Cries of ‘Taxes!’ finally echoing through Minnesota’s Capitol corridors

The word “taxes,” only whispered for the first weeks of this legislative session, suddenly is being shouted at the state Capitol. “Taxes!”  You can hear the echoes throughout the Capitol corridors. “Taxes!”

The opening of the tax season at the Capitol may have come a little earlier than planned.

DFL Senate leadership on Thursday reluctantly announced the foundation of the budget it wants to use to close the state’s $4.6 budget deficit and counter Gov. Tim Pawlenty’s budget proposal.

The announcement — which calls for $2.4 billion in cuts, including a $973 million cut in K-12 education and $2 billion in “new revenue” — was made because of a bit of media one-upsmanship. Reporter Tom Scheck reported the plan to Minnesota Public Radio listeners before the DFL leaders unveiled the plan to their own caucus.

While Senate Majority Leader Larry Pogemiller and Assistant Majority Leader Tarryl Clark claimed they were trying to find out who leaked the report, they also were quickly calling for a meeting of the DFL caucus to inform caucus members and scheduling a mid-afternoon news conference to announce the plan that had already been announced.

Sen. Larry Pogemiller
Sen. Larry Pogemiller

Pogemiller at center of swirl of rumors
Understand, because Pogemiller is involved, rumors filled the Capitol. Things, even leaks, don’t usually just happen with Pogemiller. They’re caused. So there were a lot of legislators from both parties wondering if the Senate leader might have actually created the leak — in a plausibly deniable way, of course. If so, they wonder, what is his end game?

“Always remember, he’s the maestro,” said one Republican leader who asked for anonymity because of the politically charged environment. “He’s a lot of things. But stupid he isn’t.”

Pogemiller was not available to answer the big leak question Thursday night.

No matter how, or why, the DFL plan got out, Republicans were quick to pounce on it.

Rep. Marty Seifert
Rep. Marty Seifert

“This plan is the worst of both worlds,” Rep. Marty Seifert, the House minority leader from Marshall, was telling anyone who would listen. “They’re raising taxes AND cutting K-12.”

(Under the budget plan Gov. Tim Pawlenty announced a few weeks ago, there were to be budget shifts and long-term borrowing and major budget cuts in some areas but no tax increases, and K-12 was to be held “harmless.” Pawlenty is scheduled to announce a “revised” budget sometime next week.)
DFL progressives unhappy, too
Republicans weren’t alone in being highly critical of the DFL leadership’s first whack at solving the state’s budget problems. The DFL’s most progressive members were at least as upset as Republicans. In fact, their anger might be more sincere.

The plan, progressives said, showed a lack of courage and humanity.

“People in politics are so scared of everything these days,” said Sen. John Marty, DFL-Roseville, a candidate for governor.  ” …. I don’t think the people who elected us really sent us here to compete with the governor on how deep we could cut.”

Marty believes that the DFL must frame the debate in its own terms, not Pawlenty’s.

“My whole thing is that I really like the governor using the idea of people sitting around the kitchen table talking about their budget,” said Marty. “I like the idea of our state as family. But I think Tim Pawlenty ought to listen to how real Minnesota families talk. I don’t think when there’s a crisis that real families push their weakest members out the door.”

Though the DFL plan doesn’t call for as deep of human service cuts as the governor seeks, the cuts are still there.

As for the education cuts seemingly proposed by DFL leadership?

Pogemiller, as great a friend as public education ever has had at the Capitol, has been talking about the need for K-12 cuts for weeks. But most, including DFL House leaders, believe it’s all a ruse. Pogemiller, they say, is expecting Minnesotans will rise up and demand that the state maintain education funding at its current levels and use $650 million in federal money, not as backfill, but as a genuine increase in K-12 spending.

But Sen. Terri Bonoff, DFL-Minnetonka, doubts that.

“The issues we’re facing are too serious for shell games,” she said, adding that the broad proposals made Thursday are just the beginning of a process that’s going to get muddier before it gets clearer.

Leadership still avoiding actual use of word ‘taxes’

Perhaps the most amusing thing about the broad budget outline proposed by the DFL Senate leadership Thursday was the fact leaders still did NOT use the word “tax increases.” Instead, they talked of  $2 billion in “new revenue.”

But tax proposals are beginning to be heard.

For example, earlier this week, Sen. Ann Rest, DFL-New Hope, made what likely could be the first serious tax proposal.

Part of Rest’s plan was aimed directly at raising revenue. She’s calling for a “fourth tier” for the state income tax code, which she says would affect only 54,000 taxpaying households, in which income of a married couple amounts to more than $250,000. That small group would see an increase of their tax rate from 7.85 per cent to 8.75 per cent, creating $200 million for the starving general fund.

Additionally, Rest is proposing a two-pronged, “revenue-neutral” tax change. She would slowly decrease corporate taxes, which Pawlenty also wants to do. But under Rest’s plan, the state’s sales tax would be broadened to include clothing and such services as fees for attorneys and accountants. At the same time she proposes broadening the sales tax, she would lower the rate from 6.5 percent to either 6 percent, or even 5.5 percent. Low-income people, by the way, would get a credit on the sales tax broadening.

The sales tax broadening has not been greeted warmly by her colleagues.

“People have an emotional attachment to keeping the tax off food and clothing,” she said. “I have it on food.”

The intent of her proposals, she said, is to “rebalance” the system, give it more stability and predictability than it currently has.

But is there “fairness” in her proposal?

Fairness is going to be a huge issue, at least in the next few weeks of this session.

On Wednesday, the House tax committee heard the results of a Tax Incidence Study, a nonpartisan study that has been conducted by the Department of Revenue every two years dating to 1990 on all levels of state and local taxes.

The study is 106 pages long, filled with data and graphs and tries to answer the question: “Who pays Minnesota’s taxes?”

Study showing tax system becoming more regressive
Short form of a long study: The newest study shows that Minnesota’s system is becoming markedly more regressive, meaning the poor and middle class are paying a higher proportion of taxes than the wealthy. The system of all taxes — sales, property, income, etc. — has become markedly more regressive in the last night years.

It also appears that Minnesota, once proud of its progressive heritage, is not what it once was. There are now 10 states less regressive than Minnesota.

Not surprisingly, the study shows that the income tax is the one tax that’s the least regressive. Property and sales taxes are the most regressive.

Minnesota tax impacts by tax area
Courtesy of the state of Minnesota
The property tax share — which declined slightly between 2004 and 2006, is projected to increase substantially in 2011.

(Rest says her proposal, calling for a broadening of the sales tax, will not make that tax more regressive than it already is. She points out that typically, middle- and lower-income people aren’t hiring attorneys and accountants. Additionally, there is her credit for the poor on broadening the sales tax to clothing.)

DFLers clearly plan to use the study as an attack on Pawlenty’s no-new taxes era of governing.

At the very least, said Rep. Ann Leczewski, DFL-Bloomington, chairwoman of the House Tax Committee, the governor is going “to have to own up to it.”

“If he doesn’t want to address it (tax fairness), he needs to admit he’s OK with it,” said Leczewski. “He needs to say that he’s fine with embedded unfairness.”

Leczewski, by the way, says her committee will start taking up tax bills next week. Those bills are sure to get tempers flaring among all players.

Republicans, for the most part, will oppose any new taxes.

But even DFLers will be fighting each other over what sort of taxes are most reasonable.

For example, at some point, Rep. Tom Rukavina, DFL-Virgnia, expects to propose a “progressive income tax surcharge” on all Minnesotans. But he’s ready to get into brawls over what most see as the easiest taxes to increase, the so-called “sin taxes” on alcohol and tobacco products.

“It’s not the smokers and the drinkers who caused this depression,” Rukavina said, adding that the “sin taxes” are the most regressive of all.  (Rukavina is frustrated that he can’t even get a hearing on his one favorite “sin” proposal, which would place electronic pull tab devices in state bars.)

Taxes of all kinds are finally out of the Capitol closets.

“It’s about time we got going,” said Rukavina. “We had a (tax) committee the other day, and I said, ‘Whoever thinks we’re getting out of here without raising some money, raise their hand?’ One guy did, but he was laughing when he did it.”

Doug Grow writes about public affairs, state politics and other topics. He can be reached at dgrow [at] minnpost [dot] com.

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Comments (14)

  1. Submitted by Bill Krause on 03/13/2009 - 11:01 am.

    “the income tax is the one tax that’s the least regressive.”

    Doug, it’s the least regressive because it’s clearly overwhelmingly progressive.

    From the 2009 Tax Incidence Study (p13)

    “The only major progressive tax is the personal income tax.”

    also, you stated
    “Property and sales taxes are the most regressive.”

    Wrong again, the most regressive tax, is the business tax, with a Suits index of -.210, compared to sales tax of -.208 (the more negative the more regressive). See page 13 Table 1-4. The Suits index for income tax is +.194 (clearly progressive)

  2. Submitted by NIcole Masika on 03/13/2009 - 11:32 am.

    The income tax may be the least regressive, but regressive it is. The top wage earners are only paying 9%, other brackets range from 11-12%.

  3. Submitted by David Brauer on 03/13/2009 - 11:41 am.

    Nicole, that’s not correct. OVERALL state/local tax payments (the stats you reference) are regressive, but the income tax is a PROGRESSIVE component.

    Basically, the sales and property taxes are really regressive, and the income tax reduces that regressivity partly, but not completely.

  4. Submitted by Ginny Martin on 03/13/2009 - 11:43 am.

    It’s about time the Legislature began to be honest and courageous in talking about tax increases on the wealthiest Minnesotans. They do not pay their fair share now–the 1% paid an effective rate of 8.9 percent, and middle income people about 12%.
    Raising property taxes is not a good way to raise money. Taxes go up, people’s incomes are either fixed or going down, these days, the value of the houses is going down–it’s not a fair tax.
    But a progressive income tax is fair and it’s the best option, and it should be high enough to cover education costs without cuts.

  5. Submitted by Bill Krause on 03/13/2009 - 12:02 pm.

    “the sales and property taxes are really regressive,”

    David, you are making the same mistake the Doug Grow made. The most regressive tax is the business tax.

    Go to page 13 Table 1-4 and look for yourself.

    If you can’t bring yourself to believe that this is true, than the overall conclusion by the Tax Incidence Study that MN tax system is regressive must also be unbelievable. Because with out adding in the regressive nature of business taxes, MN tax incidence would be progressive.

  6. Submitted by Thomas Swift on 03/13/2009 - 12:07 pm.

    Page 17 of the tax incidence report states:

    As shown in Table 1-5, the total effective tax rate of 23.8 percent for taxpayers in the
    first decile is much higher than the rates in other deciles.

    The effective tax rate for the first decile is overstated for several reasons.

    First, the lowest decile includes households who have temporarily low incomes or have better
    overall economic well-being than was indicated by their money income in 2006. [snip]

    Second, effective tax rates for the first decile are overstated because income is understated. The incidence sample was unable to identify all sources of income. Many first-decile households filed neither an income tax nor a property tax refund return. [snip]

    Household income is also underestimated in the Consumer Expenditure Survey used to estimate sales and excise tax burdens. To the extent that income was subject to relatively greater underreporting than consumption, particularly for low-income households, the taxable consumption expenditures calculated from CES will be overstated. [snip]

    By including only money income, the substantial amounts of food stamps and housing subsidies received by the poor are ignored in this study.
    Consequently, money income at the low end of the income distribution does not provide an accurate measure of overall economic well-being.

    For all of these reasons, effective tax rates in the first decile are overstated by an unknown but
    possibly significant amount.

    This is crucial because Democrats *always* say the *poorest* Minnesotans are “being hurt”. What this report says is that they are pulling that statement out of their back pockets, because there is no way to really know *what* is going on.

    Democrats also refuse to acknowledge that the highest deciles pay the bulk of the yearly tax bill. I’ve seen numbers ranging from 60-80%.

    Harping on the percentage of their incomes our most successful neighbors are *allowed to keep*, while claiming ever worsening situations for the poorest, without any reliable facts to back those claims up appears as nothing more than pure, naked averice.

  7. Submitted by David Brauer on 03/13/2009 - 01:00 pm.

    Bill – thanks for the addition to the record. If we want a progressive tax system, we reduce to proportionally reduce business (and sales and property) taxes and increase income taxes. Pick your own level of spending.

    Tom – even without the first decile, our tax system is regressive. No one denies the rich pay more overall, but the question is whether they should pay more relative to everyone else.

  8. Submitted by Bill Krause on 03/13/2009 - 01:21 pm.

    “and increase income taxes.” — across the board.

    There’s no reason to make the income tax more progressive, if you reduce the impact of all of the regressive taxes.

    “Pick your own level of spending.”

    Thanks, wish I could.

  9. Submitted by Bill Krause on 03/13/2009 - 01:35 pm.

    But, if you want to collect a larger proportion of your tax revenue from income tax, then you need to prepare yourself for the large variations that occur with economic cycles.

    The 2009 Tax Study hints at that when they explain that the increase in regressiveness for 2006 (and 1998 and 2002) is because of the high amounts of income from capital gains, not do to any changes in tax law, and certainly not a trend.

    I’m sure this condition doesn’t exist for tax years 2008 or 2009.

  10. Submitted by Michael Friedman on 03/13/2009 - 01:52 pm.

    “She [Rest] points out that typically, middle- and lower-income people aren’t hiring attorneys”

    Presumably because they can’t afford to. So in order for the non-rich to have equal access to justice, which is of preeminent societal value, the legislature must find a way to fully fund Public Defenders and Legal Aid, (as well as the courts so there is a timely resolution for all of our disputes and infractions). Taxing attorneys without providing corresponding funding to these entities will make the access to justice divide even larger.

  11. Submitted by Craig Westover on 03/13/2009 - 02:02 pm.

    First, as pointed out at Politics in Minnesota, the system has become more regressive, not because of any changes to the tax code, but because the income gap between the top-earners and the rest of us has grown significantly. That’s a given from the data.

    Objections to the current system are premised on “fairness.” No one has yet shown or discussed, using economic principles, why a progressive system is better or worse that a regressive system. No one has used economic principles to demonstrate why a wealth gap is bad for the economy, prosperity and the quality of life.

    “Fairness” is simply not the right objective. We should be asking questions, as the 21st Century Tax Reform Commission did, about the effectiveness of various forms of taxation. The proper objective of a tax system is raising the necessary revenue the state requires for essential functions (no more, but no less) with minimum disruption to the market and extracting the minimum amount of capital out of the private sector.

  12. Submitted by Amy Wilde on 03/13/2009 - 05:45 pm.

    As a fiscally conservative county commissioner, I’ve had to swallow hard every year and raise the property tax levy, mostly to deal with the reality of inflation, plus accommodating the $1.5 million in cuts, new mandates and shifts placed on my county’s budget since 2003 by our state legislature and governor. It’s now a $11.1 million levy. It was $8.7 million in 2003, when the “no new taxes” guys “solved” the first big deficit with smoke-and-mirrors techniques.

    Despite our role as the “bad guys,” most county commissioners have been re-elected, because our constituents understand we’re doing the best we can to deal with the state cuts and shifts, inflation and the unemployment which creates greater demand for services. However, local incumbents get challenged and defeated at higher proportions than state legislators do, so it appears making local officials the scape goats has succeeded, to some extent. It is politically risky to raise taxes, but sometimes it’s the responsible thing to do, compared to passing on debt to our children.

    If our county had as structurally unbalanced a budget as the state has had since 2003 (and our governor has again proposed,) the state auditor would be on our case. But local governments are apparently kept to a higher standard of auditing than state or federal government.

  13. Submitted by Bernice Vetsch on 03/14/2009 - 10:17 am.

    How Republicans in the state legislature can continue to help Pawlenty retain the power to foist his belief in a failed ideology on the entire state is incomprehensible to me.

    Last Saturday at the rally seeking retention of funding for programs desperately needed by the elderly and by people with disabilities, Senator Henjem, Republican leader, was cheered when the told the attendees he would do everything he could to help them. And you could tell he really meant it.

    “Everything,” however, according to his statements on MPR a few days later, does not include voting against Mr. Pawlenty. I hope the senator will rethink his position and that five or ten other Republican senators will rethink theirs. Is loyalty to the governor or to your party worth the deaths his cutting/barring a total of 113,000 people from MinnesotaCare will cause? Will the reductions in assistance and care to those at Saturday’s rally?

  14. Submitted by nelson finstad on 03/14/2009 - 07:56 pm.

    This argument that the “wealthy” aren’t paying their “fair share” is ludicrous.

    First, one must define “wealthy.” Is it $60K per year? $100K per year? $250K per year? $1MM in assets? What is it?

    Secondly, it is blatantly obvious to anyone with a brain that a wealthy individual earning $500K per year pays precisely the same tax rates on his first $50K as the “middle class” person earning $50K. Now, what’s not fair about that?

    What becomes unfair is when the wealthy individual, still but one little ‘ol person in this state (or world, for that matter), is required to fork over another $40K in the form of “regressive” income taxes that the “middle class” individual is not on the hook for.

    Perhaps a “resident” or “citizenship” tax would be more appropriate. One person earning an income in this state/country is required to pay one flat fee, say, $5000 per year. One person, one fee. Now, THAT is paying one’s “fair share.”

    If this state is not careful, if it continues to bash the rich and attack the fact that they pay taxes ABOVE and BEYOND the middle class tax burden, then the state risks losing that tax base to places like Wyoming, South Dakota, Nevada, or even Mexico and Panama, where those individuals can live COMPLETELY tax free.

    To all “progressive” DFL members: Don’t look a gift horse in the face…and then spit on it.

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