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Tax issues could shape the 2019 Minnesota legislative session

MinnPost photo by Corey Anderson
Simply put, we have more roads, bridges, and highways than ever, more people driving on them than ever before. Current revenues are not keeping pace with needs.
Taxes are always a contentious issue in Minnesota politics. Who pays, how much, and for what purposes divide the DFL and Republican parties. The same will be true in the 2019 session. While the focus going into the session has been Gov. Tim Walz’s plan to raise the gas tax to pay for long-term infrastructure maintenance to roads, bridges, and highways, four or five other taxes could shape the session and complicate the gas tax debate.

schultz portrait

David Schultz

First, one of the items left undone from the 2018 legislative session was changing Minnesota tax law to conform to federal changes in 2017. It was passed by the Republican Legislature and vetoed by Gov. Mark Dayton. The failure to pass tax conformity makes it more complicated for taxpayers to do their state taxes, but it also will cost them more if the state does not change its tax code. One estimate is the failure to change the law will cost taxpayers nearly $60 million; conversely, conformity potentially means less money coming into the state.

Second, the Minnesota Health Care Provider tax expires at the end of the year. It generates $700 million annually, paying for programs such as MinnesotaCare, the insurance for the working poor. Walz and the DFL wish to renew it; Republicans views it as a “sick tax.” Were this tax to expire it would leave a major hole in the state budget, complicating Democrats’ plans to create a single-payer health care law in the state.

Third, Minnesota, like every other state, has an infrastructure problem. There is insufficient money to pay for transportation infrastructure maintenance. Even though the Minnesota Constitution has language authorizing a gas tax, the revenues it generates are insufficient for the needs in the state. Simply put, we have more roads, bridges, and highways than ever, more people driving on them than ever before. Current revenues are not keeping pace with needs, therefore necessitating additional money.

Gas-tax hike: pros and cons

The obvious revenue source is the gas tax. On the one hand, increasing the gas tax makes sense – it is sort of like a user fee on driving. The more you drive or use the roads, the more of a fee or tax you pay. On the other hand, there are several problems with the gas tax. First, it is not directly a user fee on driving – it is really a carbon-fuels fee that in theory acts to discourage people from polluting. Second, the gas tax is regressive, hurting people more heavily who are low-income and have to drive to work and may not have a mass transit alternative (including in rural areas). Third, as cars become more fuel efficient, the gas tax produces less revenue. Finally, increasing the gas tax is politically explosive. When it was last raised under Gov. Tim Pawlenty and several Republicans voted for it, they were ousted from the party in primaries or elections. Gov. Dayton wanted a gas tax as part of a more permanent fix for Minnesota’s infrastructure spending, but it went nowhere.

Enter Tim Walz. He too wants to fix and fund Minnesota’s infrastructure deficit, looking at the gas tax as a possible solution. His Cabinet appointments, such as Margaret Anderson Kelliher as MnDOT commissioner, point to this as a priority because she was the speaker of the House when the last gas tax was adopted. But Republican opposition to a gas tax persists, and the illusionary $1.5 billion budget surplus complicates any argument to raise taxes. Why, for Republicans, should we raise taxes when there is a surplus? Use it to pay for infrastructure.

This surplus is illusionary for several reasons. First, state law still factors in inflation for revenue projections but not obligations. This was the pact Pawlenty and Roger Moe made in 2002 when they were in the Legislature and running for governor and they wanted to deal with a budget deficit through cooking the state’s books. Adjust for inflation and a lot of the surplus disappears. Second, part of the surplus must go into a rainy day fund. Third, even at its full value, $1.5 billion is barely 3 percent in a $50 billion+ state budget. Fourth, the surplus assumes status quo in terms of some revenue sources. For example, if the Health Care Provider Tax were to expire, it alone might cut into half of the projected surplus. Finally, as the recent state fiscal forecast pointed out, revenue estimates can change with a slowing economy projected to occur in 2020. The point is that the surplus really does not exist, but the belief that it does will harden opposition to a gas tax.

The Wayfair case

Yet there are three other potential taxes or sources of revenue out there that could serve as bargaining tools for infrastructure and much of the budget negotiations this year. First, in June 2018 the Supreme Court ruled in South Dakota v. Wayfair that states, including Minnesota, could require internet and out-of-state businesses such as Amazon to collect sales or use taxes on purchases. While the windfall from Wayfair could be significant, short term it has not so far generated much. Nonetheless, internet sales taxes open up one new revenue stream.

Second, another Supreme Court decision, Murphy v. NCAA, struck down a federal law preventing states from legalizing sports gambling. This decision opens the possibility for Minnesota to legalize a new revenue stream with potential large payoffs. However, tribal casinos, nonprofits (the latter who do charitable gambling), and the Minnesota Lottery may oppose this.

Finally, Forbes magazine recently ran an article depicting Minnesota as one of a handful of states likely to legalize recreational marijuana. It is not clear that will happen and if so, what legalization will look like. But one possibility is also to allow for commercial sale. Commercial, if done as it has occurred in Colorado, could also be a source of tens of millions of dollars of new revenue. Whether there is a political coalition to support this option is unclear.

But given the options of internet sales tax, sports betting, and marijuana taxes, their possibilities may complicate demands for a gas tax. One could also see strange options, with calls to legalize marijuana or sports betting and tax them to pay for infrastructure or replace the Health Care Provider Tax. Or perhaps federal tax conformity — something more prized by Republicans perhaps — is traded for something else, such as expansion of sports gaming, the gas tax, or the provider tax. Perhaps trading tax options might build support, even among Republicans, for legalizing marijuana or supporting spending programs the Walz administration wants.

David Schultz is a Hamline University professor of political science and a visiting professor at the University of Minnesota Law School. His latest book is “Presidential Swing States: Why Only Ten Matter.” 

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Comments (13)

  1. Submitted by Bob Barnes on 01/08/2019 - 09:51 am.

    One note about a gas tax, all consumers get their food and goods via trucks. Everyone benefits from the roads so everyone should pay for their repairs and upkeep.

    Legalizing then taxing weed is both good and bad. It should be legal as it has medical uses and prohibition has never worked. However it should not be taxed or regulated as that will just create yet another criminal enterprise since it would be cheaper to buy it illegally.

    As the 5th highest taxed state, it’s long past time to prioritize spending and stop raising taxes. The met council should be abolished saving millions a year in salaries and benefits alone. Light Rail needs to be sold off if possible to private enterprise or shut down if it can’t be sold. The amount of money wasted and lost on that alone would likely fix every road and bridge in the state. There are many other places we can cut since the budget has doubled in the last 10 to 15 years.

    • Submitted by Pat Terry on 01/08/2019 - 01:00 pm.

      That’s a recipe for economic disaster (other than the weed legalization bit). Why don’t Republicans understand economics.

      • Submitted by Bob Barnes on 01/08/2019 - 01:27 pm.

        You keep saying that so prove your claim. The state takes in way more than enough revenue to pay for the essentials. The problem is it wastes a lot of the revenue on things that don’t benefit the entire state or things lobbyists want.

        Spending a billion+ dollars on something a tiny fraction of the population will ever use is a waste of money. That money spent on roads and bridges across the entire state would benefit every person in the state. Same can be said for the Twins and Vikings stadiums. Only a small fraction of the state population will ever go to an event there. Had we not raised taxes and gave them insane property tax deals and took out bonds to pay for these things, Minnesotans in general would be better off.

        • Submitted by ian wade on 01/08/2019 - 02:08 pm.

          Light rail isn’t going anywhere, in fact mass transit is going to be expanded. Young people have no interest in owning vehicles and technology is on the cusp of hurling them towards obsolescence.
          Some people need to come to grips that they live in a society and the one constant in life is change.

          • Submitted by Bob Barnes on 01/08/2019 - 03:19 pm.

            Population density is nowhere near high enough to make light rail anywhere close to cost effective. We aren’t NYC and never will be. A better use of the money would be to expand and repair the roads and bridges. Minnesota, like many other states, fails to look forward far enough. 94 downtown should be at least 4 lanes in each direction, 6 to 8 would be even better. 494 and 694 should be 4 to 6 lanes both directions as well. That would keep traffic flowing easily for years to come. Look at Omaha, 680 around the north side during rush hour is 55+ non stop. It’s 4 to 6 lanes wide each way. 80 is upwards of 8+lanes wide in some areas each way (including exit lanes). Of the times I’ve been through there even at rush hour never once did I have to slow down let alone stop.

            All residents use the roads even if only via trucks bringing goods to the stores where they shop. Very few use light rail. Buses can easily handle mass transit in MN. I doubt there will ever be such a population density that Mpls becomes more like NYC today.

            • Submitted by Jim Bernstein on 01/08/2019 - 04:53 pm.

              By suggesting that I-94 be widened to “6-8 lanes in both directions through downtown Minneapolis and/or St. Paul one loses all credibility.

            • Submitted by ian wade on 01/09/2019 - 06:29 pm.

              Absolute nonsense. One visit to LA, Atlanta or Houston completely shatters the myth that more lanes equates to better traffic flow.

              • Submitted by ian wade on 01/09/2019 - 06:35 pm.

                By the way, Greater Omaha ( radius of fifty miles) has a population of 1.3 million. Mpls/St. Paul is nearly four million. There’s a reason that Omaha’s airport only has about 4 gates.

    • Submitted by Dan Landherr on 01/08/2019 - 01:45 pm.

      Baloney. Alcohol and tobacco are taxed and regulated and I don’t see a huge black market for either of them. Nevermind that there already exists a criminal enterprise for obtaining marijuana. Legalizing, taxing and regulating marijuana sales will eliminate a criminal enterprise, not create one.

      • Submitted by Bob Barnes on 01/08/2019 - 03:23 pm.

        Go look at CO and now CA. High taxes and regulation have created a black market because it can be gotten much cheaper illegally. The only reason you don’t see more moonshining is because alcohol taxes aren’t at absurd levels just yet.

        It’s a logical fallacy to say we must regulate/tax something because other similar things are regulated/taxed. Sin taxes shouldn’t exist. It’s just an attempt to control the population based on someone’s belief system.

    • Submitted by Frank Phelan on 01/08/2019 - 05:26 pm.

      If I walk to the grocery store, and my food gets trucked there, the trucking company pays a fuel tax, and that gets passed on to me.

  2. Submitted by Kathie Noga on 01/08/2019 - 06:22 pm.

    What we should do is this: have a legacy fund where people can put of their refund for funding transit and the roads. This way we can get around those Republicans who are always against funding both. Let us be honest, they don’t want taxes for many things. You get what you pay for. I would like this fund because I use mass transit and the service is very inadequate out to the suburbs where most of the new jobs are. This would help with this problem. This would provide more steady employment for us in the inner city who must resort to temp. work because that is all there is in other locations.

  3. Submitted by Kathie Noga on 01/08/2019 - 06:24 pm.

    I also think legalizing pot would be good for the schools, roads and transit. That why it would be taxed and we could fund all these items more in line with their needs, not what the Republicans think we should have.

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