The Republican majority in the Minnesota Legislature is putting the final touches on legislation that could significantly increase the projected deficit in the next biennium and for years to come.
The legislation is the omnibus tax bill. Its major feature is the elimination of the statewide business property tax, one of the major sources of revenue the state uses to finance schools and other state services.
It’s sort of like a family that doesn’t know how it is going to pay its bills and decides the solution is to quit one of its jobs.
The proposed legislation would remove a staggering $7 billion in revenue from the state general fund that pays for education and other services between now and the time it is fully phased in in 2025. The almost necessary result of this revenue loss would be further reductions in state aid to schools and further property tax increases on homeowners.
Raise your hands, Minnesotans, if you think your picking up business’s share of the cost of state government is in your best interest.
Bonanza for businesses
When fully phased in, the tax-cut bonanza for businesses and seasonal recreational property will be $2.3 billion a biennium. The legislation provides little means to replace the revenue that would be removed from the general fund that pays for schools and other services. The plan is a blueprint for future deficits.
The Burnsville school district just announced it was considering reducing the school week to four days due to fiscal stress brought on in large part by cuts in state support for schools over the last decade. Minnesota now ranks fourth highest in classroom size. With state revenues picking up lately, parents may have thought Minnesota’s fiscal stress on schools had bottomed out. Think again. Under the GOP tax plan, that light at the end of the tunnel is another oncoming train of deficits.
Minnesota faces a projected deficit next biennium of $2 billion when one counts the cost of inflation. On top of that, it needs to figure out a way to pay back another $2 billion in payments it has delayed to schools. The proposed new legislation could increase the projected deficit in the next biennium by approximately $200 million.
This legislation would continue the practice of almost continual deficits that occurred under Gov. Tim Pawlenty and would prolong the time until Minnesota regains its high credit rating.
Former Republican Gov. Arne Carlson recently lamented the current Republican Party in Minnesota no longer practices fiscal discipline. He wrote in his blog:
“I would argue that the party has moved in the wrong direction, and it is no surprise the administrations of Governor Tim Pawlenty and Tony Sutton have left behind crushing financial messes. Yes, the Republican Party went from moderate to what I call ‘the new Right.’”
Senate Majority Leader David Senjem recently attempted to claim credit for an increase in projected state revenues over the last two months. The powers of the Minnesota Republican Senate must extend far and wide because the Washington Post reported Thursday that all 50 states reported revenue increases.
A fortunate veto
Minnesota enjoys a temporary surplus only because it chose to postpone some of its bill-paying into a future biennium and because it chose to grab revenues it would have received in future years to pay this year’s bills — practices that cause bond rating agencies to roll their eyes. This year the Legislature sought to deplete the state’s limited reserves. Fortunately, Gov. Dayton vetoed that exercise in fiscal folly.
How do Republican leaders justify this proposed raid on the dollars that finance schools? They argue these big business tax breaks are necessary for job growth.
History is not on their side in this argument. Gov. Tim Pawlenty and Republican leaders in the legislature used this argument when they beat back DFL efforts to prevent property tax increases and deep cuts in school aids through restoring higher tax rates on those with very high income. Pawlenty argued keeping these tax cuts at the top in place would unleash job creation.
Not a single net new job
Unfortunately for his argument, Minnesota ended up with fewer jobs after eight years of Gov. Pawlenty than when he took office. That’s right. Eight years of tax cuts at the top produced not a single net new job, while protecting those tax cuts wrecked havoc on school finances and increased property taxes by $2.5 billion. Adjusted for inflation, Minnesota’s per pupil revenues are significantly lower that they were 10 years ago.
When fully phased in, the proposed law would give businesses $1 billion a year in reduced taxes whether they created a single new job or not. Rep. Ann Lenczweski characterized this GOP tax proposal well when she said, “It’s like throwing money out of an airplane” and yelling please create a job.
Ironically, the GOP leadership is slow-walking the one piece of legislation that is guaranteed to put long-suffering construction workers back to work and help provide needed customers for businesses — Gov. Mark Dayton’s plan to bond for needed public improvements that would advance the state economically. This plan would take thousands off the unemployment rolls with no fiscal risk to the state and help cash registers ring at struggling businesses across the state.
No need for a change
The statewide business property tax is actually a very well crafted tax for the state and for business. It is stable and predictable. It favors business. It grows slower than property taxes on homes. Minnesota property taxes for manufacturers are lower than in other states. For commercial property, these taxes are somewhat higher. When one adds up all the taxes on businesses, Minnesota ranks lower than most. The highly reputable business-backed Council on State Taxation ranks Minnesota 15th lowest in taxes on businesses and 10th lowest in taxes on new investment. In short, there is no need for a change, particularly one that dynamites state finances.
The effect of this revenue loss would be harmful to Minnesota’s economy. Historically, Minnesota has outcompeted other states by virtue of its superior work force. Shortchanging education yet again diminishes Minnesota’s strength.
Republican leaders, perhaps desperate for arguments, say cutting the tax will reduce a regressive tax. It’s an odd argument for House Speaker Kurt Zellers to make as the initial tax cuts for business are financed in the House mainly by net tax increases on middle- and modest-income renters. Half of the business tax-cut dollars would not go to Minnesotans at all — rather to out-of-state corporations. In this exchange, Minnesota taxes would likely become even more regressive.
If these GOP leaders were serious about tax fairness for ordinary taxpayers, they would not have insisted on middle-class property tax increases last year instead of Gov. Dayton’s income-tax increases on those at the top. And this year they would have undone the property tax increases they wrought through their elimination of the homestead credit. House Research reports property taxes payable in 2012 will be 5.2 percent higher as a result of the 2011 GOP law changes. Small businesses will be 7.4 percent higher; apartments 8 percent higher.
To hurt the most outstate
Outstate Minnesota received the brunt of these increases — 62 percent. The increase for an outstate homeowner will be five times greater than a metro homeowner will receive. One would think stiffing businesses and homeowners in the GOP’s base region would be poor politics, and it is. Former Gov. Carlson nailed this phenomenon too. The new Minnesota right isn’t “representational” any more, he says; it is ideological. And the ideological shots are called by groups outside Minnnesota.
Next time you hear Speaker Kurt Zellers say he’s for no new taxes, don’t read his lips. Read his bills.
Wayne Cox is executive director of Minnesota Citizens for Tax Justice.
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