Recently in Minnesota Category

In unusually difficult times like these, one of the most responsible decisions a policymaker can make is to keep all revenue options on the table. Unfortunately for residents of Minnesota and Hawaii, their governors have approached the current crisis with exactly the opposite mentality. Governor Tim Pawlenty of Minnesota and Governor Linda Lingle of Hawaii have clung to the "no new taxes" mantra in recent months, despite the passage of responsible revenue-raising packages by the legislature of each state. Prominent in each of those packages were progressive income tax hikes.

In Hawaii, despite the Governor's veto, as well as her repeated assertions that any tax increase would be economically damaging for the state, the legislature managed to pass the revenue package over the Governor's stubborn opposition. The bill raises income taxes on single Hawaii residents earning over $150,000 per year, and married couples earning over $300,000.

Minnesota thus far has not been so lucky. Less than a week ago, Governor Pawlenty vetoed a tax package (based on the House and Senate bills we described last week) containing progressive income tax increases. So far that veto has held up, as proponents of the bill appear to be just a few votes shy of an override. Deeper cuts in public services or increased borrowing (the preferred solution of the Governor) may be turned to next in order to win wider support for the package.

Staring down a $6.4 billion deficit, Minnesota legislators last week decided that tax increases would have to be included in any plan to balance the budget.

In the Senate, SF 2074 increases income tax rates across the board, but also adds a new top rate on income over $250,000 per year for married couples. On top of that, the Senate bill also prevents those owning multiple homes from taking the mortgage interest deduction for interest paid on their second home.

The House plan, HF 2323 is a bit more ambitious in its pursuit of true tax reform. Like the Senate plan, the House adds a new top rate as well -- in this case on income over $300,000 for married couples. In addition, the House converts costly and poorly targeted deductions for mortgage interest and charitable giving into tax credits that should be accessible to a wider range of Minnesota families. The bill also repeals the credit for child/dependent care costs, but does add a refundable per-child tax credit. Furthermore, the House bill ends the exclusion for interest received from state/local bonds, eliminates the deduction for real and personal property taxes, and ends a variety of education tax preferences. From a tax simplification standpoint, the bill earns high marks. As the Minnesota Budget Project put it, "the House bill wipes the tax expenditure slate mostly clean."

Unlike the Senate plan, the House does include a variety of significant tax increases on cigarettes and alcohol in its bill. While such increases are usually among the easiest to enact politically, it's important to remember that they are also among the most regressive. Progressive offsets, such as an enhanced EITC, could help temper this regressivity.

For the Minnesota Budget Project's roundup of the House bill, click here. For the Senate bill, click here.

P>Minnesota's Department of Revenue released a study last week showing that the regressivity of the state's tax system has grown significantly in recent years. On the heels of this study comes a proposal from the Chairwoman of the House Tax Committee seeking to clean up the tax code by eliminating a slew of tax expenditures in order to fund more progressive changes to the state's tax system.

You can find more details on the Minnesota Budget Project's blog, but the general idea is to replace a variety of tax breaks that are either regressive or too narrowly targeted with three simplifying tax credits, including credits for mortgage interest, charitable contributions, and lower-income families with children. Tax rates on the lower two income tax brackets would also be reduced.

On the business side, the proposal seeks to end a variety of ill-conceived business tax breaks, though unfortunately it does seek to replace them with other ill-advised measures, such as single sales factor and equipment expensing.

It's hard to believe, but there may actually be a trend in state tax policy more prominent than increasing cigarette taxes. Business tax credits aimed at spurring economic development have been among the most popular ideas in statehouses scrambling for ways to reduce unemployment. Just last week, we described a plan in Minnesota to boost investment tax credits and a budget in California containing a few credits of its own. This week, proposals to do the same in Iowa, Kentucky, and Missouri are under discussion.

In Iowa, Republican lawmakers have suggested paying (via tax credit) half the salary of each new job created by private businesses. Oddly, because this payment would be administered through the tax code rather than as a direct grant, the debate has become confused to the extent that this policy has been labeled as a way to return to a "market-based, capitalistic system".

An excellent op-ed out of Kentucky helps clear things up a bit, noting that Gov. Beshear's proposed expansion of business tax incentives would be a costly, nontransparent, and likely ineffective way of encouraging job growth. The op-ed goes on to argue that a "broader" approach, including better targeted and more closely scrutinized spending programs, could do far more good than creating more tax credits.

Finally, as an expansion in economic development tax credits works its way through Missouri's legislature, the admission of at least one legislator that he is a "recovering tax credit addict" helped to shine some light on the unfortunate politics behind these types of tax credits. These programs can cost a state enormously, and are rarely defensible on principled tax policy grounds. Instead, they constitute a type of spending done through the tax code -- commonly referred to as "tax expenditures" -- which add complexity, shrink the tax base, require higher marginal rates, and offer little if anything in terms of making the system more responsive to individuals' and businesses' ability to pay.

We've been lamenting for the past several years about the folly of Ohio's former Governor Bob Taft pushing through a phased-in 21 percent cut in income tax rates. Of course, the tax reductions made Ohio's overall tax structure less fair. Policy Matters Ohio recently released a report detailing the impact of the Taft tax cuts. Analysts there found that "key economic trends continued to go in the wrong direction after the tax overhaul." Despite this evidence, current Governor Ted Strickland has vowed to continue Taft's tax cutting legacy. But there is some hope brewing in the Buckeye state.

Representative Michael Skindell has called for freezing the phase-in of the Taft tax cuts for the wealthiest Ohioans. It's estimated that adopting Skindell's recommendation would bring in over $200 million and it's certainly a step toward making Ohio's income tax more progressive.

For tax justice advocates in Minnesota, it's a bleak time. Governor Tim Pawlenty is vehemently anti-tax, and his 21st Century Tax Reform Commission has largely followed his lead with recommendations to eliminate the state's corporate income tax and enact several investment tax credits, though in fairness the Commission does recommend two revenue raising options: expanding the sales tax base and increasing cigarette taxes. It's too bad that progressive revenue raising options weren't mentioned. It's hardly a surprise that some would like to see income tax cuts for the wealthiest Minnesotans preserved. But Wayne Cox at Minnesotans for Tax Justice argues against tax cuts in a recent commentary, correctly arguing that increasing the progressivity of Minnesota's tax structure would not harm the state's business climate. He warns that "the alternative is carrying out an even riskier plan that trims muscle, not fat."

There are more good proposals on improving the progressivity of state income taxes. Next we turn to Montana where Representative Dave McAlpin is trumpeting a "fix" to the state's 2003 major tax revision that reduced the top tax rate and bracket. State estimates were that the tax changes were supposed to cost $26 million a year, but in reality they actually cost the state $100 million. His legislation would introduce a new top income tax rate of 7.9 percent on Montanans with taxable incomes over $250,000, and help to right the wrongs of the 2003 revisions. If Rep. McAlpin's bill is adopted, the state could see $26 million in additional revenue and improve the progressivity of Montana's tax structure.

For more on the importance of progressive income taxes read ITEP's policy brief on this topic.

In too many states facing terrible budget shortfalls, proposals to cut vital services and even poorly targeted tax cuts are receiving a lot of attention from lawmakers. Progressive research groups are pointing out that states cannot escape their fiscal morass simply by cutting public services. This week, the Washington Budget and Policy Center released a letter to Governor Gregoire, the Speaker of the House and the Senate Majority Leader, which was signed by twenty economists urging them to consider all options when trying to balance the budget, including tax increases. The economists agree that, "Implementing deep cuts in government spending and declining to raise revenue through tax increases is not an effective strategy to guide Washington State out of this recession. The best strategy is to continue our long-term investments in education, health care, community vitality, and economic security."

Speaking of putting all the options on the table, the Minnesota Budget and Policy Project recently released their report Revenue-Raising Options to Help Close Minnesota's Budget Deficit. In a state where the Governor has repeatedly taken tax increases off the table, it's important that policymakers and the public realize that there are progressive revenue-raising options available. Read about the menu of options presented in the paper, including sales tax base-broadening, enacting an income tax surcharge, and the creation of new income tax brackets.

At the federal level, one of the key controversies in the stimulus debate has been over how much of the stimulus should come in the form of tax cuts. Fortunately, a consensus seems to have formed that tax cuts should play a less important role than spending increases (though there are still a variety of tax cuts in the federal proposal that we could certainly do without). In Minnesota, however, the Governor recently made a number of proposals in direct contradiction to this sentiment. He proposes to cut business taxes with the alleged goal of reducing unemployment in the state.

Among the Governor's proposals:
- Slashing the tax rate on business income in half
- Allowing companies to deduct the entire cost of their equipment purchases up-front, rather than doing so gradually over time as the equipment depreciates
- A variety of tax credits for business investors within the state
- A capital gains exemption for those who invest in small business within Minnesota

The Minnesota Budget Project quickly issued some sharp criticisms of the Governor's stimulus plan. Those criticisms rely heavily on the well-publicized figures produced by Mark Zandi demonstrating the relative effectiveness of various kinds of stimulus measures. Unsurprisingly, business tax cuts ranked among the least effective stimulus options available.

Unfortunately, however, the Governor is not alone in attempting to chart a course down this ill-conceived path. House Republicans have recently begun touting what is perhaps an even more radical measure: a five year suspension of the corporate income tax for any company that relocates to Minnesota, or expands its business within the state.

As the Budget Project points out, though, Minnesota can expect to have even less success with business tax cuts than the federal government could, since the requirement that the state balance its budget (coupled with the already dire budgetary situation in Minnesota) means that every dollar in business tax revenue lost through these cuts will result in economically harmful spending cuts.

Ultimately, stimulus is a matter best left up to the federal government, which can borrow to pay for temporary injections into the economy. The states, including Minnesota, would be much better off focusing their energies on maintaining the valuable state services that Minnesotans are depending on to weather the current economic storm.

For state lawmakers facing a balanced-budget requirement, the problem of revenue volatility can be a serious one. Since one of the more important goals states pursue is to provide a consistent level of services each year, it only makes sense that a correspondingly consistent level of revenue be available. In California, the Governor, together with state legislators, has appointed a commission specifically tasked with providing recommendations on how to reduce volatility. Minnesota recently formed one such commission as well, which actually released its findings just this week. Some of the commission's findings include (as summarized by the Minnesota Budget Project):

- "Shifting to more stable revenue sources would lead to a more regressive system with slower growth rates. Instead of attempting to rebalance the tax system, they recommend establishing a much larger budget reserve ($2.1 billion for now) to help carry the state through economic downturns."
- "Using one-time surpluses strictly for one-time purposes (like rebuilding the reserves)"
- "Avoiding permanent tax cuts or spending increases unless reserves are filled and shifts have been bought back."
- Ensuring "that policymakers and the public have access to more information to improve the decision-making process. That includes releasing a demographic forecast every biennium and adding inflation back to the expenditure side of the state's budget forecasts."

As these recommendations should make clear, revenue volatility is only a problem if it is not planned for in the budget. Restructuring an entire tax system just to smooth out revenue collections is an extreme example of trying to 'throw the baby out with the bath water'. In fact, as we've pointed out in our policy brief on progressive income taxation, restructuring a tax system with this aim in mind is likely to create even more revenue problems in the long-run.

But while there's much to be excited about in the wisdom behind the Minnesota Commission's recommendations, those ideas have yet to take root everywhere. In Indiana, for example, just this week the Governor called for automatically refunding any tax collections above some pre-determined level, during good economic times. Such a change would directly restrict the flexibility policymakers need to plan for rough budgetary times when things are going well.

Arizona voters wisely rejected Proposition 105, a proposal that would have placed a nearly insurmountable obstacle in the way of Arizona residents seeking to raise their own taxes through the referendum process.

Arkansas voters approved a measure to institute a state lottery. While the state could certainly use the additional revenue, Arkansans should be wary of funding their government through regressive revenue sources such as the lottery.

Maine residents rejected an increase in the alcohol and soda taxes to fund health care. While it's certainly a bad thing that these taxes are regressive (as well as unlikely to exhibit sustainable growth in the coming years), the ludicrousness of the fervent opposition this relatively minor tax created can be read about in this Digest article and this blog post.

Maryland residents also decided to secure additional revenues for their government via expanded gambling, in the form of 15,000 new slot machines. Check out this Digest article to learn about some of the problems with this proposal.

Missouri also attempted to increase its haul from gambling. Increased gambling taxes and the elimination of limitations on the amount of money one is allowed to lose were approved by voters this Tuesday. This Digest article explains how the proposal leaves much to be desired.

Minnesota voters decided to go through with a 3/8ths percent sales tax hike. While the environmental causes to which the funds will be dedicated are undoubtedly worthy, the regressive way in which voters decided to go about funding the projects (through the sales tax) is far from ideal.

Nevada residents voted to amend their constitution to require that all new sales and property tax exemptions be subjected to a benefit-cost analysis, and accompanied by a sunset provision that will force their reexamination in the future. While the proposal sounds good in theory, its requirements are relatively loose in practice. It will be up to Nevadans to carefully watch their representatives to ensure that the spirit of this law is adhered to. Learn more about this proposal here.

This summer we brought you word of Minnesota Governor Tim Pawlenty's plan to create a "21st Century Tax Reform Commission." The 15 member Commission is meeting throughout the fall and is charged with "providing advice and recommendations to the Governor on options for revenue-neutral tax reform." The Governor said that "this Commission will specifically focus on improving our job climate by reforming Minnesota's tax laws."

The Commission seems bent on discussing ways to attract businesses solely by changing tax policy, apparently assuming this is the only factor that affects a state's economy. ITEP responded to a posting by the Commission asking for public comments. We took the opportunity to remind the Commissioners that taxes actually account for a small portion of business expenses, that businesses thrive when public investment thrives, and that low business taxes don't guarantee a company's loyalty. For example, in Minnesota, "despite receiving millions of dollars in tax breaks and incentives from federal, state, and local governments, Northwest Airlines has repeatedly reduced employees and threatened to close local Minnesota facilities." Click here to see our comments in full. To stay updated on the Commission's activities check out the Minnesota Budget Project's Minnesota Budget Bites blog.

This November Minnesota voters will be asked to approve a change to the state's constitution. If the Clean Water, Land and Legacy Amendment is approved, Minnesota's constitution will be changed to increase the state sales tax by three-eighths of one-percent (from 6.5 to 6.875 percent). The new rate will begin on July 1, 2009 and expire in 2034. The sales tax rate increase will bring in an estimated $290 million a year for the next 25 years. Revenues generated will be divided among a variety of programs including: water quality, wildlife habitat, arts and culture, and parks and trails. Advocates of tax fairness may be torn about how to vote on this amendment given that sales taxes are regressive and take a larger share of income from low income folks than from the wealthy. It will be up to the voters to decide if clean lakes, conservation efforts, and environmental protection trump tax fairness in this particular situation

Earlier this year in his State of the State Address, Minnesota Governor Tim Pawlenty announced his plan to create a 21st Century Tax Reform Commission. The 15 member Commission was charged with "providing advice and recommendations to the Governor" on options for revenue-neutral tax reform. The Governor said that "this Commission will specifically focus on improving our job climate by reforming Minnesota's tax laws."

Ensuring that a state's tax structure is able to sustain the challenges of the 21st century goes far beyond a state's business climate. In fact, there's been a lot of talk in Minnesota about how the Governor's Commission is too narrowly focused on corporate concerns. Given this obvious slant, perhaps it's not surprising that in their deliberations members were asked to take into consideration various tax policy principles, including simplicity, competitiveness, efficiency, and stability, but tax fairness didn't make the list!

The Commission is heavily stacked with representatives from the business community. The Minnesota Budget Project's Budget Bites Blog tells us of one especially egregious exchange, "when one member asked what percentage of the state's total revenues come from the corporate income tax... so how much money would the state lose if we eliminated it? 'Seven percent,' was the reply. 'So, if it's just 7 percent, we could live with that,' said the member." Let's hope the Commission moves away from eliminating the corporate income tax, which is projected to bring in $1.9 billion in revenue for FY 08-09.

In slightly more hopeful news, testimony heard earlier this month by the Commission included a discussion of broadening the sales tax base to include more services and applying the sales tax to items purchased online. If enacted, both of these changes would modernize the state's tax structure. For more see ITEP's latest policy briefs on sales tax base expansion and taxing internet sales.

North Carolina is suffering from an increase in the cost of asphalt. Asphalt is made of petroleum derivatives, and its cost has increased 25% since the end of 2006. This is causing the state to cut back on road repaving projects which are likely to cost more money to accomplish the longer they go unrepaired.

In Missouri, the state has a projected $1 billion transportation fund deficit. It is only expected to be able to meet 40% of obligations starting July 2009. In spite of this, all three major candidates for Missouri Governor pledge not to raise the state motor fuels tax. The two Republican gubernatorial contenders, Sarah Steelman and Kenny Hulshof suggest dedicating general funds revenue to transportation and privatizing some state roadways respectively.

Virginia is currently confronting a "growing bridge and road maintenance shortfall" which is depriving money from road construction. Governor Tim Kaine has recently released a proposal to raise vehicle registration fees and sales taxes on vehicles, while keeping the state fuel tax unchanged.

These states have in common a tendency to tinker around the edges of transportation funding policy while failing to address the taboo topic of gas taxes. The root cause of these transportation troubles is that the gas tax has been kept too low to finance the transportation needs in all these states.

Most states have a "per gallon" gas tax that leaves them unable to cope with rising costs of transportation as inflation erodes the value of the tax collected on each gallon. North Carolina's gas tax has been capped at 29.9 cents since 2006 due to pressure from anti-tax activist Bill Graham, although it was formerly readjusted to reflect price changes twice a year. Missouri has not raised its gasoline tax since 1996 and Virginia's gasoline tax has stayed constant since 1992. None of these states index their gasoline tax either to transportation costs or the general inflation rate.

Sometimes even a major crisis is not enough to get politicians to consider gas tax adjustments. Due to Iowa's recent flooding, Iowa's legislature is likely to convene an emergency session to confront their newly pressing infrastructure needs and find sources of funds for disaster recovery. Legislators rejected efforts to raise the gasoline tax earlier in the year to fill the $200 million highway maintenance deficit, opting instead to tinker around the edges and simply raise vehicle registration fees. But even now, the Iowa House Majority Leader considers a hike in the gasoline tax "an absolute, absolute last resort," with gas selling for $4/gallon.

Even a spectacular tragedy is sometimes not enough to get politicians to wake up. Before the August 2007 Minnesota I-35W bridge collapse, Governor Tim Pawlenty vetoed a bill raising the gasoline tax 7.5 cents per gallon, calling it "an unnecessary and onerous burden" as consumers were paying $3 per gallon for gasoline in May 2007. This was in a state that hadn't adjusted its gasoline tax in 19 years. Not even a bridge collapse and transportation funding shortfall of nearly $2 billion were enough to change the governor's position that gas taxes are anathema. Needed road and bridge repairs were being neglected, with obviously dire consequences. Fortunately, Minnesota lawmakers were finally able to override Governor Pawlenty's veto in February, raising the gas tax by 8.5 cents.

For many, there will never be a "right time" to raise the gas tax. It wasn't the right time at $2 per gallon in 2005 when Gov. Pawlenty first vetoed a gas tax increase, nor at $3 per gallon in 2007, nor now at $4 per gallon. In fact, it's never the "right time" to raise any kind of tax... no one wants to pay more than they have to. But sometimes in order fund vital services policymakers need to come together and bite the bullet as they did in Minnesota, even if it is politically difficult.

Opponents have sometimes successfully argued that raising the gasoline tax would be regressive and particularly damaging to the economy in such a car-dependent nation. But gas tax increases can be done in conjunction with progressive measures, such as raising the Earned Income Tax Credit and creating a refundable gas tax credit as was done in Minnesota and proposed in Virginia.

The Minnesota legislature approved a property tax bill this week (discussed here by the Minnesota Budget Project) that should be studied very closely by New York, Massachusetts, and any other state looking to improve the fairness of its property tax. The Minnesota bill makes use of what is primarily a two-pronged approach to providing tax relief. However, one of those prongs, the property tax circuit-breaker, is noticeably more effective than the other.

The first prong of the Minnesota plan is an expansion of the state's property tax circuit-breaker credit that provides refunds to households who spend more than a given percentage of their income on property taxes (for information on the fairness gains to be had from circuit-breakers, refer to this ITEP Policy Brief). For other states interested in enacting or expanding similar programs, a recent report from the Massachusetts Budget and Policy Center proposes a variety of targeted expansions to the Massachusetts circuit-breaker (which, as in many states, is currently available only to low-income seniors) that would greatly improve the fairness of the property tax.

The second prong of Minnesota's approach to property tax relief was a late addition at the request of Governor Pawlenty: a 3.9% cap on increases in local property taxes. A Center on Budget and Policy Priorities report released this week explains why such caps are a bad idea. The most obvious problem is that caps constrain local government revenues without regard to the cost of providing public services. Tax caps also force localities to become more dependent on state aid, which becomes problematic during an economic downturn when that aid decreases but the cost of providing goods such as education and law enforcement remains the same or even increases. Fortunately, Minnesota's cap is slightly less stringent than some states. It has a higher ceiling on revenue increases, numerous conditions under which a locality can avoid the cap, and a provision to expire after three years.

This discussion is especially relevant in New York, where a state property tax panel is expected to propose both a circuit breaker and a cap on annual revenue increases sometime in the next two weeks. Thankfully, the influential Working Families Party in New York, as well as teachers' organizations and over thirty state legislators have voiced support for the circuit-breaker idea. The Working Families proposal would pay for this relief by raising income taxes on people earning more than $500,000 annually. Fortunately, the tax cap idea appears slightly less popular, though it is far too early too tell if that proposal will pick up steam as well. To keep up with the debate, which is sure to quickly gain steam, see the New York Fiscal Policy Institute.

At a time when it seems like only the worst kinds of property tax reform have any chance of gaining steam, the Minnesota House recently came through with a reform bill that completely bucks the trend.

Expecting that property tax bills in Minnesota may soon grow a bit too high for comfort for some families, legislators avoided the temptation that we've seen take hold elsewhere to carelessly slash property taxes without regard for how those cuts will affect families of varying income levels. Instead, the House has proposed expanding the state's "circuit-breaker" credit to include many more families than are currently eligible, and to provide many families already benefiting from the credit with even more relief.

Just as appealing as the expansion of the state "circuit-breaker", however, is the means by which Minnesota plans to pay for that expansion. The House has proposed ending the state income tax deduction for property taxes paid. This deduction overwhelmingly benefits better off taxpayers who are more likely to itemize, and for whom deductions are more valuable since they pay income taxes at a higher rate.

The combination of these changes is a significant step toward making less unfair a starkly regressive property tax in Minnesota. Scaling back the state's existing homestead credit will also provide funds with which to pay for this better-targeted relief. Finally, the bill would also eliminate what is estimated to be a $186 million loophole for foreign operating corporations.

Unfortunately, there are serious obstacles to the bill's passage. First, the Senate has been contemplating a different approach in which state money would simply be given to local governments, in the hope that an influx of funds would encourage localities to cut taxes. Fortunately, Governor Pawlenty is not on board with this plan, preferring relief be given directly to taxpayers. But the Governor is also not yet on board with the House's plan. Pawlenty continues to insist that a firm cap on increases in local property tax collections must be the "linchpin" of any reform. The House added a levy limit on local governments to its bill in an attempt to accommodate the Governor, though that limit is not as strict as he has requested. Hopefully the Minnesota legislature will be able to push this bill through without too strict a limit on local government revenues. Such limits generally tend to leave local governments hurting for funds as the rising cost of providing government services outpaces the allowed limits.