Budget fix: Minnesota lags behind other states

A common theme in the state’s tax-and-spend debate is that other states are balancing their budgets without raising taxes. In a fiercely competitive business climate, standing out in that regard is the last thing Minnesota needs, the argument goes.

Sen. Majority Leader Amy Koch, R-Buffalo, put it this way during a recent forum at the University of Minnesota’s Humphrey Institute: “If you look at all of the states across the country that are doing some of the same things and facing some of the same budget difficulties…most are achieving their budget targets through reductions and reforms not through raising taxes. In this economy, for Minnesota to be raising taxes at this time makes us an outlier — and, I believe, sends a bad signal.”

Combo approach
I’d heard this theme repeated often enough to make me want to check the record. So I contacted the National Conference of State Legislatures in Colorado, which tracks state budget action. The record is not complete for this year because many states, like Minnesota, still are wrestling their budgets to the bottom line.

What is clear is that most states struggling in the aftermath of the Great Recession took steps in 2009 and 2010 to significantly boost taxes and other revenue while Minnesota did not.

In other words, those states built themselves some cushion early in this bout of hard time, and that is a factor in their ability to tighten spending this year.

Call it the combo approach.

2009: billions in new taxes
The key year was 2009 when states took their first hard hits from the triple whammy of the burst of the housing bubble, the near collapse of the financial system and the massive layoffs that followed.

The National Conference of State Legislatures reports that states passed a net tax increase of $28.6 billion that year to ease their budgets for 2010. That added up to a 3.7 percent overall tax hike, the largest increase since 1991.

The personal income tax went up the most, jumping in 15 states by a total of $11.4 billion.

“States relied heavily on it to raise new revenue, an event not observed in years,” the Conference researchers said in their report. “Many of the income tax raising states targeted higher-income earners.”

Further, 17 states increased or expanded sales taxes to generate another $7.2 billion. Twenty states raised business taxes. Taxes also went up for tobacco, alcoholic beverages, gasoline and certain health industry transactions.

Here are a few particulars from legislation passed in 2009 to shore up state treasuries for 2010:

•    The biggest personal income tax bites came in California and New York, some $9.2 billion of the total increase.

•    Delaware raised taxes on incomes above $60,000.

•    Oregon added new top rates of 10.8 percent and 11 percent to bring in $243 million.

•    Wisconsin increased income taxes on top earners by 1 percent. It also scaled back capital gains preferences and increased certain telephone taxes as well as tipping fees at landfills.

Minnesota’s tight hold
Wisconsin’s overall tax package represented a 5.8 percent increase over the previous year. The net effect was to relieve Wisconsin’s budget deficit by $870.5 million for 2010.

Minnesota, by comparison, scored a net gain of $28.6 million in revenue for that year, mostly by terminating income-tax reciprocity with Wisconsin.

Minnesota is listed among six states that actually reduced income taxes slightly for 2010, mostly through adjustments made to conform corporate income taxes to federal changes.

Only 15 other states held the line against overall taxes as tightly as Minnesota did that year. And eight of those states came back in 2010 with substantial revenue increases.

More increases in 2010
By 2010, legislatures across the country were better prepared to hold the line on taxes. Still, many of them “increased taxes and fees for the ninth consecutive year as they worked to shore up state budgets,” the Conference reported.

Overall, states enacted a net tax increase of nearly $4 billion. Add spikes in fees and other revenue, and the total came to $5.5 billion. Sales and use taxes were raised the most, increasing by $1.7 billion. Also up were taxes on businesses, tobacco, the health care industry, alcoholic beverages and motor fuel.

Minnesota is listed as having increased taxes slightly (about 0.4 percent) that year, chiefly by reducing property tax aid to local governments and the renters’ property tax refund. It also delayed payments of sales and corporate tax refunds.

By comparison, here’s a sampling from other states:

•    Arizona enacted a three-year sales tax rate increase from 5.6 percent to 6.6 percent.

•    New York raised its cigarette tax from $2.75 a pack to $4.35, extended the sales tax on clothing and limited personal income tax deductions for charitable donations for taxpayers who earn more than $10 million a year.

•    Ohio delayed a scheduled income tax reduction for two years.

•    New Mexico increased the sales tax by 0.125 percent, increased cigarette tax by $0.75 a pack and eliminated a tax deduction.

Taxing yoga and more in 2011
While all of this taxing helped cushion dozens of states, it didn’t save them from another round of budget battles this year. With a few exceptions — like North Dakota where agriculture and energy industries are prospering — states are crawling back slowly from the ravages of the recession.

Many states have considered even more tax increases — on everything from yoga services (Missouri) to sales by Internet retailers like Amazon.com (California, Minnesota and others).

Illinois already has passed whopping tax rate increases: 66.7 percent on personal income and 48 percent on corporate income.

In California, Democratic Gov. Jerry Brown proposes to extend 2009 increases on income, vehicle and sales taxes. Republican legislators are trying to block his bid to seek voter approval for the taxes in a June election.

Governors tackle thorny issues
But many other states realize they can’t go back to the tax well year after year. Thus, they are suffering the political and fiscal pain of serious spending cuts.

“The dismal fiscal situation in many states is forcing governors, despite their party affiliation, toward a consensus on what medicine is needed going forward,” The New York Times reported in January after examining the inaugural addresses of more than two dozen incoming governors.

The prescription, according to the Times, has been to “Slash spending. Avoid tax increases. Tear up regulations that might drive away business and jobs. Shrink government, even if that means tackling the thorny issues of public employees and their pensions.”

New York in particular has signaled it’s at the end of the line on tax increases. To the dismay of many of his fellow Democrats, Gov. Andrew Cuomo, declared that New York’s government “spends too much money, and has for too long with too little performance for the taxpayer.”

The recently passed New York budget slashes spending by about 2 percent, rather than impose new tax increases. Targets for cuts include health care and education, two big-ticket spending items that previously had been deemed untouchable.

No padding for Minnesota
So both sides in the Minnesota debate can hold up valid examples to prove their points.

But context is relevant too.

In that light, it’s important to note that some prominent new champions of fiscal austerity — most notably Wisconsin and New York — are tightening their belts against the padding of recent tax increases.

Minnesota doesn’t have that padding.

Comments (19)

  1. Submitted by Ron Gotzman on 04/15/2011 - 08:37 am.

    Mr. Dayton desires to increase spending by 22%.

    If we would simply freeze spending at current levels, we would have a surplus. In fact, we could increase spending slightly and still have a surplus.

    Of course, it is tough to “pay-off” the DFL special interests by freezing spending.

  2. Submitted by will lynott on 04/15/2011 - 09:35 am.

    Very telling that every time those ideologically driven (as opposed to fact driven) conservative talking points are fact checked they come out on the short end. Regardless of what Koch chooses to believe, many states are raising taxes to control their deficits. Public employees are actually not making more than those in the private sector when education, experience, and responsibility levels are held constant. High income tax rates have never been “job killers” or the cause of mass exoduses of capital–unless you count the offshoring by corporations of the huge profits they make off American workers and consumers. Tax cuts do not result in job creation. And so on…

    Republicans are “governing” by what they desperately hope is true and want to be true, even when, as here, they are shown that their ideological assumptions are demonstrably false. Fortunately, they all have to stand for election next year, while our Governor will still be around for two years thereafter.

  3. Submitted by Michael Corcoran on 04/15/2011 - 09:44 am.

    “Minnesota doesn’t have that padding” – my oh my, is Sharon revealing her bias?

    The example of Governor Cuomo of New York with his ALL CUTS budget in New York should be a wake up call to all liberal knee jerking tax loving lefties – the party is over. The simple truth, as President Obama himself described the ‘new normal’, is government must get smaller and the private sector bigger. This is not only a philisophic difference between political parties, it is a real world economic necessity. The voters in 2010 sent the 1st all GOP Minnesota legislature to St. Paul to insure that this happens.

  4. Submitted by Jim Roth on 04/15/2011 - 10:47 am.

    You described the budgeting and revenue raising approach in some states that are weathering the recession as the combo approach. Unfortunately, Minnesota, under the “leadership” of Governor Pawlenty took the Rambo approach and depleted every possible pocket of money so he could continue to brag “No new taxes.” Public policy and fairness be damned. It was as if the best interests of the state and the majority of its citizens didn’t matter as long as he could pander to his base. The result, of course, is that we now face an even more serious budget situation and the proposed remedy of the Republican legislators is “more of the same”.

  5. Submitted by Andrew Kearney on 04/15/2011 - 11:10 am.

    Mr. Gotzman ignores the reality that drives some increases in spending. For example there will 10,000 new additional students in schools in the coming biennium. Does Mr. Gotzman think we should not fund those students. In a place like Apple Valley that means that they will be adding classrooms and teachers with no way to pay for it. Simple solutions are not the answer despite our desire to make it so.

    Mr. Corcoran has a reading comprehension problem. Schmickle states that New York is holding the line on taxes this year after raising them last year. That is very different from what Minnesota is doing. Also Corcoran is wrong we did not send an all GOP legislature to St. Paul. There are plenty of DFL legislators there and they represent real people with views different from Mr. Corcoran’s. Let’s not pretend we don’t have divided government-Mark Dayton is “all DFL.”

  6. Submitted by Josh Williams on 04/15/2011 - 11:48 am.

    “Mr. Dayton desires to increase spending by 22%. ”

    Citation, please.

  7. Submitted by Bill Gleason on 04/15/2011 - 12:02 pm.

    Another solid piece by Ms. Schmickle.

    Of course it will draw quibbles from the fact-challenged and Tea Party whining about librul media bias. They hate facts.

    But there is an election coming in two years. Dayton will still be in office and by then most folks will finally recognize the damage done to our state by the right wing of the GOP.

    Time for a(nother) change?

  8. Submitted by Tim Walker on 04/15/2011 - 01:24 pm.

    Jim (#$): Not a “Rambo” approach, but a “Dumbo” approach…

  9. Submitted by Beth Dhennin on 04/15/2011 - 01:45 pm.

    Again, may we say, “Thanks to Gov. Pawlenty”, who has sacrificed the future of this formerly great state for his own putative run for the White House. What a scam-artist!

  10. Submitted by Ron Gotzman on 04/15/2011 - 03:15 pm.

    Josh,

    Easy to find many sources…The question? – Is a 22% increase enough for you?

    In criticizing the governor’s budget, GOP legislators start with a budget base of $30 billion and claim the governor’s budget proposals add up to a 22 percent spending increase. They argue that the stimulus money and K-12 savings were a one-time-only fix and the base should remain at $30 billion.
    Cyndy B – Minnpost

  11. Submitted by Mark Stromseth on 04/15/2011 - 03:21 pm.

    I think there’s a bit of unintended confusion here with the tax increase figures given for Illinois.

    Schmickle writes: “Illinois already has passed whopping tax rate increases: 66.7 percent on personal income and 48 percent on corporate income.”

    But that’s incorrect, and misleading as it’s written. It implies that Illinois raised their tax rates to 66.7% and 48%, respectively. They did not do that; in fact, the corporate tax rate was increased by 30 percent, not 48 percent, according to The Tax Foundation.

    What they did do is increase the tax rate by 66.7 percent and 30 percent, respectively, resulting in new tax rates of 5% for individuals, and 9.5% for corporations. Those are temporary increases, and far from the onerous burdens that Republicans portray them to be.

    Source: The Tax Foundation (http://www.taxfoundation.org/publications/show/26965.html)

  12. Submitted by will lynott on 04/15/2011 - 06:10 pm.

    Given the eye-popping property tax increases from the TP years and the projections for more of the same with the Republican budget, I wonder how these people can claim “no new taxes” without a red face.

  13. Submitted by Alec Timmerman on 04/15/2011 - 06:27 pm.

    Ron,
    You cannot just not count the stimulus money as part of our spending last year. This whole $22 billion spending increase is a lie. We spent the stimulus money. It was real money, hiring real people, starting real programs, and completing real projects. You can’t just make up your own accounting rules. We spent what we spent. Dayton is not calling for a $22 B spending increase. That is simply a manipulation.

  14. Submitted by Alec Timmerman on 04/15/2011 - 06:38 pm.

    http://www.house.leg.state.mn.us/fiscal/files/ib1110GFcashflow.pdf

    Ron,
    Here is the official general fund analysis.

    You will see,

    Total Expenditures & Transfers
    30,520,575
    38,699,274

    The increase is 8 billion, not 22 billion

    http://www.mmb.state.mn.us/doc/budget/report-fba/nov10-detail.pdf

  15. Submitted by Herbert Davis on 04/16/2011 - 06:42 am.

    Surprise…the “starve the beast” crowd of Pawlenty/MCCL? Taxpayers League has done well if you subscribe to their fascist view of life.

    Too many “politicians” in the DFL refused to see the theocratic assault on our secular government.Actually, some of them were part of it because,unlike Republicans, they have no party discipline! Like Obama and others…they just want to negotiate with terrorists…the class war almost over and the Handmaid’s Tale of future awaits!

  16. Submitted by Ron Gotzman on 04/16/2011 - 10:14 am.

    Alex,

    Please read…I said a 22% increase in spending is what Mr. Dayton is proposing. NOT 22 BILLION.

  17. Submitted by blaine rollins on 04/16/2011 - 02:45 pm.

    Why Illinois’ corporate tax increase from 4.8% to 7.0% will raise prices, lower wages and force companies to relocate…
    Suppose I am a company located in Illinois with all of my manufacturing and employees located right next door to my major customer, Caterpillar. I have 20% pretax margins, pay my full 35% Federal and 4.8% State income tax which puts my after-tax margin at 12.0%. Because Illinois raised the State tax rate to 7.0%, I will need to raise my prices by 3.8% to earn the same after tax profits. If Caterpillar rejects my 3.8% price increase, then I must cut wages and other expenses to maintain my same profits. Either way, there will be wage pressure on my employees and price pressure on my customers.
    And since companies with no facilities in Illinois must also pay taxes on the profits that they derive from sales inside of Illinois’ borders, they must also raise their prices to all Illinois customers. Suppose my company is based in Texas where there is no State Corporate Income Tax and I sell to Caterpillar plants in Illinois and Texas. To generate the same level of profits on each sale, I must charge the Illinois customer 12.0% higher prices than my Texas customer. Said another way, Texas customers get to buy my products at a 10.8% discount to Illinois customers.
    This helps to explain why Caterpillar recently put a new operation in Texas and not Illinois. Expect the decisions to not put new operations in Illinois and to move them from Illinois to accelerate. I wonder how long it will be before one of the major trading floors moves from downtown Chicago?
    http://www.EliminateCorporateIncomeTax.com/

  18. Submitted by Margaret Chayka on 04/17/2011 - 09:29 am.

    We have a $34 billion budget for a mere 5 million people. This is ridiculous already. 40% of the budget goes to 20% of the population. That’s right, “education”. Though, saying that money actually goes to the classroom is laughable. Kids don’t need a lot in the classroom to learn. A book and a pretty good teacher – doesn’t even have to be the best teacher, just one who knows their subject – and discipline. However, the “budget” isn’t really a budget. It’s just a set of numbers that started out years ago as a real budget, and is now just an automatically increased set of numbers. No one actually sits down anymore and looks at what they will spend money on and how much it will cost. They just submit their budgets based on what they got the year before. We need to wipe those clean and start from zero, and that should happen each and every year.

  19. Submitted by David Willard on 04/18/2011 - 11:35 pm.

    Love the “fascist” reference Herb! Way to go on that! It’s why I tune into MinnPost so little lately and take their stories with a grain.

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