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Legislative tax plans: Equitable, inspirational or destructive?

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

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.

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.

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.)

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.”

Comments (6)

  1. Submitted by Matthew Steele on 04/30/2019 - 11:59 am.

    The gas tax only affects those who choose to drive, and it has a higher effect on those who choose to drive more. Census ACS data shows that 14% of Minnesotans get to work without driving or being a passenger in a motor vehicle. Yes, many Minnesotans have to drive to work because of heavy-handed government social engineering that has produced and subsidized largely automobile-exclusive land uses where humans need a car to participate in the social and economic fabric of their community. Most of the proposed revenues from this proposed gas tax would double down on that failed approach, which is why I can’t support *this* gas tax even though we generally do need to significantly raise the cost of driving. A true non-regressive increase in the gas tax would cover the cost of our existing roadway network (while slowly shrinking it when possible) while using any surplus revenues (yes this would require a constitutional amendment) to support the mobility of Minnesotans without the burden of an automobile.

  2. Submitted by Joel Stegner on 04/30/2019 - 12:33 pm.

    There is no significant difference between the tax rates increases of the lowest and highest income groups, but the benefits are greatest for low and middle income households. As for the gas tax, working people do not need high accident and maintenance costs of poorly maintained roads, often not having the money to repair a broken down car. Their employers are also impatient with those hourly wage employees who are late to work – punching the clock rather than having the time flexibility of salaried managerial staff. Those who lose their insurance face a higher probability of medical bankruptcy of foregoing care, a decision that can kill you. Taxes pay for stability for low income families and serve as a safety net for middle families a car accident of job loss away from having their lives overturned. It is really sad that Republicans don’t have the empathy to understand how so many depend on government services.

  3. Submitted by Donald Long on 04/30/2019 - 12:44 pm.

    I strongly support the DFL proposals to raise additional revenue where they add to progressive and equitable impacts upon Minnesotans. Likewise, it is difficult to support the DFL recommendation of a regressive fuel tax. Isn’t there a better approach where those who have the bulk of income and wealth step up to their responsibilities to a society that has provided them with so much? We can do better.

  4. Submitted by Frank Phelan on 04/30/2019 - 05:24 pm.

    Gazelka is sooo concerned about low income folk he wants to lower the minimum wage they can be paid.

    Touching, really.

  5. Submitted by William Duncan on 05/01/2019 - 08:43 am.

    Some day thinking people will ask, how is it we came to focus on taxing the income of working people, instead of rentier income, automation, pollution and monopoly/corporatism?

    Of course, thinking people are asking such questions. It is merely that those in power making tax policy are doing the bidding of the powerful keeping the many in check, with a complicit media benefiting from that policy, defending it as inevitable and the only way.

  6. Submitted by Tom Knisely on 05/01/2019 - 10:04 am.

    Only the DFL could raise hundreds upon hundreds of millions in regressive taxes and call them fair. SMH

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