue and treasury departments seems as counterproductive as fast food menus calling their burgers Gut Bombs.

Then there's "burden," a good and useful accounting term that carries excess baggage when the word "tax" is loaded aboard.

At Growth & Justice, we try to avoid such loaded language, although some claim "investment" just means a tax by another name. (Actually, it means "spending" with a "smart" in front of it and a payoff on the other end.) Making taxes a dirty word is a much easier job than accentuating the positive.

As Richard Coniff pointed out this week in the New York Times, the word "tax" itself

comes from the Latin for “appraise” with punitive overtones of “censure” or “fault,” as if wage-earners have done something wrong by their labors. “Dues,” in contrast, is rooted in social obligation and duty.

[...]

Instead of denouncing taxes, politicians would do better to appeal to the patriotic corners of our hearts that warm to phrases like “we the people.” “Taxation” is a throwback to the time when kings picked our pockets. “Paying my dues,” a phrase popularized in the jazz music world, is language by which we can stand together as Americans.

Union members and country clubbers both pay dues, too. But changing the word is less important than establishing the values that reinforce shared purpose and solidarity — and connecting what's paid in with what comes out.

— Charlie Quimby

Like politics, all taxes are local.

When Minnesotans argue about taxes, we usually start with the personal state income tax, which is used to support the persistent claim that we're one of the highest-taxed states in the nation. (Dane Smith deals with that here; the Minnesota Taxpayers Association recently ranked

Minnesota

23^rd for state and local taxes as a percentage of income. Looking solely at state income tax also pushes Minnesota higher in the rankings because other states raise more revenue at the local level.)

Severance taxes on mining have far less visibility in Minnesota, because we derive such a small portion of annual revenues from taconite extraction (in the $7 million range). By contrast, Alaska funds about half its state budget from oil revenues, and Wyoming is close behind. These resource-based taxes have the added advantage of "exporting" some of the state's tax burden as the oil, gas, coal and other minerals are paid for by others.

Still, the tax arouses feelings on the Iron Range, as Minnesota Brown reminds us:

What Pawlenty and many outside the Iron Range often fail to understand is that our taconite tax revenue, while significant during good times (and not all times are good), is not a secret pot of cash that we use to buy beer and ammunition. It is what mining companies pay IN LIEU of PROPERTY TAX. Mines own or lease thousands of acres of enormously valuable land in northern Minnesota and they don't pay a dime in property tax. Suburbs raise their revenue from those sleek office buildings along the freeways and in overpriced residential homes. The Iron Range raises its school and community funds from taconite taxes, and per capita we get less money over time as a result. But wait, there's more. All the while over Range history a portion of these taconite taxes have gone to the state general fund or to the University of Minnesota fund, money that has benefited more than a million people who couldn't find the Iron Range on a map.

Gov. Pawlenty frequently laments any Iron Range project or program that doesn't rely exclusively on our taconite taxes. We aren't deserving of general state funds, because of our financial privilege. (Anyone who has been to my native Iron Range understands my implied sarcasm).

There are good reasons to have a mixed basket of revenues (fairness, more stable revenue sources). But instituting an array of taxes and fees can lead to undesirable effects, too (obscuring who's paying for government, dedicating funds to narrow purposes that restrict flexibility in tough times).

One side effect of the anti-tax climate in the state has been to build credence for the consumerist notion that every tax dollar should be earmarked for a purpose that benefits the person or corporation paying in. In one sense, like politics, all taxes are local, but this mentality can only reduce the kind of wealth-building investment in education and infrastructure that benefits all Minnesotans.

Government should be accountable for spending, of course. But accountability is about measuring what the money does, not just remembering where it came from.

Tax rankings: When "facts" obscure the truth

A letter in the Park Rapids Enterprise contains a common set of distortions about taxes in Minnesota. I've debunked similar statements before, but I guess one broken record deserves another.

Passage of Minnesota’s largest tax increase in history by the DFL controlled legislature has triggered a barrage of editorial comments both pro and con. Although most have expressed strong opinions, few have provided factual data in support of their positions. Here are the facts regarding Minnesota’s tax burden per capita relative to the national average and comparable surrounding states:

Minnesota, ($2,871), 4th highest; Wisconsin ($2,283) 12th; national average ($2,000).

These data were last revised March 6, 2008 by the US Census Bureau and represent an accurate, non-partisan viewpoint. I am certain most reasonable people would agree there is no logical reason why Minnesota should be the 4th highest taxing state in the nation and substantially above all surrounding states with similar geographic and demographic characteristics.

The 10-year, $6.6-billion transportation bill might qualify as the "largest tax increase in history" because the amount funded — to start making up for 20 years of neglect — covers a longer span than typical revenue bills. It also gets called out because legislators  spelled out the cost in the bill, unlike the increases in tuition, fees and property taxes that have fallen on taxpayers since 2003. If all those "no-new-taxes" increases had been put in one, 10-year bill, they'd add up to far more.

Now, what about those facts?

Though I haven't found updated per capita rankings the letter writer attributes to the Census Bureau, the Bureau tax rank data covers only state taxes, not local sales and property taxes. Using only state taxes for comparison distorts the relative tax burdens, since service costs for transportation, education, etc. are borne at different levels of government state-to-state. Relative dollar amounts per capita are also misleading, since states have different average incomes and costs of living. A poor state has less revenue-generating capacity than a wealthy state.

(The Census Bureau's most recent 2004 ranking of state revenue per capita shows Minnesota at 18th. Alaska and Wyoming, with their small populations, no income tax and large mining and oil royalties, rank 1 and 2.)

A better measure comes from the Tax Foundation, which includes state and local taxes and calculates tax burden based on a state's total income. Using income is appropriate because it reflects the overall capacity to pay and does not count every two-year-old in the census as if they were taxpayers.

By this more complete measure, Minnesota ranks 11th, 0.8% above the median for all states.

While there are legitimate reasons to compare our level of taxation with other states, numeric rankings are among the least useful measures — except to make a political point. Clearly, using the "4th highest" ranking suits the anti-tax argument that Minnesota taxes are "sky high" far better than saying "8/10ths of a percent above average."

Repeating this sort of thing over and over does not make it true — but can make people believe it. So we have to object, whenever the "facts" are used to paint a false picture.

— Charlie Quimby

Accounting for taxes not collected

There may not be too many Minnesotans who'd consider the Minnesota Tax Expenditure Budget [Download pdf] a "great read," as Katherine Blauvelt calls it. But chances are most would who read this blog.

Her post at Minnesota Budget Bites explains: Because tax exemptions, deductions, credits and lower tax rates forgo revenue in order to advance a certain policy, they function much like program spending.

>>>>>

On April 1st, state and federal governments can be counted on — not for April Fool jokes — to start announcing prosecutions of tax cheats over the next two weeks.

Out in Western Colorado, where I go to escape winter — not Minnesota taxes — a local story popped up yesterday, too.

A former Delta School District superintendent has been charged with filing a false tax return, according to a news release from the U.S. Attorney for the District of Colorado.

Laddie Livingston, 67, of Paonia, allegedly filed a false tax return in 2003, according to U.S. Attorney Troy Eid.

[...]

When asked why Livingston is being charged five years after allegedly filing the false return, U.S. Attorney’s Office spokesman Jeff Dorschner said simply, “It can take that long.”

Plus, they had to wait for Tax Charges Filing Day.

— Charlie Quimby

Well Said, Mr. Nobles, and Happy 25th

It was about 20 years ago and the Office of the Legislative Auditor was getting attention for a series of tough investigative reports on questionable behavior by public officials and poor performance by state government,  which back then was completely dominated by DFLers at the executive, legislative and judicial branches. I was a reporter for the Star Tribune and was impressed by the competence and toughness of the watchdog agency and its director, Jim Nobles. So I wrote a story about Nobles and conveyed the consensus at that time, held by both parties, that he was an inquisitor of unquestioned fairness and tenacity.   

Fast forward to last week and Nobles was in the spotlight again for his agency's tough analysis of Republican Gov. Pawlenty's JOBZ program and the deteriorating state of the state's transportation system. Britt Robson of MinnPost put together a spot-on Q&A with Nobles, focusing on a question about whether the agency was anti-Pawlenty and whether "truth has a liberal bias.''

Nobles' response was a classic statement of the good-government principles that Minnesota has long prided itself on, and which need to be reinforced as we move toward more investments in education, transportation, health-care access and other progressive goals.

MP: So you don't subscribe to the idea that the truth has a liberal bias?

JN: [laughs] No. You know the only way in which that might be true is that I really believe in the important role government can play. But I also honestly believe that once an agency is given a responsibility, it has to be fulfilled in a very serious and cost effective way. I want to bring good value to government. That tends to make me say government is important, if for no other reason than it is extracting a lot of money from the citizens and needs to use it effectively. So I am not one of those who just throw up their hands at government altogether, say they are just a bunch of slugs wasting our money. I believe we can take money and do good things. But I believe you really have to work hard and set high standards. I would like all of government to work the way I manage this office, with great intensity.

Nobles has been the epitome of grown-up integrity and a force for good in Minnesota's public sector for 25 years. He and his office, which had a good reputation before he arrived in 1983, deserve a salute.

Dane Smith

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All those who want to pay more taxes, raise your hands!

Guest post by Myles Spicer

What’s this? I see no hands raised. Well, neither do I “want” to pay higher taxes. Indeed neither does anyone currently running for office — on a national or state level. Why? Because “taxes” are the third rail of a political campaign. Touch it… and you’re dead!

And it certainly conforms perfectly to Gov. Pawlenty’s recent ironic proclamations on the subject, as part of his curious “solution” to our significant state deficit. There is only one thing wrong with this position. While we deny the reality of revenue needed to run government, our country and our state are slowly going down a path of decline, if not disaster.

On a national level, a New York Times column by Bob Herbert reported the following:

On Thursday, the Joint Economic Committee, chaired by Senator Chuck Schumer, conducted a public examination of the costs of the war. The witnesses included the Nobel Prize-winning economist, Joseph Stiglitz (who believes the overall costs of the war — not just the cost to taxpayers — will reach $3 trillion), and Robert Hormats, vice chairman of Goldman Sachs International.

Both men talked about large opportunities lost because of the money poured into the war. “For a fraction of the cost of this war,” said Mr. Stiglitz, “we could have put Social Security on a sound footing for the next half-century or more.”

Mr. Stiglitz and Mr. Hormats both addressed the foolhardiness of waging war at the same time that the government is cutting taxes and sharply increasing non-war-related expenditures. They both pointed out  taxes had never been cut in previous administrations while the country was at war. This war has been financed almost exclusively by deficits to the tune of about $2 Trillion, to be paid (with interest) by our children and grandchildren, and maybe even great grandchildren.

In a similar vein, on the state level, “no tax” Pawlenty will leave future generations with significant deficits and substantial debt — and a weakened infrastructure and education system, to boot. His reckless actions have not brought in added revenue or increased business activity, as the theory of no tax/low tax proponents promised. So, what is to be done? Well, now I am going to write an obscenity, so tell the kids to cover their eyes:

We may have to raise taxes! 

There, I said it. And few political leaders would do the same.  One, who has seen an epiphany on this issue, curiously, is Arnold Schwarzenegger, who very recently stated (as his state faced a $14 Billion deficit), “I am a big believer that when we have a big financial crisis like this we should all chip in.”  He pointed out that failing to find new revenue from taxes, closing loopholes or other means, “doesn’t bring anyone healthcare…doesn’t bring education…doesn’t fix problems.” And just the other day, former Gov. Arne Carlson expressed the same opinion.

In regard to the mantra of “cutting spending”, Schwarzenegger earlier noted that when he came into office to “cut waste” he found less than 1% he could actually cut.

Now, in Minnesota, we hear that same claim: we don’t need new revenue, just cut “waste.” Well, Pawlenty, and his Taxpayer League philosophy, after several years of “cuts” and failing to balance a budget, not only cut waste, they cut muscle, bone, and are now removing the vital organs. The Legislature, to their credit, recognized this in the Transportation Bill, and took courageous action. As stated above, raising taxes is never a popular idea.

But, having said that, neither the nation, nor the state, can continue to run these massive deficits to the detriment of sound governance. The options are simple and clear:

a) huge borrowing (deficits);
b) elimination of vital (some even mandated) programs like public safety, education, healthcare and transportation; or
c) seek new revenues.

Conservatives talk a good game when it comes to fiscal responsibility — but they are the ones who brought us to this point. They have led us into being a horrendous debtor nation. At the same time on a state level, their idea of letting schools decline and bridges fall must not be acceptable to the citizens of Minnesota. Which brings us to the final option: raising revenues.

How to do this? I am not suggesting a general increase in taxes, but we do know some places where added revenues can be had without a general increase, so that a “fair” and progressive share is paid by all. Reinstating the Bush tax cuts (especially on the highest income groups); selective user fees; and eliminating special interest and hidden shelters would be a start.

For example, Schwarzenegger (and his legislature) has estimated he can generate $2.5 Billion of added revenue simply by closing various special interest loopholes. The main point is, adding revenues cannot be taken off the table as Bush and Pawlenty have done. It has to be part of the solution, popular or not.

Yes, taxes are ugly things. But to me, they are merely the “dues” we pay to live in a clean, safe, educated environment — the way Minnesota used to be.

We elected George Bush and Tim Pawlenty to be stewards of our nation and our state; and that means leaving it in better condition when they exit office than when they came. They clearly have failed us in this dimension. Hopefully, those who follow them will have more courage to face up to that which can pull us out of this deep deficit morass; and that almost certainly means dealing with the reality of raising revenues.

— Myles Spicer is a third generation Minnesotan, graduate of the U of M and Air Force veteran. He retired after 45 years as owner of several ad agencies in the Twin Cities and San Diego. He frequently writes about Minnesota's quality of life and the policies to maintain it.

Tax cuts, not aid for struggling families, popular use for surplus funds.

Bob Collins at News Cut reminds us that last time Governor Pawlenty used funds from the state's health care access fund to help balance the budget, he moved the money to the general fund. Though the tax collected from health care providers is earmarked to help low-income Minnesotans obtain health coverage, fewer people were were made eligible for the program as part of the shift.

This time will be different, according to the Governor.

Pawlenty says using the health care fund will be used for other health care "for the disadvantaged, and says nobody will be removed from government health programs. But, he conceded, an expansion of MinnesotaCare will be canceled. [Note: Some might call it a "restoration."] At the same time, the governor proposed a reduction in the state sales tax.

Ah, yes, draw down $250 million of the surplus in what MMA lobbyist now calls "the health care slush fund," shift elsewhere an equal amount formerly allocated for health and human services, and cut taxes $77 million.

Net: $173 million of the deficit reduced this budget cycle at the price of continued backsliding on health care and $179 million lower tax collections next biennium. (Not to mention another  $187 million in reductions to health and human services spending.)

Back in 2002 when the state was facing its prior budget deficit, and before Pawlenty raided fund, the Minnesota Budget Project noted that spending to aid struggling families did not fare too well during flush times, either. Between 1997 and 2001, 52.7 percent of surpluses went to tax cuts and rebates, 5 percent to budget reserves, 0.3 percent to children and families, and -0.2 percent to health and human services.

The Pioneer Press has a good summary of the devil in the details of Pawlenty's health and human services cuts.

— Charlie Quimby