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.
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.
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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