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Legislative tax plans: Equitable, inspirational or destructive?

Making sense of the the Legislature’s various tax proposals.

House Speaker Melissa Hortman, House Taxes Committee Chair Paul Marquart
House Taxes Committee Chair Paul Marquart, with House Speaker Melissa Hortman at left, discussing the tax bill at a press conference earlier this month.
MinnPost photo by Peter Callaghan

Democrats at the Minnesota Capitol, from Gov. Tim Walz down to rank and file House members, portray their tax proposals as an attempt to accomplish two things: to raise money for investments in education, health care and transportation; and to make taxes more fair.

The first goal is the easier of the two. The plans being proposed by House DFLers and by Walz — including changes outlined the House omnibus tax bill; a gas tax hike and other transportation fees; and the preservation of the existing health care provider tax — would raise billions for the DFL’s agenda. The omnibus tax bill alone would add an estimated $1.2 billion in general fund revenue, and would pay for increases in funding for both K-12 and higher education.

Making Minnesota’s tax system more equitable has proven a bit harder. The DFL’s tax plans have been billed as an antidote to the 2017 federal tax reform law, which Democrats say favored the wealthy and corporations.

But a state Department of Revenue report — known as a Tax Incidence Analysis — on the impact of Walz’ tax proposal showed last week that, taken together, the plan’s tax burden falls heavily on the lowest-income earners in Minnesota.

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The report shows that the lowest 40 percent of Minnesota residents — those with incomes of less than $44,730 — would bear 41.73 percent of the increases in tax burden. Those earning more than $185,601 a year would pick up just 4.39 percent of the impact.

Gov. Tim Walz
Gov. Tim Walz
Minnesota’s current tax system is considered one of the nation’s most progressive. The Institute on Taxation and Economic Policy, a nonpartisan think tank that assesses state and federal tax policies, ranks the state the fourth most-equitable in the way it taxes lower-income residents. It’s the provider tax and that proposed gas tax hike — two inherently regressive taxes — that drag down the overall progressivity of the plans.

Walz has defended his proposals. His own department’s analysis, he said, combines his general tax increases with the gas tax, a combination that makes it more regressive than it might be without the gas tax impact.

“We certainly understood in talking about the gas tax that there’s a regressive nature to this,” Walz said. He said GOP lawmakers worrying about regressive taxation “brings up real possibilities for us to have a much-more progressive tax system in Minnesota.”

But Walz said he also thinks the budgetary changes in his overall proposal will benefit lower and middle income people, especially the continuation of the provider tax which pays for insurance subsidies that help provide insurance for people at lower income levels.

“I think if you go out and ask moderate and middle-income people which proposals they are supporting, I think you’re gonna see overwhelmingly that they support the proposals we are paying for,” Walz said. “You could make the argument that removing the provider tax would look on paper that you reduced the tax burden on those people, but we know all of them would get kicked off medical assistance and MinnesotaCare and it would bankrupt them.”

That didn’t stop Legislative Republicans from gloating a bit about the tax incidence analysis. After releasing his own tax bill last week, Senate Taxes Committee Chair Roger Chamberlain, R-Lino Lakes, used the DFL plan as a reference point, using it to draw a sharp contrast with his his zero-new-revenue tax bill.

MinnPost photo by Peter Callaghan
State Sen. Roger Chamberlain
“We want to protect the taxpayer,” Chamberlain said. “We’re not gonna steal it from them and take their money and shake them down for it. The other side: I cannot express how destructive those proposals are going to be. You cannot do this in this economy and hope to raise enough revenue to spend all the money they want to spend. You can’t do it. It’s a non-starter. It will lead to ruin of the economy.”

Of the impact on lower and middle income Minnesotans, Chamberlain said: “It’s the facts, it’s the data. It’s what it is.”

The GOP bill, the Senate omnibus tax bill, makes changes to the tax code, but the overall impact is essentially zero. Senate File 5 makes changes needed to bring the state code into compliance with 2017’s federal Tax Cuts and Jobs Act.

The two systems have used the same taxable income as starting points and include similar deductions. But because the federal code eliminated or capped many exemptions and deductions while increasing the standard deduction, the conformity became more complicated.

Chamberlain claims that all taxpayers will either see no changes or see a decrease in what they owe under his plan.

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DFL defends approach

Like a good salesman, House Taxes Committee Chair Paul Marquart, DFL-Dilworth, begins the description of his tax plan, House File 2125, by talking about what the money will purchase rather than the price tag.

Before the House brought up and passed his bill on a nearly party line vote last week (the only DFL no vote came from first-year Rep. Heather Edelson, DFL-Edina), Marquart pitched the education improvements that the increases in revenue will pay for.

“Typically tax bills are mundane with lots of technical things, but I’m excited about the tax bill because it’s inspirational, aspirational and talking about the future of how you make things better for folks and our students and the business climate and growing our economy,” Marquart said.

Marquart pointed to the projections that show that because of inflation, current state revenues will not pay for current services in three and four years. “That means that not one dime of ongoing funding in education or health care or anything else can be funded without providing resources into the future,” he said.

The House bill is close to the Walz tax plan, but Marquart said it has more cuts in income taxes and property taxes. That could bring different results in the incidence study that has been ordered for the House bill. (The Pioneer Press has a handy side-by-side-by-side comparison of the various tax plans.)

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Like Walz, Marquart said many of the new programs and spending in the House DFL plan will help people at the lower end of the economic spectrum than those who at the higher end. The higher education increases, for example, come with a freeze on tuition at state universities and colleges.

Marquart is responsible for the general tax bill, while the DFL caucus and the governor are proposing increases through committees he doesn’t chair, including a gas tax hike via the Transportation committee, and the provider tax extension through the Health and Human Services committee.

So while the impact of his proposal might help make state taxes more progressive, the entire package could well have similar problems once the incidence report comes out from the Department of Revenue.

House Majority Leader Ryan Winkler
MinnPost photo by Taryn Phaneuf
House Majority Leader Ryan Winkler
That left House DFL leaders to defend the party’s overall approach. “It’s really important to point out that the tax proposals that the Minnesota House DFL have put forward really respond to the fact that we’ve had 40 years of trickle down Republican budgeting and we’ve had an explosion of inequality between those at the very, very top and everyone else,” said House Speaker Melissa Hortman. “We were aggressive about progressivity.”  

Added House Majority Leader Ryan Winkler, DFL-Golden Valley: “There’s nothing you can do to make the gas tax, the provider tax or the property tax progressive taxation. Every state in the country has this same challenge, which is you have a mix of tax sources at the state level and they have historically been regressive.”

“We are trying to move in a more progressive direction, but you can’t fund roads and bridges in Minnesota with a gas tax and have it be a progressive tax. It is a user fee, and people who drive on the roads pay for it,” Winkler said. “We are doing a lot of things to offset the impact of that on lower-income minnesotans but fundamentally everybody has to pay something for better roads, better schools affordable tuition, all the things that we care about cost money.”

One of the conundrums of state taxation is that regressive taxes tend to be stable. The revenue they provide doesn’t change dramatically, even when the economy worsens.

“If we put everything on the income tax, which would be progressive, we would have a highly unstable revenue source, and we can’t deficit spend so we have to have stability in our tax code,” Winkler said.

At the political level, the argument over relative progressivity of the tax proposals is rhetorical, since Senate GOP leaders have said since day one of the session that there are not the votes in the Senate to adopt the Walz tax increases, a gas tax hike — or the extension of the provider tax.

Senate Majority Leader Paul Gazelka, R-Nisswa, repeated that Monday. “The tax incidence study confirmed that [the gas tax] is one of a number of taxes that would hurt the middle class and lower income,” taxpayers, Gazelka said. “We’re not going to do a gas tax. I’ve made it very clear that’s not a direction we’re going to go.”