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You fix the Minnesota deficit

You fix the Minnesota deficit

Your assignment is to close a gap of $5 billion for the fiscal years 2012 and 2013. The choices offered below are based on specific proposals by government officials, state agencies and independent experts. They do not represent a complete list of the options. And they represent estimates. But they do frame key tradeoffs.

As you select options, your total will update in the right-hand column. For more information on the Minnesota budget deficit, click here.

Now, get ready to make some decisions.

Increase revenues, including raising taxes

  Extend sales tax to clothing

     Close gap by $600 million
Minnesota is one of five states that exempt all clothing from sales taxes. Without some break, low-income families could struggle to pay this tax. Wealthier consumers would pay the biggest share though because they buy more clothing and more expensive clothing. But retailers warn they could lose out-of-state customers who come for the tax-free clothing.

  Extend sales tax to services such as car repair, hair styling, accounting and legal work

     Close gap by $868 million
Taxing sales of goods reflects the days of the manufacturing economy. Today’s economy is more service based, and this change would modernize the tax code accordingly. But businesses are major consumers of these services, so this tax could increase the cost of doing business in Minnesota. It also could be tricky to administer.

  Enact a 10 percent income tax surcharge

      Close gap by $1.6 billion
The state used a surcharge to plug budget holes in the 1980s. High-income earners would see larger surcharges, while low-income households likely would pay nothing. But this is a temporary fix, and Minnesota’s structural deficit is not a temporary problem.

  Increase taxes on alcoholic beverages

      Close gap by $278 million
Unlike the general sales tax, alcoholic beverage excise taxes don’t rise with inflation. And Minnesota hasn’t increased them since 1987. Meanwhile, state and local governments are saddled with mounting bills related to addiction, drunken driving and other costs. A bill Gov. Tim Pawlenty vetoed in 2009 would have raised taxes on alcoholic beverages at the retail level from 2.5 percent to 5 percent and also increased the excise taxes by about the equivalent of two to three cents a drink.

  Increase tobacco tax

      Close gap by $252 million
Minnesota’s $1.58-per-pack cigarette tax is near the national average. But some states – including New York, Washington, Connecticut and Hawaii – tax more than $3 a pack. A proposal [PDF] by a consortium of health industry groups in Minnesota calls for joining that top tier by adding $1.50 to the per-pack taxes.

  Return income tax rates to 1998 levels

    Close gap by $1.8 billion
In 2009, Senate DFLers tried to roll the rates back to the levels before the state granted tax cuts in 1999 and 2000. You might go for this option, but don’t expect it from elected officials in this anti-tax climate. It also could hurt the fragile economic recovery.

  Adopt a corporate “throwback” rule

   Close gap by $39.7 million
Some Minnesota corporations earn “nowhere income” from sales in states where the corporation isn’t taxed on the profits. Of the 45 states with corporate income taxes, 25 require that such sales be “thrown back” to the home state for tax purposes. Dayton has proposed the same for Minnesota.

  Allow a racino or some other state-sponsored gambling

    Close gap by $140 million
Tribal casinos prove that Minnesotans will gamble enough to turn hefty payoffs for the house. Still, strong opposition to gambling has killed this proposal every year. If you’re inclined to go for this option, keep in mind that a good share of the state’s take might be diverted to pay for a Vikings stadium.

  Close "Snowbird" loophole

     Close gap by $30 million
Under current law, someone can have a home in Minnesota and live in it for up to 182 days (spring, summer and part of fall) without paying state income taxes. Gov. Dayton proposes to set the limit at 60 days, except for people who come for medical treatment.

  Extra tap on top earners for three years

    Close gap by $918 million
Gov. Dayton proposes to add a temporary 3 percent income tax surcharge on taxable income higher than $500,000. About 17,200 filers would pay an extra $20,000 a year on average. After federal deductions, the increase would be about 2.7 percent of income for these taxpayers. One objection is that this surcharge coupled with other Dayton-proposed increase would make Minnesota the nation’s highest taxing state on top earners. (Dayton dropped this proposal after the February forecast, but we leave it here as an option for you.)

  Tax mansions

      Close gap by $84 million
Gov. Dayton proposes a statewide property tax on home values above $1 million. Some 9,400 homeowners would pay an average of $6,000 more in property taxes annually. A property valued at $1,100,000 would pay an estimated $1,050 in additional tax while a $3,000,000 home would pay an additional $21,000 in tax.

  Close corporate loopholes

      Close gap by $430 million
Gov. Dayton proposes several adjustments in corporate and other business-related taxes. Examples: End insurance companies’ exemption from the corporate franchise tax; apply sales tax to hotel and resort bookings paid through online travel sites; end tax relief for corporations with foreign royalties.

  Increase Medical Assistance surcharges

      Close gap by $627 million
Gov. Dayton proposes to increase surcharges that hospitals, managed care organizations and others pay to the state in connection with the federal dollars they get for the care of the elderly, the poor and the disabled.

Sources for the above section: Minnesota Budget Project (an initiative of the Minnesota Council of Nonprofits); Minnesota House research and fiscal analysis departments, Gov. Mark Dayton

Increase taxes on high income earners (choose one)

  Use neither choice below

  Create a new 10.95 percent bracket for taxable income above $150,000 a year for married couples

      Close gap by $1.9 billion
Gov. Mark Dayton proposed this tax increase, arguing that the tax burden has fallen too heavily on middle-income filers while top earners don’t pay their fair share. The counter argument: This tax increase would hit job-generating small business owners. This MinnPost report says there is scant evidence for the job-loss claim.

  Create a new 9 percent bracket for income over $250,000 for a married couple

      Close gap by $468 million
This scaled-down version of the Dayton proposal is included because it has more support. Same arguments as above.

End certain tax breaks

State and federal governments forego substantial revenue by allowing deductions for mortgage interest and other items. Now such “tax expenditures” are a target of analysts in Washington, D.C., and St. Paul. Eliminating a deduction wouldn’t technically count as a tax increase because these items are considered to be expenditures within the tax code.

  Eliminate home-mortgage interest deduction

   Close gap by $1.1 billion
Research shows the deduction has little bearing on home-buying, the original intent for the tax break. Only 29 percent of Minnesota income tax returns claim the deduction, and the greatest benefit goes to high-income earners.

  Eliminate property-tax deduction

   Close gap by $417 million
This break also goes disproportionately to high-income earners who can afford high-value homes.

  Tax the “income” some workers get in the form of employer contributions to their health insurance and pension plans

     Close gap by $3 billion
This break goes to those fortunate enough to have jobs with benefits – at the collective expense of less fortunate workers.

  Eliminate JOBZ program

     Close gap by $68.9 million
The Job Opportunity Building Zone program was a bid by former Gov. Tim Pawlenty to stimulate rural economic development. The Legislative Auditor said some of the program’s tax breaks went to businesses that would have expanded in Minnesota without the incentives and also to businesses that compete with existing companies. But it also said the program has attracted some jobs.

Sources for this section: Minnesota Budget Project, Minnesota Department of Revenue, Gov. Mark Dayton and the Legislative Auditor

Cut spending

  Extend shifts in state aid to K-12 schools

     Close gap by $1.3 billion
During the last budget cycle the state delayed aid payments to schools. That forced about half the school districts to borrow money to pay bills. The other districts drew from reserves and thus lost interest income. Eventually, the state must reverse the shift. For now, though, districts would rather see aid payments delayed than see them cut.

  Extend cuts to higher education

     Close gap by $185 million
The GOP bill would extend higher-ed cuts made in the last budget cycle. This could spur further increases in tuition, which has doubled during the past decade. It also could undermine a vital pillar of Minnesota’s economy: providing a well-trained workforce. But outside experts say the Minnesota State Colleges and Universities system should close some campuses and combine operations with the University of Minnesota to save money for both institutions. Also, Dayton said MnSCU should cut top pay brackets.

  Create health-care networks and insurance exchanges

     Close gap by $250 million
In 2008, a governor’s task force recommended sweeping changes that would have cut billions of dollars in health care costs while also covering the uninsured and making Minnesotans generally healthier. Because time has been lost and the federal government has overhauled the national health-insurance system, savings estimates need updating. But the state could move ahead on “accountable care organizations” (networks of doctors and hospitals that share responsibility for patients) and insurance exchanges.

  Reduce state workforce by 15 percent

     Close gap by $60 million
A GOP bill would eliminate some 4,500 executive-branch positions through early retirements, attrition, etc. It would take time to realize the full savings. And Dayton may veto the bill because of “right to work” provisions. Meanwhile, the state could save up to $100 million for 2012 and 2013, but the bill’s author said initial savings could be less.

  Scale back health and human services

     Close gap by $72 million
GOP bills would extend previous one-time cuts to child support enforcement programs, child and community service grants, emergency general assistance and basic human services. After these items were cut in the last budget cycle, counties used federal stimulus money to make up much of the difference. That’s not an option now. Among other items, this step would wipe out 22 percent of the money the state spends to help investigate reports of maltreatment of nearly 25,000 children a year.

  Extend reductions in renters credit refund

     Close gap by $106 million
Because the property tax falls heavily on low- and middle-income families, Minnesota has granted refunds to renters with household incomes lower than $53,539. About 300,000 Minnesota households got refunds averaging about $600 a year. One-fourth of the recipients are seniors or disabled. Temporary cuts made during the last budget cycle reduced the refunds by about 27 percent. The GOP bill would extend those cuts.

  Revamp school transportation

     Close gap by $48 million
Some school districts operate their own buses, fueling depots, maintenance depots and repair crews. Many could save money by sharing those facilities and services with neighboring districts. Other districts contract for bus services, and a Legislative Auditor’s report said some of them are paying too much. Dayton pledged to revamp the system, saving the state 5 percent of the $960 million it spends every two years on school transportation.

  Pool health-insurance purchasing for school districts

     Close gap by $88 million
For years, teachers unions have pushed a proposal for a statewide insurance pool, claiming it could cut costs. Pawlenty disputed their savings estimates and repeatedly vetoed bills that would have set up the pool. Among other objections, he argued that it would take control away from local districts. Dayton proposed to revive the idea which had some bipartisan support in earlier legislatures.

  Coordinate state purchasing

     Close gap by $100 million
Candidate Dayton said Minnesota’s procurement process needs to be streamlined and re-tooled. Other states are using tools like coordinated purchasing pools with all levels of government to save substantial amounts of money. What’s unclear is whether the vast purchasing system could be revamped in time to save the money Dayton estimated for the years 2012 and 2013.

  Freeze state employees' pay

     Close gap by $64 million
A GOP bill would indefinitely freeze state employees’ pay beginning July 1. Some employees may prefer this move over layoffs. But legal challenges are likely if any law were to clash with contractual pay increases negotiated by labor unions.

  Cut spending for prisons

    Close gap by $15 million
With a burgeoning prison population, Minnesota’s general fund expenditures for prisons increased 33 percent from 2002 to 2009. And 70 percent of the $900 million corrections budget for two years goes to pay for correctional institutions. Various proposals have called for shortening sentences for low-risk offenders, diverting some inmates to local probation offices and substance-abuse treatment. Initial savings would be modest, but they could grow down the line.

  Squeeze health-care costs

      Close gap by $480 million
Health and human services represent 30 percent of the state’s outlays, second only to K-12 education. Gov. Dayton proposes to squeeze some health programs intended for the poor and elderly. Examples: End state-subsidized health care for 7,200 adults who earn more than 200 percent of the federal poverty line. Cut the rates paid to nursing homes by 2 percent and to home and community-based services by 4.5 percent. (After the February forecast reduced the projected gap, Dayton revised this item to add back $200 million for seniors' long–term care.)

  Deliver human services on a regional level

     Close gap by $350 million
Certain human services like housing and help for the disabled have been delivered county by county or agency by agency. Some counties are moving toward an integrated regional approach. More of that should be done, says Beyond the Bottom Line, a report by six Minnesota-based foundations. “Minnesota’s human services system is a tangled intergovernmental puzzle in which responsibility is fragmented and results are elusive” says the report.

  Reduce need for special education

     Close gap by $320 million
Instead of waiting for students to fail before providing assistance, intervene earlier. Most Minnesota schools “use out-dated and expensive models which require that “students fail” before they can be helped,” says the Bottom Line report. There are proven models that would improve learning and also save “a significant amount of professional staff time doing evaluations, attending meetings and preparing ‘paperwork’ for which special education is famous,” it says.

  Free counties to focus on results

     Close gap by $540 million
The Bottom Line report calls for creating a new state-county relationship that holds counties accountable for results rather than mandating levels of service.

Sources for this section: Minnesota Association of School Administrators, League of Minnesota Cities, Legislative Auditor, Minnesota Taxpayers Association, House research, Gov. Mark Dayton, Minnesota Department of Corrections, Taxpayers League of Minnesota, Minnesota Council of Child Caring Agencies, Rep. Thomas Huntley (DFL-Duluth), Rep. Keith Downey (R-Edina), Rep. Jim Abeler (R-Anoka), Rep. Denny McNamara (R-Hastings), Rep. Bud Nornes (R-Fergus Falls)

Cut or eliminate local government aid (choose one)

Use neither choice below

  Extend cuts to local government aids and credits

      Close gap by $566 million
Critics say this is a sneaky way of raising property taxes – in effect, passing the pain to renters and homeowners and the blame to cities and counties. Proponents say cities and counties should cut spending rather than raise property taxes. Cities lost more than $300 million in state funding from 2008 to 2010. Counties lost nearly $200 million. Property taxes jumped in response, even while local governments cut employees and services. A GOP bill would extend earlier cuts.

  Gradually eliminate aid to cities

    Close gap by $477 million
Same arguments as above but amplified by a bolder cut for cities. The conservative Taxpayers League of Minnesota and like-minded organizations proposed in a 2008 budget project [PDF] to phase out aid to cities over four years. The League argued that taxpayers would have better chances to hold local officials accountable for taxing and spending. A counter argument is that disparities would grow between affluent suburbs and lower-income rural towns and inner cities, leaving poorer communities struggling to provide services.

Reduce medical-assistance costs (choose one)

Use neither choice below

  Adopt medical-assistance changes proposed by a health industry consortium

     Close gap by $496 million
This plan would reduce hospital admissions, emergency department use, supply costs and certain home and community-based services. It would also align benefits with those paid in other states, move care for the disabled to managed-care systems and streamline administration.

  Replace health-care services and payments with insurance subsidies

     Close gap by $2.85 billion
Medical Assistance provides health care coverage for some 600,000 low-income senior citizens, children and parents, and disabled people each month. The federal government pays the bulk of the costs, but the state spends nearly $3 billion a year. The Taxpayers’ League project called for revamping the program to provide insurance subsidies of about $6,000 per person rather than full health-care services. Dayton likely would veto such a plan. The savings counted for this item is the League’s 2008 estimate.

Cut business taxes

  Cut the corporate income tax

     Widen gap by $100 million
This idea, introduced in a GOP bill, has some bipartisan support. Corporate income taxes reduce the state’s competitiveness without contributing significant revenue. Even though this choice widens the gap, you might want to factor it into your budget because Republicans will insist on it as part of any compromise.

  Cut the state general levy for commercial-industrial property

     Widen gap by $100 million
Same points as above.

Sources for this section: Sen. Geoff Michel (R-Edina)

Kaeti Hinck, Karl Pearson-Cater and Jeff Severns Guntzel contributed to this project.


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