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Budget fix: Minnesota lags behind other states

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.

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.