Tax Justice Digest stories about Minnesota
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.
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.
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.
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.
- "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.
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.