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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