Growth & Justice Blog

A different tone in this year's tax committee hearings, and a clear consensus for more and fairer revenue

I've heard infinite versions of "don't tax me''  or "taxing me or my customers more will destroy my business AND the economy'' in my decades under the dome.   And last week's opposition at a House hearing to ending sales tax exemptions on business services was typical in many respects.   Just because these fears often turn out unfounded _ our economy was performing better, in the 1990s,  when taxes were higher  _ doesn't mean these specific concerns shouldn't be heeded.   

But I don't recall ever hearing as many tax opponents acknowledge, as they made their sincere case against losing tax exemptions on their own business, that our communities do need more revenue for public investment and for dealing with demographic challenges.    Time after time I heard these business owners or their association leaders, who are also citizens,  say that they supported or understood the need for more revenue, just "please, not on me or my customers, this time.''  And when all the opponents got through testifying, alternating one-for-one with those who favored the governor's plan, there were still more testifiers left who favored the reasonable increases in Dayton's plan, and the badly needed investments on the budget side, from early childhood education to transportation to workforce training.   I didn't hear nearly as many angry diatribes against government and taxes in general as I've heard in previous years.

That consensus for more revenue comes through in the Star Tribune's Sunday poll, showing  once again that a majority favor restoring higher income tax rates on the highest income margins, while opinion is evely divided on expanding the sales tax base to more consumer services.   A clear majority opposes ending the exemptions for so-called "business-to-business'' services.

This consensus for "reasonably more'' actually is not new.   Polls show support for revenue sufficiency was strong all through the 12 years of rule by one governor whose slogan was  "give it all back'' and another whose central theme was "no new taxes,'' and  legislative majorities that took the same hard and uncompromising line in 2011-2012.   Especially after budget crises began recurring regularly in 2001 and beyond, polls consistently showed that most Minnesotans thought revenue increases ought to be at least part of the solution for budget shortfalls.  That happened also to be the position of almost all former governors in all three parties through that period.    And in almost every reputable poll I've seen, most Minnesotans think those who have been reaping almost all the benefits of increased productivity in recent years, and who have been paying a smaller percentage of their big increases  in state-local taxes, ought to contribute reasonably more.

 

Dane Smith   

 

 

A week for reflection and commitment to justice and broader prosperity (and yes, taxes and public investments help do that)

We have this week a confluence of events that ought to lift our hopes and sharpen our resolve to reduce racial and economic inequality in our state and nation,  and to build a more inclusive prosperity.

The hope comes from the momentous coincidence today of Martin Luther King's official birthday observance and a re-inauguration, after a convincing re-election,  of the first African-American president of the United States.    Michelle Obama, a descendant of slaves, is the First Lady of a White House that once was occupied by white slave-holders, and actually built by slaves.   This is a remarkable country, capable of extraordinary self-correction, powerful and wealthy because it is governed by its own people, and stronger yet when ALL its people are empowered.  We can  expect President Obama will build on the theme in his inauguration speech that we all do better when we ALL do better.    While the Obamas have succeeded spectacularly, far too many people of color are still left behind, and economic disparities continue to grow between top incomes and families of all races in the middle-income brackets.

In Minnesota, attention swivels on Tuesday to the release of both a two-year state budget proposal and a major tax system overhual from Gov. Mark Dayton.    Minnesota's prosperity rests on an innovative business leadership, to be sure, but also on a  foundation of public investment, in the form of high-quality public education,  physical public works infrastructure, public health and natural resource protection.   We need to invest more and more effectively in those things, including early childhood education and post-secondary training,  and Gov. Dayton can be expected to emphasize that this broader prosperity and better government is the end we seek, while taxes merely are one of the  means.   Minnesotans understand these fundamentals and have long been distinguished by a commitment to public good, as well as private gain.   Let's try to keep this in our heads as we all get ready to argue over the details.

Dane Smith

 

 

How we can help the poor help themselves, and our economy, Selvaggio-style

Joe Selvaggio is a celebrated former priest who has spent nearly half a century helping poor folks become more productive and less poor,  lately through the MicroGrants program and before that, Project for Pride in Living. 

He also recently authored one of the most inspiring and articulate cases I've ever seen for investing in the human potential of our large and growing underclass.   His powerful essay appeared in the Star Tribune on Sunday Nov. 18, and was headlined "Think of the poor as part of the solution: They're a source of economic growth. That's why we can afford to help them.''

Selvaggio is the soul of charity but he's not a naive do-gooder who sees poor folks as purely victims.  And he argues that they ultimately are responsible for grabbing on and pulling up on the hands that are  offered from public and non-profit workforce training providers.  And he also concludes that governments need to invest more in broad-based self-sufficiency and productivity efforts instead of just focusing on direct aid and entitlements.    Citing the success of the Harlem Children's Zone and other non-profits such as Twin Cities Rise! and Summit Academy OIC, Selvaggio notes:  

"Entitlements seem to be anathema to the right, left and center.  But job-training programs are politically acceptable to left, right and center.   The private nonprofit sector has proven that they work, but philanthropy can't do it alone.  Now it's time for government to put muscle behind them...Change the paradigm and think of the poor as locked in a cocoon, ready to develop into a productive creator of wealth.''

Our policy-makers in Minnesota need to find what's working best in in preparing and moving chronically unemployed or under-employed folks in to the decent jobs that are being created in our new economy and right in their communities,  whether it's health-care, transportation, financial industries, or construction.   Growth & Justice is beginning a project that will illuminate those models.   And our legislators and other elected officials must be ready and willing to invest in them.   Because this really is an investment that pays off for everybody.

 

Dane Smith   

 

 

Small businesses aren't built alone—that's how they die

In an op/ed appearing in several Minnesota newspapers, State Representatives Deb Kiel and Dan Fabian call out Minnesota Department of Revenue Commissioner Myron Frans for saying something to the effect that a Thief River Falls entrepreneur did not build his business alone.

It’s evident from the commissioner’s response to the business owner that there are two vastly different ideas as to how we should help our economy grow and add jobs to our area.

The Dayton administration proposes big government, increased taxes and long-term dependency.

We maintain that local businesses — the backbone of our economy — will help rebuild our economy with a more favorable tax code that makes it easier for business owners to operate and expand, decreased regulations and a government that gets out of the way.

The representatives work themselves into a lather over the commissioner's comment so they can segue to a popular and evergreen theme: Minnesota is an unwelcoming place for small business, with taxes and regulation that stifle entrepreneurs and drive companies into the low-tax arms of South Dakota.

But where's the proof? One business owner grumpy about his taxes does not make a case. And while the gentleman's company wouldn't exist without his original vision, hard work and risk-taking to get it off the ground, he could not have built it alone.

No one really builds a business without the help of other people or the support of the community in which it operates.

No matter how hard you work, no matter how smart you are, no matter what the income tax rate is, your business's potential is extremely limited without the talents, ideas, contacts and labor of other people. And while the importance of location varies with the type of business, no owner can function without the public infrastructure, laws and court systems that support the company.

As the founder of a business that has lasted for 24 years, some of them without me since I turned it over to employees, I learned how hard it is to find, recruit and retain good employees, suppliers and customers—and how important place is, in educating workers, giving them relevant experience and providing an environment where they want to live, raise families and enjoy a well-rounded quality of life.

Without employees, you're unlikely to ever have to worry about paying the top tax rate.

However, it's also true that a majority of small businesses are one-person enterprises, so in that sense, there are a lot of business people whose businesses are the product of their work alone.

Starting a business is tough, but it's even harder to build one. Look at these facts:

• The average American small business employed roughly 2.5 to 5 people, depending on the industry. PDF
• 90% of companies with workers on the payroll employed fewer than 20 people in 2007, when the economy was in better shape.
• Only about 3% of small business owners in the U.S. will earn enough to be subject to top-tier federal tax rates; 57% of small businesses have revenues of less than $25,000 a year.
• About half of small businesses either fail or close within five years; by 10 years only about 35% are still around.

Most of these businesses fail to grow because of inexperience, insufficient capital, poor management practices and competition, not regulation and taxes. And here's one more reason why businesses don't grow:

Most small employers are restaurateurs, skilled professionals or craftsmen (doctors, plumbers), professional and general service providers (clergy, travel agents, beauticians), and independent retailers. These aren’t sectors of the economy where product costs drop a lot as the firm grows, so most of these companies are going to remain small. And according to Hurst and Pugsley’s survey evidence, the majority of small business owners say that’s precisely their intent—they didn’t start a business for the money but for the flexibility and freedom. Most have no plans to grow.

In other words, the greatest limitation on the growth of small businesses is the individuals themselves.

I can honestly say that government never got in the way of my business, nor did it directly intervene to make us successful. It simply contributed to the conditions that allowed us to succeed, and when we did, it collected more taxes.

But issues vary by industry. If there's concrete evidence of real problems, Kiel and Fabian should cite them and propose solutions. Instead, they allege a Dayton administration hostility toward business in general, while claiming credit for Minnesota job gains, lower than average unemployment and higher tax revenues that occurred under the governor's watch.

"Getting government out of the way" is a political slogan without an actual track record. Constant carping about Minnesota's tax rankings and business climate hasn't helped a single business, and it's probably scared away a few.

Going back to 2007, we've repeatedy looked for evidence of job migration because of taxes and dug into claims about the superiority of other states as business havens. While we won't deny that businesses occasionally relocate or expand in other states, we've found no credible study that shows taxes and regulation are a significant factor in hampering Minnesota's economic growth.

—Charlie Quimby

Inequality, education and innovation: U.S. higher on the first, slipping on the other two

Sometimes the anti-tax, anti-government zealots will actually concede that the United States is an outlier in economic inequality and becoming more unequal all the time. But they hasten to insist that this is a function of a meritocracy, and that our weak economic security system and low taxes foster creativity, initiative and innovation, from which all boats will rise.

But during a period marked by historic tax cuts and federal-state disinvestment in education, the U.S. has slipped in average education attainment (largely provided by taxes and government) and there are signs it may be slipping in innovation too.

The U.S. has dropped to 10th on the Global Innovaton Index, behind nations such as Sweden, Finland, Denmark, the U.K. and the Netherlands, all with much superior economic security entitlement. The index is an annual analysis published by Insead, an international business school, and the World Intellectual Property Organization, a United Nations Agency. The index is comprehensive and takes into account dozens of factors, including business sophistication, human capital and research, and creative output.

I like the analysis on these rankings by Education Week blogger Jason Tomassini, who says this:

"So, if we didn't know already, in order to create innovators through education we need to increase rigor in Science, Technology, Engineering, and Math instruction; teach students business acumen and entrepreneurship; and lower class sizes. Get to it!

Oh, and there's another factor we should watch out for: We are No. 2 in the world in video uploads to YouTube. According to the Global Innovation Index, this is a good thing, but I can't see the harm in dropping a few spots before next year." 

Let's allow that there might be a trade-off for public-sector size and private-sector growth rates, and in the extreme too much government and prohibitive tax rates might well stifle creativity and incentive.   I personally think people tend to be more creative and productive when they are relatively secure, and know they will have health care and enough to eat, even if they take a risk and fail. That's how a retired Swedish businessman explained it to me when I visited there three years ago, as I wrote in an op-ed column inspired by his creative analogy of economic efficiency to humane handling of hunting dogs.

--Dane Smith

 

Itasca Project elevates higher ed as key to growth

Every serious student of public policy In Minnesota needs to see at least the executive summary of an important new study out this week by the highly respected Itasca Project. The IP is a group of corporate and community leaders that has led the way in the past with consensus-seeking studies on transportation investment, early childhood education needs, and the education achievement gap. The Itasca Project's latest report elevates higher education improvement and attainment as the key to sustained economic growth in Minnesota. Among the findings and recommendations in Higher Education Partnerships for Prosperity:

• Future growth will require "deeper and more relevant skills from the workforce and increased innovation from researchers, entrepreneurs and businesses." By 2018, 70 percent of Minnesota jobs will require postsecondary education.
• Pressure on state budgets during the decade from 2000 to 2010 drove a 35% reduction in public funding per student in Minnesota, which drove up tuition and raised barriers to completion. (My editorial comment: these cuts were driven by an anti-government, anti-tax pledge that was unconscionable, and cutting higher education was dumber than eating seed corn).
• Minnesota strategically needs to: align academic offerings with workforce needs, foster an "ecosystem of research and innovation," form "new collaborations" to "optimize system-wide intellectual assets and efficiency," and (duh, editorial comment again) "graduate more students."

At Growth & Justice, we've been urging for several years now that policymakers set a clear goal for the state for postsecondary completion of 75 percent for all young adults by 2020. Put another way, the best route to sustained prosperity in Minnesota is to ensure that at least three out of four young adults have some sort of post high-school certificate or credential that enables them to enjoy a more productive career and realize their fuller human potential. And this imperative is particularly important for our kids of color, who currently are lagging far behind in academic achievement and attainment. Developing their potential is our best opportunity for business growth and productivity.

--Dane Smith

Can Minnesota learn from North Dakota's business model? Sure, if we strike oil.

As someone who grew up in oil sale country and spent two summers working oil rigs during college, I often cast a jaundiced eye over claims that combine "economic growth," "business-friendly regulatory and tax climate" and "oil and gas industry."

Chances are, the writer is about to praise a government that is only starting to enjoy its first oil and gas boom before all the social costs have come due. High paying jobs and environmental problems tend to get noticed first, but there are also  housing shortages, crime, new demands of roads, schools and other public systems that cost money (which oil companies cover somewhat) and aggravation, which is almost completely paid for by the residents.

Earlier this month, I ran across a breezy opinion piece in the Duluth News Tribune titled, "A view from North Dakota: Minnesota can learn from North Dakota’s business model," that set off my radar. It began:

My move (from Duluth) to North Dakota and position at the state’s chamber of commerce has allowed me to better understand how and why North Dakota is capturing the nation’s attention with record economic growth and low unemployment rates.

There's nothing like a regular paycheck to allow you to better understand your employer's point of view. But when you promote it in the newspaper, it's a good idea not to get too far outside the facts.

The op/ed has since slipped behind the newspaper's paywall, but it was posted as a comment at Minnesota Brown if you want to read the entire piece. I thought it worth questioning, and wrote the following response, which the newspaper published:

How nice that the CEO of the North Dakota Chamber of Commerce wrote a column for his hometown paper to cheer on Minnesota businesses to imitate North Dakota — or else to simply move there.

Before anyone pulls up stakes for the greener grass across the Red River, let’s look closely at Andy Peterson’s business-climate claims.

He declared the impact of the oil and gas boom is overblown. Why, “only 25 percent of the state’s tax revenue” comes from that industry. Compare that to Minnesota, where mining produced 0.5 percent of the state’s tax revenue in 2011, and where taxes from all corporations kicked in 4 percent.

Peterson wrote, “Of the more than 24,000 jobs available in North Dakota, nearly 66 percent are outside of the oil-producing counties.” Of course they are. The top five counties had barely 20,000 people before the boom began. And consider all the other sectors that depend on oil and gas expansion: trucking, construction, hospitality and even education and health services. How many of those support jobs could find a foothold in the small towns near the oil patch?

Then there was the claim that “North Dakota is a national leader in manufacturing growth.” According to the Bureau of Labor Statistics, the state had a 12-month, 4.6 percent manufacturing growth rate as of April, definitely beating Minnesota’s 1.7 percent rate, but that’s off a small base. Minnesota has 305,500 manufacturing jobs while our neighbor to the northwest just crept over 24,000 in December — up a total of 1,000 jobs compared to 10 years ago.

Take away oil and gas, which has been growing at a 44 percent rate, plus all the employment serving that industry, and the North Dakota miracle looks like nothing to write home about.

The author also made it sound like North Dakota's friendly business and tax climate had induced Minnesota's Marvin Windows and Doors to open three plants North Dakota. While it's true Marvin has expanded in the state, the company itself hasn't made the claim that tax and regulatory concerns drove it there. Back in 2008, when Marvin announced a plant expansion in Grafton, ND, I suggested some other reasons it made sense for the company.

We wish North Dakota good luck with its oil boom. Severance taxes are a great way to export a state's tax burden. But when those state boosters make distorted economic comparisons with Minnesota (even if they're disguised as Minnesota Nice helpful advice), we'll be there to set the facts straight.

—Charlie Quimby

 

Top priority for transitway development should be employers and jobs

You are a policymaker and you have a tough choice between two big development proposals for the same site on a key light rail line or transitway. All other things being equal, which do you choose: a major employer or a large housing complex?

If overall accessibility improvement and employer access to labor is the goal, take the employer, says new research presented this week at the 23rd Annual Transportation Research Conference in St. Paul this week.

The research report by University of Minnesota Humphrey School Assistant Professor Yingling Fan was complex and aimed at planning professionals. But the bottom-line key finding was straightforward: "Locating new jobs near transitways produces larger increases in accessibility than locating new housing near transitways.'' Getting these fundamentals right are important because by 2030 we likely will have an integrated network of 14 transitways up and running in the Twin Cities, ranging from light rail to commuter rail to express bus lines. Few public investments are more important for business growth than transporation infractructure.

Fan's research was sponsored by the McKnight Foundation, the Jay & Rose Phillips Family Foundation and the Surdna Foundation. Abstracts from the conference provide rich state-of-the-art thinking on a wide array of transportation investment issues.

Dane Smith 

St. Paul resident and son inspecting Central Corridor construction in downtown St. Paul (Metropolitan Council photo)

Jason Lewis' gaping omission in attack on nonprofits

Jason Lewis’ latest attack in his Star Tribune column on Minnesota’s nonprofit community--opening with disdain for the very concept of “shared responsibility"--is wrong in tone and content, and far removed from Minnesota sense and sensibility.

The smart-alecky dismissal of nonpartisan groups ranging from public radio to anti-smoking campaigns was mostly just unfair and cynical and predictable. But the biggest shortcoming was a glaring omission. Lewis did not say a word about the billions of tax-deductible dollars contributed nationally to fundamentalist churches, right-wing causes and conservative think tanks, including, in Minnesota, the Center of the American Experiment. All of those groups must adhere to the rules that forbid political endorsements while allowing religious expression, nonpartisan citizen engagement and communication around public policy.

It would have been fair enough for Lewis to propose reducing tax breaks for contributions to nonprofits, which actually would have the effect of raising federal and state taxes on the affluent. Some progressive tax reformers propose just that. But Lewis didn’t travel very far down that road at all. His obvious aim was to stir up anger on the far right against only those nonprofit, nonpartisan causes and foundations that don't line up with his extremely individualistic world view.

Finally, we at Growth & Justice were pleased to be associated with the other constructive Minnesota organizations listed in Lewis’ “rogues’ gallery." It was instructive to see that Lewis’ idea of roguish causes actually includes “reproductive rights, saving the planet, and world peace." (Horrors!!) But he got it half-wrong in dismissing us as “a merry band of collectivists." Growth & Justice is no more “collectivist" than the moderate Republican former office-holders, business managers and former CEOs who have supported us from our founding. We seek ways to broaden prosperity and business growth, with evidence-tested and cost-effective policies and interventions. And we have been allies with business leadership in this state on a host of policy fronts, including early childhood education, increasing transportation investment and gas tax revenue, and reducing some business taxes. But we are also almost entirely positive in our tone and content and therefore, I suppose, “merry."

Dane Smith

 

Five Reasons For Optimism in 2012

Five reasons, small and grand, for optimism in 2012:

• Even Katherine Kersten is hopeful. I like much of what the conservative firebrand said in her latest Star Tribune column about the "debilitating hail" of news that emphasizes "crisis and decline" and how American success has been founded on the "virtue of hope." This was a nice break from her relentless negativity about any and all things public and progressive about our nation and state. She missed some points about how Americans were always hopeful for justice and greater equality as well as freedom and business growth. But a little ray of sunshine from KK is wonderfully refreshing.
• A good friend of mine may have turned the corner in treatment for a nasty disease. A big reason health care costs keep going up is that people live longer, and thus more people need more medicine and more doctors during more of their lives. I'll got out on a limb and declare that people living longer is a good thing. Another reason for rising health care costs and increasing under-insurance is expensive financial administrative costs in the health sector. Growth & Justice will produce a study early this year that takes a look a the costs and benefits of a universal and unified system of health care for Minnesota.
• The American people are hopeful, amazingly. Although most Americans overwhelmingly view 2011 as a bad year, a recent Associated Press poll found that almost 80 percent of Americans are optimistic about the future of their own families in 2012, and more than 60 percent are optimistic about 2012 for the country as a whole. The polls suggests that Democrats are optimistic than their candidate will be re-elected and Republicans are optimistic than they will win, but hey, it's all optimism.
• Things actually are getting better for humankind as a whole. As Harvard professor Steven Pinker recounts in his convincing and exhaustive new book, "The Better Angels of Our Nature" (reviewed here), the current era is the safest and least violent in recent human history, and living conditions are improving everywhere. I like his theory about human progress being part of the “civilizing process," a term he borrows from the sociologist Norbert Elias, who attributes it to the consolidation of the power of the state above feudal loyalties, and to the effect of the spread of commerce. In other words: a happy synthesis of capitalism and good strong democratic governments.
• Finally, in Minnesota, we are well governed and our business leadership is better than elsewhere. Our public sector and our private sector are fundamentally sound, despite gridlock in Washington and depredations on Wall Street. I like what a recent Star Tribune editorial had to say at year's end about Gov. Mark Dayton taking us in the right direction, and the state Senate is now under the leadership of a Republican who is openly moderate.

The economic collapse of late 2008 turned out to be as big a hole as we thought and there is lots of room for improvement all around, from redesigning our governments to restoring our public investments in education and public infrastructure to reducing racial and income inequality. Lots of things can and will go wrong. But there's no future in pessimism. See the doughnut, not the hole.

--Dane Smith