Growth & Justice Blog

Experts Say: Fix the State's Financial Forecasts

Under the umbrella of Minnesota is Watching coalition, a group of finance and economic experts‡ called on the state to restore inflation in its budget forecasts.  They issued the following commentary in response to the release today of the state's February economic forecast, which said "changes in the revenue and expenditure forecasts for the 2006-07 and 2008-09 biennia were small and offsetting."

Time to undo political meddling in the state budget forecast Get your magnifying glass ready. You’ll need it to read the fine print, and the real numbers, in Minnesota’s latest financial forecast when it is released today. The Minnesota Department of Finance prepares major forecasts of state revenues and expenditures in November and February each year. As usual, this February’s forecast will adjust the state’s revenues to account for the impact of inflation. But curiously, due to an obscure provision passed in 2002, the Department of Finance is not permitted to consider the impact of inflation on many areas of state spending.

The result will be yet another financial forecast that does not provide an accurate understanding of our state’s finances. In the real world, inflation affects both revenues and expenditures.

We need an accurate forecast to inform the budget-making process Putting inflation back in the forecast lets policymakers and the public know approximately how much the state would need to keep funding current levels of services into the future. The forecast gives us a picture of our state's fiscal health; it does not determine our budget.

Policymakers still have the authority to scrutinize individual areas of expense and act to expand, maintain, reduce, or eliminate. Making the forecast more accurate by including the impact of inflation on current spending will not guarantee any budget item an inflationary increase; it would simply show how much current commitments would cost in the coming years.

Accurate information improves the quality of the public debate If you check the fine print of the forecast, you'll see that Minnesota's much heralded budget surplus for the next biennium does not exist. Putting inflation back in the forecast improves the public conversation dramatically by making sure the headlines in the media give an honest picture of the state’s finances. Identifying the real cost of maintaining the current levels of services would help manage the public’s expectations for implementing new initiatives, expanding current programs, or cutting taxes.

Our state’s fiscal health—and quality of life—are at stake The forecast is our most critical tool in understanding the fiscal health of our state and setting the context for budget decisions. Policymakers have a responsibility to face the tough question – can our current level of revenues sustain the commitments and investments we are making in our state into the future? No business would forecast its performance by assuming that revenue will rise in future years and expenses will stay flat, because businesses know that the things they pay for (labor, parts, services, rent, etc) are likely to rise.

A business can set a goal for zero expense growth, or develop a plan for how to get there, but it would not simply pretend that it can wave a magic wand and repeal inflation. Restoring inflation in the forecast allows policymakers to plan for our state’s future financial stability.

It's too late to fix today’s forecast, but the House and Governor should follow the Senate’s lead and change the law so that our financial forecasts include the impact of inflation on both revenues and expenses. Good decision-making requires good information. So, until the forecast is fixed, policymakers and the public should act on the assumption that the real story is in the fine print of the forecast...where the Department of Finance has been forced to leave the inflation figures since 2002.

‡ The signers of the statement, all speaking as individuals, included:

Jay Kiedrowski Senior Fellow, Hubert H. Humphrey School of Public Affairs Served as Finance Commissioner under Governor Rudy Perpich John Gunyou Served as Finance Commissioner under Governor Arne Carlson Tom Triplett Served as Finance Commissioner under Governor Rudy Perpich Paul Anton Chief Economist, Wilder Research Member of the Minnesota Council of Economic Advisors Edward M. Foster Professor of Economics, University of Minnesota Member of the Minnesota Council of Economic Advisors K. William Easter Professor of Applied Economics, University of Minnesota Jerry E. Fruin Associate Professor of Applied Economics, University of Minnesota

Affecting Achievement Gap Will Take Political Will

Star Tribune columnist Lori Sturdevant writes about the determination of DFL education committee chair and Minnesota Minority Education Partnership executive director Rep. Carlos Mariani-Rosa to make a dent in the achievement gap between white and non-white students:

Mariani-Rosa thinks Pawlenty is right to call for a radical redesign of Minnesota high schools. He likes the governor's willingness to put $75 million on the table for high schools that agree in the next two years to develop courses with more academic rigor, workplace relevance or both. He'll also be the chief House sponsor of a bill that would reward low-income high school students who successfully complete college-prep classes with scholarships, to be redeemed at any Minnesota college or university, public or private. That's the Minnesota Private College Council's variation on a Pawlenty proposal to reward with scholarships the high school students who take college-level classes.

Sturdevant suggests that Mariani-Rosa might be engaging in risky behavior by supporting a Pawlenty proposal. That's not nearly as politically courageous as facing the bigger issue Mariani-Rosa also raises:

“The tragedy of this session is that the good, innovative stuff won't get the level of vetting it should, because we have such anxiety about base funding," said Mariani-Rosa. "It's hard to focus on exciting new possibilities when we're still not adequately funding special ed," the exciting new idea of the 1957 session. It doesn't have to be that way. Mariani-Rosa says he'll be one member of the new House majority who will insist that Minnesota can have it all -- enough teachers and guidance counselors, faculty salary increases, new high school curricula and new scholarships for low-income kids. "This state has the resources to develop a world-class education system," he said. "All we lack is the political will."

If you agree, letting your legislators know will help create that political will.

Anti-tax Distortions Spring Eternal

Last week, talk radio host Jason Lewis served up a “quick reminder for tax-and-spend apologists” in the state legislature. Conservative apologists have echoed similar talking points ever since Ronald Reagan was a governor, so I’m not sure why any legislator needs a reminder. An exorcism would be more in order. Still, since the Pioneer Press printed commentary normally spewed over the airwaves, it’s easier to capture his deceptive arguments and show how they work.

Let’s take a few of the most typical distortions we’ll hear for the rest of the legislative session. According to Lewis, Governor Pawlenty’s budget is “spendthrift” and Democrats are poised to make it worse. Taxes represent a terrible restraint on the private sector. If only we could cut taxes even more and shove government out of the way, we’d have utopia in Minnesota. Or at least some of us would have more money to spend on really important stuff instead of other people’s kids.

As a matter of fact, when you look beyond Lewis’s cherry-picked figures and his invocation of discredited theories, you’ll see a different picture — one that legislators of both parties should consider very carefully in the budgeting session ahead.

Tax cuts don’t produce economic growth. Conservative commentators like Lewis have so persisted in trumpeting this myth — and its mutant variations — that you may actually believe tax cuts generate more tax revenue.

Yet current and former chairs of President Bush’s Council of Economic Advisers, the tax expert in his Treasury Department and the Congressional Budget Office say it doesn’t work that way. The latest revenue surge Lewis cites, for example, is the product of a predictable post-recession cycle. However, the last time such a spike occurred, it came on the heels of a tax increase.

Tax cuts have not helped Minnesota, either.  Throughout most of the “high tax” 1990s, the state’s economy outperformed the nation as a whole by nearly 1 percentage point of annual per capita income growth. That’s a whopping difference. However, in the last eight years — exactly coinciding with the period in which we lowered our taxes substantially compared with other states — we have become an average economy.

This isn’t just true of Minnesota. The Center on Budget Policy and Priorities studied 16 tax-cutting states, including Minnesota, and found the tax cuts failed to improve those states’ fiscal and economic health. In fact, the big tax-cutting states generally faced larger fiscal problems, and have had worse economic performance, than other states that were more cautious about tax cuts.

Lewis wrongly calls state spending “runaway” — unless he means to describe how relative state spending has been in retreat since 2001. He points to total dollars spent by state government, ignoring the state economy’s increasing capacity to pay, plus factors such as population growth and inflation that drive increases.

Measured properly — total state and local taxes and fees as a percentage of total income earned by Minnesotans — the price we pay for government is about 1.5 percentage points less than for most of the 1990s. And Governor Pawlenty’s budget will try to keep it there.

He overstates Minnesota’s “onerous tax burden” by choosing the income tax per capita ranking that puts Minnesota sixth in the nation. On the measure that includes all taxes and fees we pay in the state, Minnesota ranks 16th.

Whether you believe spending should be higher or lower, setting an acceptable price of government we’re willing to live within would be a statewide discussion worth having. Then we could focus on getting the most for our money instead of fighting over tax cuts and increases.

He distorts who’d be affected by an income tax increase. Congratulations if you’re a young couple, each making a shade over $37,000 a year. Your household now ranks with Joe Mauer’s and Jason Lewis’s among the elite taxpayers who contribute more than 69 percent of the state’s income tax.

Of course, Lewis has arbitrarily redrawn the household income line to include you with the wealthy and enlist your outrage against his hypothetical tax increase. If a real proposal comes up this year, however, it’s likely to target the real upper bracket of households earning $200,000-plus. These folks pay proportionately less of their incomes in state taxes and fees than middle-bracket earners, and many could agree that’s not fair.

That’s not his only trick to shelter the high earners. He brazenly uses only the income tax to measure state tax fairness — and bolster his theme that the wealthy are overtaxed — ignoring the heavier effect the other two-thirds of state and local taxes has on those with lower incomes.

Most Minnesotans can agree on one thing. We should not simply raise taxes. If more spending is called for to achieve results most Minnesotans want, the legislature should consider how any new money can be raised fairly, invested wisely, and managed responsibly with the rest of the budget.

Budget and tax matters can be complicated, and the anti-tax forces are counting on you to go for their sound bites. This is just a quick reminder to taxpayers and legislators not to buy everything talk radio hosts keep trying to sell.

Debunking Anti-Tax Myths

Conservatives have done a masterful job getting their talking points entrenched in the public discussion about government effectiveness, taxes and public investment. But there is ample research that undercuts their anti-government story. Check out these sources and you will never have to suffer through a “tax cuts grow the economy” diatribe again.

Tax Cut Myths. The Center on Budget and Policy Priorities debunks eight myths about taxes you probably know by heart. No. 1: “Tax cuts pay for themselves”…

State Personal Income Taxes and Economic Growth. The Institute on Taxation and Economic Policy counters a Cato Institute study and finds that higher personal income taxes do not preclude a strong economy. Look for the chart that shows high-income tax states outgrew low-income tax states. That’s right, Minnesota was among the leaders.

Tax-cutting States Still Don’t Prosper. A more recent study shows states that cut taxes sharply during the 1990s have lagged behind during the 2001-06 recovery. And yes, now Minnesota’s one of the laggards.

Anti-investment Policies Hurt Kids. “Homeland Insecurity… American Children at Risk” documents how 9 out of 10 states with the best outcomes for children are “Blue” states with higher taxes. The 10 worst performing states are “Red” states that invest less in children, with corresponding results.

High Income Taxes Don't Drive Away High Earners. Evidence of tax flight is mixed at best. Growth & Justice studied state-to-state migration data and found tax rates don’t appear to be a major factor in why people leave the state. It turns out mountains and warm weather are the real income magnets.

– Charlie Quimby, Growth & Justice Communications Fellow

Business doesn't just insist on results. It invests to get them

In last week's Star Tribune, Charlie Weaver of the Minnesota Business Partnership issued a call for "smart spending" by state government.

Many of his prescriptions — setting priorities, defining outcomes, measuring results, paying for what works and fixing what doesn’t — will sound familiar because they echo the case Growth & Justice has been building over the past year.

But Weaver has it only half right, because he says government should spend only what the state has raised and not ask taxpayers for more. He uses the classic analogy of the family that must learn to live within its means. But families do not focus only on living within their means; they also try to increase their income so they can provide a better life for their children.

Minnesota should do the same.

Even the companies in Weaver’s organization don’t work the way he suggests. They raise capital to invest more where they believe they can get a return on investment.

A balanced business perspective is presented this week by Level CEO John Foley. Unfortunately, the headline of piece, "If the state were run like a business, we'd insist on results," misses this point Foley nails:

What makes Minnesota competitive is that we have consistently invested in increasing our standard of living and quality of life.