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How does Horner budget plan stack up? Despite some concerns, 2 state finance experts see a lot to like

Both Jay Kiedrowski, Rudy Perpich’s finance expert, and John Gunyou, finance commissioner for Arne Carlson, had some good things to say about the Horner-Mulder plan.
Doug Grow: Tom Horner’s budget plan, aimed at the middle, quickly attacked

Tom Horner and running mate Jim Mulder outline their "Minnesota Works" budget plan.
MinnPost photo by Terry Gydesen
Tom Horner and running mate Jim Mulder outline their “Minnesota Works” budget plan.

Tax “reform,” budget balancing, rainy day funds, outcome-based contracts, state-backed gambling, 10 different “redesign teams” and job creation planks are impossible to squeeze into a single sound bite. They sort of need a full discussion.

“School shift payment timetables,” “early opt-in to Medicaid” and “Vikings stadium” quickly fill up all the characters allowed on a tweet. They kind of require conversation.

Then there’s the inter-relationship between sales, income and property taxes, the seesaw of budget reductions and tax increases, the balancing act of counties’ desires and the state’s needs. Hard to fit onto a bumper sticker.

Laying out a budget plan for Minnesota — as Independence Party gubernatorial candidate Tom Horner did Monday afternoon — is a lot like playing “pick-up sticks,” said his running mate Jim Mulder, who once led the Association of Minnesota Counties. Move one piece here and another stick repositions itself there.

Politically, say one thing here and the left will kick you in the shins. Say another, and the right will poke you in the chest. Suggest something marginally innovative — even if it has been borrowed from blue-ribbon task forces and other iterations of reform proposals — and you become a sitting duck.

Now, maybe that’s what Horner wants.

When you’re a target, you’re in the middle of the fray, even if you have no party apparatus and, so far, have received much less funding than your DFL and Republican competitors. When Horner unveiled his budget outline Monday, he offered more than enough specifics to be kicked and poked, as both DFLer Mark Dayton and GOPer Tom Emmer and their supporters instantly did with — you guessed it — sound bites and tweets.

“Have at it,” Horner challenged his competitors. “But then put your documents on the table.”

The plan
“Minnesota Works: Horner-Mulder Outline” (PDF) lives on the web for all voters to read and for all of us who can barely balance our checkbooks to try to understand. For now, it is there for the quick-and-dirty examination.

We went to two experts, former state finance commissioner Jay Kiedrowski, who worked under DFL Gov. Rudy Perpich, and former state finance commissioner John Gunyou, who worked under Republican Gov. Arne Carlson. Gunyou, of course, earlier this month ran as lieutenant governor candidate with DFL-endorsed Margaret Anderson Kelliher, but lost to Dayton.

Both Kiedrowski and Gunyou lean a bit left of center. Kiedrowski, a senior fellow at the Humphrey Institute, supported Barack Obama in 2008 and Kelliher. But both had some good things to say about the Horner-Mulder plan.

Yes, they have their doubts and policy disputes with the Horner-Mulder plan, but, as Gunyou, Minnetonka’s city manager puts it, “I think they deserve some credit for tackling some reform ideas which neither of the other two [candidates] have … Give them credit for teeing up all these issues.”

Jay Kiedrowski
Jay Kiedrowski

Adds Kiedrowski: “It’s always good when candidates put forth budget proposals that actually add up to the problem. We’ve had a problem in the past of people proposing things that either didn’t add up or weren’t feasible or ultimately relied on gimmicks to balance the budget … Any candidate that steps forward with a plan that has some plausibility is to be congratulated.”

But the more complex a plan — such as Horner’s six-page, single-spaced outline — the more difficult it is to pass in the Legislature. Thus, the Horner-Mulder plan might not be as plausible as it is dense. But at this stage in the gubernatorial campaign, Horner has created an intellectual and policy challenge for Dayton and Emmer.

It’s a political tactic, to be sure. “He’s trying to demonstrate that he is a seasoned candidate who understands policy and would be able to be governor,” Kiedrowski says.

After all, amid all the billions of dollars and dozens of reforms swirling around the Horner-Mulder budget plan, there’s another more daunting number out there for Horner: He garnered a grand total of 11,380 votes in August’s primary. The candidate who is fashioning himself “in the middle” is actually deeply in third place. With this plan, he’s biting at Dayton and Emmer’s ankles.

Devilish details
For the average citizen who barely reconciles his checkbook or wouldn’t know her tax bracket if she tripped over it, how Horner’s plan will affect our pocketbooks is what’s important.

First, let’s take a look at the sales tax, which drew the most instant reaction Monday. Horner would reduce the current state sales tax by 1 percentage point but broaden its base to include such items as clothing and some personal services, for example, haircuts. Horner is also proposing increased taxes on the purchase of tobacco and liquor.

Emmer’s campaign manager Cullen Sheehan struck at the heart of the matter when denouncing the sales tax notion that would come from the state government: “Pay me more for clothing, pay me more for haircuts, pay me more for liquor” is how Sheehan described it. “Collecting more money on the backs of middle class Minnesotans is not the right way.”

But Kiedrowski, the state finance expert, says, “Tax people will always tell you that it’s always better to have a broader tax base than a narrow tax base.”

Indeed, he says, data show that extending a sales tax to clothing and personal services doesn’t change the regressivity of the sales tax. That is, it won’t necessarily affect average schmoes more than rich guys, or, at least, not any worse than it already does.

The sales tax in Minnesota is already slightly regressive — if you’re poor, any purchase will affect your personal treasury more than if you’re rich — but Kiedrowski said, if the base is broadened to clothing, that regressivity won’t spike. Fact is, wealthy people buy more expensive clothing and will pay more taxes. Now, it is true that some well-off people don’t buy lots of clothing, and some poor kids buy too many shoes and jeans.

But to address that, Horner’s plan has a “low-income sales tax credit” of $350 million. Horner didn’t explain how that would work, but it would likely be an income tax credit for low-income people to attempt to offset their presumed purchases.

Reducing the sales tax rate could benefit middle-class taxpayers who purchase big-ticket items, such as washers and dryers.

John Gunyou
MinnPost/Terry Gydesen
John Gunyou

Says Gunyou: “As we become a more service economy, we’re still taxing goods. As the economy expands and becomes more service-oriented, the tax revenue has not kept up with the growth in that. It makes sense to have a tax base that relies on what the economy is based on.”

And that low-income sales tax credit reveals a certain amount of heart in Horner’s plan. He does propose $360 million in new funding for education, for homeless families and for seniors.

Where’s the income tax?
Horner’s plan has no income tax increases.

“I’m not proposing any changes in the income tax rates,” said Horner, in clear opposition to Dayton’s plan to increase taxes on the richest Minnesotans.

Gunyou has a problem with Horner’s ignoring the income tax issue, saying, “I think the weakness of this whole tax package is that they’re not doing anything with the income tax.”

First of all, in Gunyou’s view, if there’s an increase in income tax for the state’s richest, Horner might be able to reduce the sales tax rate even more than 1 percentage point.

Secondly, tax policy should be viewed as a three-legged stool: income, sales and property taxes.

Thirdly, no matter what Tom Emmer says, the state’s financial system needs more revenue to get out of its $6 billion hole, Gunyou believes.

Under Republican Gov. Tim Pawlenty, property taxes have been forced up considerably, which is a very regressive tax on the middle class, he notes. A full reform package would take all three legs into account.

As for the sales tax broadening and the phasing out of corporate income taxes over time, as Horner proposes, Gunyou’s OK with that, pointing to a report [PDF] in 2009 from the Pawlenty-appointed 21st Century Tax Reform Commission.

Much of Horner’s budget plan echoes the recommendations of that blue-ribbon panel of experts who were charged by Pawlenty to come up with solutions to the state’s tax structure. But when the commission completed its job, Pawlenty rejected the idea of broadening the sales tax base.

As for eliminating corporate income taxes over time, that actually amounts to a small total of the state’s budget. But, says Kiedrowski: “The difficulty with reducing the corporate tax is that you lose money, and you need money to be able to pay for the services that we have considered important in Minnesota … Reducing the corporate tax is no different than reducing the income tax or the sales tax. It’s always a good idea, if you ask voters, until you ask them if they’re willing to give up the services they pay for. Then they say, ‘No.’ “

Outcome-based budgeting
Horner: “We need to change the budgeting process … Right now too often the question is, ‘How much? How much are we gonna spend? How much we gonna get in revenues?’ We ought to put the focus on, ‘What for?’ “

To the average schmo with that out-of-balance checkbook, this all sounds so touchy-feely and jargony. It’s called “outcome-based budgeting,” and Gunyou and Kiedrowski say it’s been talked about for years at the Capitol.

Horner and Mulder make a big deal out of it. (Kelliher, too, talked about it in her campaign.) As part of the notion, they would allow counties to adopt a one-half percent sales tax on their own to “redesign” services.

But, Gunyou says, “What would the state be buying for that?” For the counties to levy their own taxes, reform would have to be a part of it all.

Here’s the idea, as capsulized by Kiedrowski: “You say [to counties or state departments]: ‘Here are the outcomes we want. How much would that cost?’ And then you hold them accountable for the results they produce … It’s possible that Minnesota government employees, given more freedom and creativity, might be able to improve the outcomes of what they do.”

Says Gunyou: “If a county can say, ‘I can get this outcome by doing it this way, rather than one size fits all,’ then why not challenge them to be innovative and creative?”

That means budget reductions, perhaps. But in Kiedrowski’s view, that won’t amount to billions of savings, perhaps a million here or there. And over time, not instantly.

Other points

* Savings: The Horner-Mulder plan says they will be able to trim $2.45 billion in spending cuts, redesign and government efficiency. Gunyou says that sounds ambitious. “That’s a tough target to hit,” he says. Kelliher thought $1 billion was doable, says Gunyou.

* Rainy days and racinos: Gunyou applauds Horner for reinstituting a fund to help the state in troubled times. But, under Horner’s plan, state-backed racinos at two racetracks would fund the $100 million annual rainy-day fund.

Says Gunyou: “Philosophically I’ve always had a problem with the idea that government should depend on gambling for basic services.” A rainy-day fund should be built into the budget, he said,

The racino issue also will face critics from the right and left who oppose more gambling in the state, who don’t want to take on the Indian tribes who control casino gaming now and who wonder about the future of horse racing in the state. It will muddle any real budget or tax reform, he thinks.

“It’s a debate you don’t need to have,” says Gunyou.

* Bigger government:
Minnesota Republican Chairman Tony Sutton said of Horner’s plan: “Horner likes to pretend he’s a moderate, but he always ends up taking the liberal position by pushing for higher taxes and bigger government.”

Bigger government? Horner is calling for $2 billion in cuts.

“That,” says Gunyou, “is not bigger government.”

In the end, these state finance experts turn to the practical bottom line: What is politically feasible?

Dayton’s stand-alone income tax increases will be questioned and challenged in the Legislature if he’s elected. “There’s no reform there,” says Gunyou.

Emmer’s denial that the state needs more revenue and must undergo even more massive cuts is “just unrealistic,” says Gunyou.

And Horner, he’s in a corner.

“I know voters won’t forget the governor who put sales tax on clothing,” says Kiedrowski. “It might be good for four years, but it’s not gonna be great for re-election. Same with haircuts. I’m sure that every barber will make sure that every citizen who gets a haircut knows that it was Gov. Horner who increased that tax.”

But, of course, it’s far more complicated than that.