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Remember three points about Minnesota’s budget plight

As we face a multibillion-dollar budget deficit, it’s important to wade through the anecdotes, selective statistics, and calls for more cuts in state spending and remember the three fundamental facts outlined below.

These statistics make a strong case against another tax-free budget-balancing strategy, or employing only cuts and shifts and regressive fee increases. The budget needs to be balanced in part by raising taxes and raising them more fairly, and using those funds to reinvest in the foundation of public investment that has always helped create broad prosperity. 

1) The budgets of state and local governments and schools already have been significantly downsized and they are not “the problem.”

• The most comprehensive, bottom-line measure of government size and scope is Minnesota’s Price of Government (POG).  The POG shows that total state-local revenues as a percent of income stood at about 16 percent in 2008. That’s a full percentage point lower than the typical POG that prevailed for much of the last three decades and all through the 1990s.

• One percentage-point difference amounts to more than $2 billion less per year, which would account for much of the projected latest shortfall of $4 to $6 billion over two years.   

• Minnesota is no longer distinguished as a high-end investor in good schools, infrastructure, public health, environmental safeguards and economic security. From a typical ranking among the top 15 states in revenues as a percent of income, Minnesota has fallen to about 30th place in the most recent ranking based on Census Bureau statistics. We reached that lower standard in part through large and permanent income tax cuts in the late 1990s, followed by the hard-line no-new-taxes approach to balancing budgets that debuted in 2003-04 – the last time we faced such a dire forecast.

2) The top got more and paid less in the last decade and can pay at least a modest increase to address this crisis.

• While national studies show that the top 1 percent now holds a greater share of income and wealth than they have had since the Great Depression, Minnesota’s Revenue Department’s 2007 Tax Incidence Study shows that those in the top 1 percent of incomes (households earning more than about $350,000) pay about 9.6 percent in state and local taxes. Those in the top 5 percent of incomes (households earning roughly $150,000 or more) pay about 10.5 percent of their income in state-local taxes. Most everybody else pays about 12 percent of their income in taxes.

• In 1990 those at the top also paid a smaller percentage of their incomes in state and local taxes, but the spread between them and the rest of the state’s taxpayers was less than a point. In subsequent years the gap widened by as much as 4 points.

• The Tax Incidence Study documents the resulting unfairness. The no-new-taxes policy really turned out to be no-new-income taxes on high-income folks, because sales taxes and property taxes have risen to partially offset the 2003-04 cuts. 

3) The economy is underperforming in our new status as an average-tax state.

• Our economy is losing ground. Tax cuts and small government were sold to Minnesota as a job-producing proposition. Instead, on indicators from income growth to unemployment, we have become more like other states in their lackluster economic performance.  

• Since 2002, Minnesota’s employment growth and per capita personal income has fallen relative to other states, while our unemployment rate has risen.

• Nobody should assume that higher taxes alone will restore our prosperity or our slumping quality of life. Neither should we buy the line that we can do it by neglecting education, transportation, public health and the environment. If taxes are used for smart cost-effective investment in human capital and infrastructure, we will thrive.

Minnesota has survived budget crises and will do so again. The real peril comes if we lose the memory of what made this a great state and the vision required of a smart investor.

Dane Smith is the president of Growth & Justice, a think tank based in St. Paul.


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Comments (3)

  1. Submitted by Ron Gotzman on 12/05/2008 - 12:08 pm.

    So we need to tax more and spend more – so much for “change” and new ideas.

  2. Submitted by Bernice Vetsch on 12/05/2008 - 04:16 pm.

    Mr. Gotzman: UNDERtaxing and UNDERspending is what got us where we are (recession/depression) both nationally and at the state level.

    Returning to progressive taxation and wise spending (which is not “throwing money at problems” but investment in the future) IS the change we need.

  3. Submitted by Thomas Swift on 12/06/2008 - 11:19 am.

    Let us focus on the largest expenditure in the state budget: K-12 education.

    Dane says, “Minnesota is no longer distinguished as a high-end investor in good schools..”

    Indeed?

    “Investment”, especially in this case, is an extremely poor choice of words. “Investing” in a thing assumes a reasonable expectation of receiving a tangible profit.

    Our “investment” in public education has risen by over 300% in the past 20 years. Way ahead of any inflation indicator you choose to apply.

    Astoundingly, on the heels of Dane’s callow obfuscation, the Star Tribune reports that “11th-grade math test could send grad rates plunging”….and if that wasn’t bad enough, the Strib continues on to report that the response from the Democrat legislative majority is to consider scrapping the exam all together!

    Consider now, that despite our heroic faith in our generous investment, the return we receive from the largest districts in the state (those that receive the lions share of the investment), have posted nothing but mounting losses over that period.

    Students of the Saint Paul school district now fail to graduate at an astoundingly consistent rate of 42%, Minneapolis is even worse, despite the fact that we “invest” nearly $15,000 per year, per student!

    Statewide, the “cream” of the public system’s “crop”, students that enroll into college, 25% are found sufficiently deficient in core academic subjects (math, reading, writing) to require remedial coursework before being allowed to move onto college level material.

    Any investment portfolio manager that showed as consistent a record of devastating losses as has the Minnesota public school system would have been directed to a new career selling used cars long ago.

    It is time that the Democratic leadership, and it’s allies in the teachers union, take it’s portion of the responsibility for the failure of our public schools seriously enough to admit that wholesale changes in the system, it’s lack of academic focus and administration is necessary before “investing” any further.

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