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Minnesota’s in the hands of the DFL — so what’s next?

We urge the DFL and Gov. Dayton to overhaul taxation to address unpredictable revenues that make it tough to budget and make the state less competitive for good private-sector jobs.

Voters handed control of the state of Minnesota to the DFL last week.
Photo by Bill Kelley

We are now in the hands of the DFL and the federal government will continue to influence if not dominate major state policies. What does this mean for Minnesota’s economic health?

Kim Crockett
Kim Crockett

The health of the business economy — from garage start-ups to Fortune 500s — determines the wealth of our citizens. It also determines the size of the economic pie that the state can tax to pay for the state’s core functions (like schools, infrastructure and courts) and all the other “good things” (like green roofs, bike shares and trails). If the pie shrinks, core functions get short-changed and good things should be off the table. (They stay on the table and core functions get short-changed, but that is another story for another day.) So liberals and conservatives alike should be interested in growing the economy.

What can we expect in 2013? Even though the GOP got trounced, can we look to free-market solutions to help Minnesota achieve the kind of growth we need to get back to a broad prosperity?

Health care: This is now largely driven by federal policy and in Minnesota, the feds have a willing partner in what could be a complete loss of state control. All states have to tell the federal government by Nov. 16 whether they are building a health care exchange or not. Gov. Mark Dayton is already on board the Obamacare Express, having accepted  and spent millions for an exchange. The GOP Legislature slowed him down, but that impediment is now gone.

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What does this mean for you? For people who already have coverage, we can expect health-care premiums to keep rising. Average premiums have already gone up and are projected to increase more as the “Affordable” Care Act is further implemented. You cannot add coverage for millions of new people (adult children and the uninsured) along with “free” mandates (well-care, contraceptives) without raising costs. Then you have to pay for the bureaucracy here and in D.C. Even if your employer gets stuck with the bill, you are going to pay it in lower wages or the loss of benefits. That means that employers will be looking to get out of offering health insurance by shifting their work force to part-time status (already happening in many industries) or over to public exchanges so employees can buy their own policy.

The cure for health care was and still is a shift to a patient-centered, market-based system that rewards quality through competition for patient controlled, portable dollars — not a federal takeover. That policy prescription, however, stands little chance of success in light of the election.

Taxes: Dayton proposed a $2 billion tax increase to the GOP Legislature in 2011 by moving the top income tax rate from 7.85 to 10.96 percent (plus 3 percent on top of that for the highest earners). He also wanted a new statewide tax on higher-valued homes, and an increase in the corporate tax rate.  Dayton also vetoed two tax bills last session, both of which contained modest reforms (but by no means an overhaul to address perennial problems with our revenues).

According to the Tax Foundation, Minnesota already has the 7th highest state-local tax burden at 10.8 percent. We also have the honor of being one of the few states that uses all the major categories of taxes: property, sales, individual and corporate.

Dayton has again promised to “tax the rich.” Even if “the rich” do not all flee the state, capital and investments certainly will seek a better deal elsewhere and have already done so (the governor’s wealth is reportedly in South Dakota trusts, where tax laws are more favorable). So we can expect the economic pie to shrink even further if the governor is successful.

We urge the DFL and Gov. Dayton to instead overhaul taxation to address unpredictable revenues that make it tough to budget and make the state less competitive for good private-sector jobs. We recommend the 21st Century Tax Reform report as a good starting point for discussions (eliminate the corporate tax, for example, both because incomes are volatile and the tax just gets passed on to consumers).

Energy/environmental policy: Like health care, federal tax subsidies and agencies like the Environmental Protection Agency (EPA) drive state policy and the price of energy and development. Minnesota also has a tough “Renewable Energy Standard” or “RES” that forces utilities to meet certain “green energy” and related conservation goals. In short, these increase energy prices for consumers without clear benefits to the environment. In fact, the RES and other conservation goals may be counterproductive (because utilities have to “cycle”  traditional sources of power like coal to  back up unreliable wind and solar). The natural gas boom has interrupted energy markets for the good, and we are waiting to see how that will shake out.

We recommend that the Legislature study the impact of the RES on energy rates with a view toward at least revising if not repealing the RES, along with state subsidies for “green” industries and restrictions on coal and other sources of energy. Instead, while recognizing that utilities are heavily regulated, the state should allow the market to function (subject to reasonable environmental controls) so that consumers gets reliable and affordable energy. Again, just like corporate taxes, energy prices get passed on to consumers in the form of lower wages or higher prices.

Sustainable government:  The state reports that as of January of 2012, the pension system was short by about $19 billion. The reality may be more than that — a lot more. According to the American Enterprise Institute and other national studies, the figure is closer to $60 billion. If you use the state’s number and recent Census data, this means that each Minnesota household would have to pay $9,108 to get the state retirement system to full funding (or $3,555 per capita). 

Existing pensions are pretty much non-negotiable, so reform will have to focus on new and existing employees. Defined contribution accounts (like a 401k) will have to be introduced — and the sooner the better. Whatever happens, public unions will have to get on board. Reform may get a needed boost later this fall when Moody’s recalculates unfunded liabilities assuming a much lower rate of return (5.5 percent vs. 8 percent) amortized over a much shorter time frame (17 instead of 30 years). That means municipal bond rates will be adjusted in light of pension promises, so we are likely to see greater interest in reform from counties and cities next session. That should carry weight with legislators of all stripes.

To sum up, we expect to see an expansion in the reach and cost of a state government that is already overextended and transferring yesterday’s costs to the next generation of taxpayers. Perhaps the DFL will surprise even themselves and “own” the state’s budgetary and tax revenue problems, using their extraordinary power to pass needed reforms that move the state toward fiscal health and sustainable growth fueled by private enterprise rather than public spending.

We urge the newly elected Legislature to unleash the transformative power of a free marketplace rather than trying to control our economy from D.C. and St. Paul. Then we can return to prosperity and start fighting about how or whether to fund “good things” again rather than how to pay off debt.

Kim Crockett, J.D., is the chief operating officer and general counsel of the Center of the American Experiment, whose mission is  building a culture of prosperity in Minnesota and the nation.

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