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Legislature's budget is no bargain

"Buy one, get one free." This sales pitch doesn't just apply to clothes or shoes. No, this special offer is just an arm's length (and several budget negotiation meetings) away from Minnesota policymakers.

For the price of making the state's tax structure fairer and asking the wealthiest of the wealthy to pay more – Minnesotans would get a tax system that is better able to meet the needs of all Minnesotans and put the state in a better position to achieve fiscal solvency over the long term.

However, the budget that passed both houses of the Legislature – and that was vetoed by Gov. Mark Dayton – doesn't take advantage of this special offer. Instead, the Legislature's budget does the exact opposite – it's a kind of "buy one for the price of two."

The tax components of the legislative budget would have Minnesotans believe that slashing property-tax refunds for renters and making significant cuts in state aid to cities and counties won't affect working families. Yet, nothing could be further from reality.

Less for low- and middle-income earners
The Legislature is asking Minnesotans to accept offering fewer property-tax refunds for renters (who pay property taxes through their rent), which means that more low-and middle-income families will struggle to pay their bills. Perhaps even more egregiously, the Legislature's budget slashes aid to local governments – which will inevitably mean that local property taxes will be raised to offset these cuts.

The Legislature's budget bill is about more than changes to the property tax. The legislation asks too much of Minnesotans.

The radical proposal reduces funding for job-training programs, eliminates public health insurance for more than 140,000 Minnesotans, and even reduces the funding available for domestic-violence services.

So for the price of radical cuts to services, reductions in property-tax credits and less aid to local governments, what will Minnesotans get in return? A budget balanced on the backs of struggling families.

Over the short term, working families, and seniors and people with disabilities on fixed incomes who rent (some of whom were hit hardest by the recent economic downturn) will have a harder time making ends meet and have less money to spend in their local communities. Local governments will have a more difficult time providing services, and property taxes will increase. Having made these harmful cuts, the Legislature digs the hole deeper by providing tax breaks to businesses.

Another route
There is another way. Gov. Dayton is proposing an increase in taxes for the wealthiest 2 percent of Minnesotans. It's no secret that income growth has been highest for the wealthy in recent years. The richest 1 percent of families in the United States saw their average pretax income rise by 281 percent in the 21 years from 1979 to 2007 – and that's after taking inflation into account.

Asking the wealthiest to pay more simply means that the state will have more revenue to invest in the public structures and services provided now and over the long term. It's a twofer. Since it's likely that income will continue to grow for these lucky few, so too will Minnesota's coffers.

Minnesotans shouldn't be fearful that these taxes on the rich will have a negative impact on the state's population. The parable of the millionaire who migrates from state to state each time a tax on the wealthy is implemented is pure fantasy.

'Little migration response'
For example, a recent study from Princeton University took a close look at a New Jersey's "millionaire" tax and found that "there seems to be little migration response to the state taxation of top incomes." A study from the University of Massachusetts, describing the impact of taxes on migration through New England, concludes, "taxes do not play any notable role in causing people to leave a state." Oddly, these straightforward findings never seem to find their way into the talking points used by anti-taxers.

During the intensifying budget debate, Minnesotans and their elected officials have a real opportunity to take advantage of the special offer before them: strengthening the state's public structures and tax structure over the long-and short-term, instead of asking hard-working families to pay more in property taxes.

Kelly Davis is the Midwest director of the Washington, D.C.-based Institute on Taxation and Economic Policy

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Comments (5)

A vast majority of economist agree that tax systems based on consumption are more stable. State Economist Tom Stinson has been an advocate for this position.

Tax systems that rely on taxing the income of very high earners leads to lots of volatility and instability. Because the income of high earners tend to fluctuate a great deal from year to year. This type of system is not going to be very stable in the long run.

The sales tax is regressive, taking more out of the pockets of the poor. This is probably the strongest argument against it. Since the poor consume a higher percentage of their income than the well-to-do, they are necessarily going to pay more than the well to do. There just isn't any getting around that fact, and it is something that would have to be addressed if we were to broaden our tax base.

In the current economic environment, the spending of the people with the lowest incomes in our state and nation is severely reduced. Increasing the sales taxes on the necessities they buy will only depress their spending, and therefore, the general economy further.

Such tax policy would likely push us back into a recession.

I have yet to hear of, or read, a single reputable (i.e. non-CATO or American Enterprise, et al) sponsored study that verifies the "dangers" created by the volatility of the incomes of the richest of the rich.

On the contrary, those whose incomes, especially among those of very high incomes living off capital gains, whose current low tax rates are a travesty of massive proportions, tend to have very stable incomes because they've gamed the system to allow themselves always to come out on top,...

or if they do suffer losses, to recoup them far more rapidly that those in the lower echelons, as the rapid recovery of the rich from the losses SOME of them suffered in the financial crisis of 2008 clearly indicates.

Indeed, I remain convinced that the "volatility" of taxing the rich is simply a red herring that sounds impressively worrisome, but has no basis in reality.

The stresses on the lower and lowest income groups in America (and Minnesota) are almost unimaginable, and absolutely must be redressed for three reasons: economic (to make capitalism work better), fairness, and moral. For the most fortunate and wealthiest to pay a bit more is a needed decision.

In that regard, a shutdown of the state would be catastrophic for some, especially if their health care is shut down. Additionally, those who rely on state aid will find their ability to pay their rent disappear.

Conservatives typically have little patience with these groups (they kind of live invisibly in our society), but lives will be incredibly affected for thousands of the least fortunate among us.

That said, one important benefit of lowering and broadening the sales tax insofar as those with low incomes is concerned is that they would be contributing something to the general cost of government.

But as it is, 47% of those filing federal income tax returns have either a zero or negative tax liability; that is, they pay nothing but still get a tax "refund."

When this fact is brought up, progressives always point to all the payroll taxes low-income workers pay. But they never note that the negative income tax liability many of them have comes from something called the Earned Income Tax Credit, which was established precisely for the purpose of indirectly offsetting the payroll tax for such people. Furthermore, the payroll tax does not support the government's general operations; it funds specific benefit programs, Social Security and Medicare, from which the vast majority of beneficiaries get back far more than they ever pay in.

The odd thing is that conservatives are the ones most likely to complain that the poor aren't pulling their weight, yet they fail to see that a consumption/sales tax is probably the only way of getting them to help finance the general cost of government. It's extremely unrealistic to think we are ever going to impose income taxes on very many of those now paying nothing.

Thank you for this rational and well reasoned article.