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   

 

 

Border sales tax impacts: Do we believe our lying eyes?

Back in 2007 when Growth & Justice was presenting its Invest for Real Prosperity tax proposals to the legislature, I recall a member waxing nostalgically about his parents hauling the family across the North Dakota border to buy untaxed clothing in Minnesota.

The point of his anecdote was that if Minnesota lowered its sales tax and broadened its tax base—as economists recommend—this lucrative cross-border school clothing traffic would dry up, with terrible consequences for Minnesota's border city retailers.

We're hearing a version of the same tale, now that Governor Dayton's tax reform plan has finally taken the advice of both Growth & Justice and Governor Pawlenty's 2009 tax reform commission to lower the tax rate and extend the sales tax base to a broader range of consumer products and consumer services.

This week, Rep. Pat Garofalo objected on TPT's Almanac: At the Capitol. He reported that a North Dakota Democrat was proposing eliminating the state's tax on clothing as a form of tax relief.  

"Retail businesses in border communities like Moorhead will be destroyed," Garofalo said, attracting blogger Dave Mindeman's skeptical response:

Fact: North Dakota sales tax is currently 5.0%. Fargo, ND which is the booming ND metropolis across the river from Moorhead adds a 2% city tax. So here [are] the facts. Under Dayton's tax proposal, Moorhead (which adds no city tax) would be 5.5%. Fargo would charge 7.0% Clothing may be exempt in the future, but Moorhead will still have clothing under $100 exempt as well.

Judging from comments left on the post and on Twitter, the border-crossing mythology is too well-entrenched to be swept away by simple math.

But let's suppose North Dakota finally drops its state clothing tax just when the gap with Minnesota is closing.

Then what? Will Minnesota border towns really suffer? Were North Dakota retailers in the thriving cities of Fargo and Grand Forks suffering in silence all these years?

As the Minnesota legislator said in that 2007 hearing, should I believe you or my lying eyes?

Certainly one person's personal experience can be more persuasive than actual scientific studies—especially when it confirms his biases—but let's push ahead anyway.

As you can imagine, economic theory predicts that consumers will seek to lower the costs of goods where a sufficient tax differential exists along with relative ease of acquiring the products from the alternative source.

We think we see this principle at work with internet sales that make it easy to circumvent state sales taxes—but application to the border situation is clouded because the internet sales are often deeply discounted as well.

Looking at the literature studying economic activity in response to sales tax rates, I found research that supports the following points: 

Response to differences in the sales tax depends on proximity of border communities. In other words, the farther you have to drive to avoid the tax, the less likely you are to do so. 

How much does distance matter? A 2010 Utah study of local option sales taxes PDF* that investigated distance as a variable found increasing the tax rate lowers taxable sales (all else held equal) when there is a jurisdiction with a lower tax rate within 5 km, or about three miles. The effect disappears altogether within about 40 miles. This is to be expected for low-cost goods and everyday commodities. But it also appears to hold for expensive major purchases such as new or used automobiles.

Occasional forays to other markets are probably more memorable than routine local trips to buy the same goods, causing people to overestimate the total economic impact of their trip to buy tax-free products.

 

Clothing purchases appear less sensitive to tax-influenced decisions. When different types of goods are taken into account, several studies found only modest evidence that consumers would alter their consumption or search for lower tax rates on food, clothing and general consumer goods.

Small tax differentials have small effects. Another study based on a natural experiment compared a local option sales tax increase that resulted in a one-half percent difference between neighboring cities. The town with the higher tax rate showed a modest retail sales decline, but drop did not affect the number of businesses, and the reduced sales revenue for the town was more than offset by the increase in tax revenue.

In cases like cigarette taxes, where cross-border differences are large and the product is regularly consumed, we see clear evidence of cross-border activity.

Bottom line, there's some support for the economic theory or it wouldn't be a theory for long, but people tend over-estimate the larger effect of their own behavior and observations.

Dayton's proposal is a target precisely because it takes on the difficult and sometimes contradictory outcomes of tax reform.

Bruce Nustad, president of the Minnesota Retailers Association, for example, doesn't like the clothing tax: “We like the idea of lowering the overall sales tax rate. The tradeoffs, though, are a little difficult for us.”

Which is maybe why there have been so few serious attempts at reform, despite the theories.

—Charlie Quimby

* The state of Utah has wide diversity in local option sales taxes, enabling researchers to study differences between adjacent communities without distorting effects by comparing different states.

Among the five counties that form the urban core in Utah and represent 70 percent of the state’s population, every major city in each of the counties has a different tax rate. In several rural counties, there are no differences in the tax rates within the counties, but in twenty-six of the twenty-nine counties in Utah, 30 percent of the local taxing jurisdictions have tax rate different from each other.

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

 

 

Voters want the reasonable middle ground

Elections can be a surprise, and this latest was for me, on both the national and state level, a very pleasant surprise. I've been weary of the "devil take the hindmost" style of political brinkmanship that seems to have become commonplace in Washington and at the State Capitol. I don't care who's to blame, or even that everyone or no one is to blame. I just want a group of legislators willing and able to identify the plights of the people -- all the people -- and addressing them with creative, nonpartisan solutions that are effective and cost efficient.

One thing our recent elections show is that the voting public, as an electorate, is only several degrees on either side of middle ground. And, our votes will swing in favor of one party or the other based on how far the party in power has strayed from the middle. We are not against government, but only ineffective, inefficient government that wastes tax dollars. We are not against regulation, but want regulations that are patently fair, reasonable, non-discriminatory and not arbitrary. And, we are not at all against taxes, but only taxes that burden us without adequate demonstration that our tax dollars are being spent efficiently for the good of all.

The clear message to politicians everywhere is that they don't stray too far from the middle. The people want government and expenditures focused on things that matter to the mainstream, and that both improve lives and make it easier to live, work and play in their own communities. Our newly elected political leaders should be thinking long and hard about that, and less or not at all about sticking it to the other political parties for paritsan gain.

--David F. Fisher

(Note: David F. Fisher is a new member of the Growth & Justice Board of Directors, and is Executive Director of the Corporate Institute at the University of Minnesota Law School. He was commissioner of the Minnesota Department of Administration under Independence Party Gov. Jesse Ventura.)

"Minnesota's Miracle" can inform a new generation

Policy enthusiasts and history buffs will enjoy "Minnesota's Miracle: Learning from the Government That Worked." It's a gem of a book on 1970s legislative policy-making, and Minnesota's golden age of bipartisan problem-solving, progressive reform, public investment and innovation. The writing, by Tom Berg, a former legislator and a strong Minnesota community leader on many fronts since then, is both careful and lively, sprinkled with delightful anecdotes such as the triumph of pioneering women legislators in gaining entry and membership in the once all-male St. Paul Athletic Club. For my money, the heart of the book is the chapter "Breakout Session," between pages 79 and 112, which contains an inspiring summary of lasting reform legislation that protected the environment, expanded access to education, and improved housing and metropolitan governance. Younger citizens in particular need to know this history, to know what is possible and to keep hope alive for constructive resolution of the demographic and economic challenges we face 40 years later. The book launch and celebration is set for 4 p.m. Tuesday evening at the Cowles Auditorium and the Hubert H. Humphrey Center.

--Dane Smith 

 

 

Wonkish Ryan's budget specifics take center stage

Congressman Paul Ryan is routinely described as a "wonk." And all of us policy enthusiasts have to like the new focus on substance--budgets and taxes and who gets how much--that's likely to occur with the naming of a fellow wonk as Mitt Romney's running mate.

Conservative and liberal commentators also agree that the choice of Ryan signals a harder turn by Romney toward a more specific anti-tax, anti-government policy agenda. It reflects an even more pronounced valuing of private interests over public interests on the GOP side, and perhaps the strongest attack since before the 1930s on our federal government's fundamental role in providing economic security for all Americans.

The best and most comprehensive critique of Ryanism, and the spectacular claim to be able to reduce the federal deficit by cutting taxes, can be found at the Center on Budget and Policy Priorities (CBPP) blog post headlined "Everything You Need to Know About Chairman Ryan's Budget.''

Here's how CBPP President Robert Greenstein summarized the Ryan blueprint: "It would likely produce the largest redistribution of income from the bottom to the top in modern U.S. history and likely increase poverty and inequality more than any other budget in recent times (and possibly in the nation’s history)."

The ramifications for Minnesota of the Ryan budget were teased out of the CBPP studies late last week by the Minnesota Budget Project (MBP). The MBP reported that "Minnesota would lose an estimated $420 million in federal funding for education, law enforcement, clean water, and other state and local priorities in 2014 under the House-passed Ryan budget...The total impact from 2013 to 2021 would be a loss of $3.8 billion in federal funding to Minnesota and local communities."

Meanwhile, on the libertarian end of the spectrum, the Cato Institute is much more bullish on Ryan's budget, but Cato also faults him for inconsistency and for not taking a similar whack at the huge military-industrial complex that taxpayers support through military spending.

It's common knowledge that Ayn Rand, the novelist and amateur philosopher who worshipped capitalists as godlike Atlases to whom everything was owed, has had strong influence on Rep. Ryan. The New Yorker reminds us that her novel, Atlas Shrugged, once was required reading for his staff. But Ryan has since attempted to disavow Rand, in large part because of her militant atheism and utter contempt for religion and the altruistic values of Ryan's Catholic faith. The American Values Network offers an intriguing challenge to Christians to choose between Ayn Rand and Jesus Christ.

--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

 

Top 10 Facts About our LOW Taxes

The week when federal taxes are due predictably generates fist-shaking by the various forces for individualism and small government and, increasingly, counter-demonstrations by the "99 percent" who favor a stronger public sector and fairer economic outcomes.

But the basic fact that taxes actually are lower in the United States and in Minnesota--lower overall than in other wealthy nations and lower for the wealthy in our country than at any time in recent decades--is often missed by news media coverage of the sign-waving by both sides.

The most crisp presentation of these realities I've seen recently comes from the national group Demos, along with The American Prospect, which produced the following "Top 10 Tax Facts." Growth & Justice was a partner last year with Demos in a report on the declining security of Minnesota's middle class.

1. The government has collected less in taxes as a proportion of the economy in the past three years than it has in any three-year period since World War II, and tax rates are at historic lows.

2. One out of three multi-millionaires pays a lower percentage of their income in taxes than the vast majority of people making $60,000 a year.

3. House Budget Chairman Paul Ryan’s tax-cut proposal, which has been praised by presidential candidate Mitt Romney, would deliver benefits to people with incomes over $1 million that are 10 times greater than the benefits to those earning $40,000 or less.

4. Corporate income taxes for the past three years have hovered at just over 1 percent of GDP, lower than for any three-year period since World War II. The average for OECD countries is 3.5 percent.

5. The Bush tax cuts added $1.7 trillion to the nation’s debt between 2001 and 2008, which is more than it would cost to send 25 million kids to four-year public universities.

6. America has a revenue problem, not a spending problem. It is only because of the Bush tax cuts that our national debt is rising. If not for those cuts, our debt would be stabilized at under 60 percent of GDP.  

7. General Electric, which reported over $4 billion in US profits in 2010, paid ZERO taxes. 

8. A financial speculation tax of only 0.50 percent on financial trades could raise up to $170 billion annually.

9. Upper income households save an average of $5,500 thanks to the mortgage interest tax deduction whereas families earning between $40,000 and $75,000 save only $500.

10. Only two OECD nations collect less revenue as a percentage of GDP than the United States—Chile and Mexico.

For my money, that last fact is the most compelling. Do we want our nation and state to be more like Canada, or more like Mexico? Immigration patterns in both hemispheres suggest that people are voting with their feet for the safer and more prosperous destinations with higher taxes, more equitable communities, higher education levels, and better jobs.

And finally, making a strong case for more revenue and pubic investment, from a retired Minnesota businessmans's perspective, check out Myles Spicer's latest op-ed, calling for reasonable higher taxes to pay our debts and invest further in our community.

Dane Smith 

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