It might be tempting to think the healthier state economic and revenue forecast released Friday will put an end to the Legislative debate over tax increases.
The forecast, afterall, transformed a $1.27 billion shortfall for the next two-year budget period to a $1.6 billion projected surplus — nearly the same amount as the $1.66 billion tax increase proposed by Gov. Tim Walz in his budget rollout last month. It appears now that the Walz plan could be funded with current tax rates and revenue, though that plan also dipped into rainy day savings.
Ending the tax debate, however, is not happening in St. Paul. Walz said he was open to talking to lawmakers — particularly Republicans who control the Senate — about next steps, but also said he did not rule out still wanting tax hikes, and that he didn’t want to “negotiate with himself.”
And DFL leaders and advocacy groups continue to push for some tax hikes on corporations and high-earners, for what they term as tax fairness issues rather than a requirement to pay for new spending. Walz’s plan would add spending in public education for both general support and summer school, small business assistance, child care grants, tuition assistance for job changers and other social and economic supports tied to the pandemic.
The debate is a political one more than an actual option for crafting a two-year balanced budget. Even before Friday’s forecast, Republicans who control the Senate have said they will block any tax hikes this year. But the issue will continue to be used to distinguish the parties from each other — and to speak to their respective constituency groups.
Republicans said the new numbers prove that tax hikes aren’t needed and would only further burden families and businesses.
[image_credit]Minnesota Management and Budget[/image_credit]
Rep. Pat Garofalo, the Farmington Republican and ranking GOP member of the House Ways and Means Committee, called for tax relief for two groups impacted by the recession: businesses that received federal loans to keep workers on payroll and are subject to state income taxes on that money; and jobless workers who owe taxes on the $600 per week unemployment top-off payments they received last spring and summer. Garofalo also proposed an income tax exemption for tips by hospitality workers.
“People were skeptical about tax increases happening in the first place,” he said. “It’s not going to happen. The question is what is the state of Minnesota going to do with the billions of dollars it’s sitting on right now.”
DFLers took a much different approach.
“We need to make investments so that Minnesota can recover from the pandemic, address the growing disparities in our state, and build for a strong future for all,” said Senate Minority Leader Susan Kent, DFL-Woodbury. “This may require additional funding by asking the wealthiest and most profitable of Minnesotans to pay their fair share.”
At a virtual rally on Thursday evening of labor unions and progressive groups called to support tax increases on higher-earning Minnesotans and corporations, House Speaker Melissa Hortman predicted the new forecast would “look better” and that there will be those who say “this isn’t the time to be bold. But the truth is, people are still hurting, the needs are still great and this isn’t the time for the status quo.”
The confounding COVID-19 economy
Friday’s forecast showed again that the economic impact of COVID-19 continues to confound the people charged with making predictions. A once-projected $1.27 billion shortfall for the two-year budget period that starts July 1 is now a $1.6 billion surplus, while a surplus for the current budget period — which still has four months to run — grew from just under $400 million to $940 million.
These are major changes from a forecast just three months old and was attributed heavily to two numbers not known in November. The first is the $900 billion federal COVID relief law passed in late December that sent money to individuals and boosted jobless benefits, education funding, rental assistance and health care support. The second is $1.5 trillion, which is the amount expected to be spent in the third major stimulus currently before Congress.
“I feel like we’ve been on a year-long roller coaster; an unwelcome ride,” Minnesota Management and Budget Commissioner Jim Schowalter said Friday. “This change is really large, and unusual under the circumstances in part because it’s so late in the biennium. But we don’t typically see such large changes in federal fiscal policy either.”
Higher than expected revenue is only part of the equation, he said. Two significant spending areas have seen reductions as well: payments to school districts because of declining enrollment; and reduced use of health care coupled with an increased share of those costs covered by the federal government.
Those savings are worth $456 million. Walz has already proposed using state funds to hold school districts harmless for enrollment losses, though Senate GOP leaders are less willing.
The state’s economic and revenue forecasts have swung widely during the pandemic, first because of the economic damage from stay home orders and business restrictions, then from the difficulty economists have had in forecasting the impacts.
Before the pandemic was declared, Minnesota had a $1.51 billion surplus and $2.36 billion in a rainy day account. That was all based on a two-year budget of about $48 billion.
The debate in the Legislature last February was whether and how to spend the extra revenue. By May, a new forecast meant to give lawmakers some sense of what COVID-19 would mean for the state’s finances showed that surplus transforming into a $2.42 billion deficit for the current two-year budget.
[image_credit]MinnPost photo by Tom Olmscheid[/image_credit][image_caption]Gov. Tim Walz said he was open to talking to lawmakers — particularly Republicans who control the Senate — about next steps, but that he did not rule out wanting tax hikes, and that he didn’t want to “negotiate with himself.”[/image_caption]
There was also a positive effect from the state’s share of the $2.2 trillion federal CARES Act, which extended jobless benefits, added a $600 weekly “top-off” to those benefits and sent checks directly to residents. Federal Paycheck Protection Program loans also kept many people on payrolls who might otherwise have been laid off or furloughed.
By November, the deficit was gone and was replaced with a projected $641 million surplus for the current budget period. And the outlook for the next two-year budget period that will begin July 1 shrank from a projected $4.7 billion shortfall to a $1.27 billion shortfall.
Now, surpluses are expected in both the current budget and the next budget. Part of the better numbers result not just from an economy that bounced back sooner than expected but from the fact that it never fell as far as feared. State economist Laura Kalambokidis showed charts Friday indicating that while unemployment reached as high as 10 percent at one point in 2020, the yearly decline in total wage and salary income fell just 0.6 percent.
“These job losses have disproportionately impacted lower-wage workers,” she said. And workers in sectors like hospitality and retail earn less than average in the private sector.
That disproportionate impact of the pandemic is at the center of Walz’s plan to increase taxes on wealthier Minnesotans and corporations while using the revenue to help those most hurt by the economic fallout from COVID-19.
“I don’t ask for the tax hikes to be punitive… but I do think we’re going to have to come to grips as a nation and a state with income inequities and the pandemic exacerbated those,” Walz said. “Yes, the situation is vastly improved but this ability to try and balance out how and who is getting hit the hardest on this is still there.”
Outlook ‘remains volatile’
To make their forecasts, state budget officials look at actual tax collections and past economic activity but also at professional projections for the state and national economies. Friday’s forecast includes projections by the state’s macroeconomic consultant, IHSMarkit, which has continued to upgrade its outlook on the economy.
The positives were the federal relief laws; higher than expected consumer spending in January, which was helped by new federal stimulus checks; and progress against COVID-19 that allowed reopening of more of the economy.
“The U.S. outlook remains volatile and uncertain and depends critically on the path of the pandemic,” the new state forecast states.
Given the ups and downs, how confident is Schowalter that these numbers are reliable enough to use them to craft a two-year budget of more than $50 billion?
“I do put a lot of faith in the numbers, and I do think they’re going to change,” he said.
I’m not a Republican by any stretch of the imagination, but Garofalo’s push to eliminate state taxes for PPP-loans and people on expanded unemployment makes some sense to me. These federal programs weren’t supposed to hit people at tax time; they were meant to be a kind of disaster relief – something to keep businesses from going under and people from going homeless. It was a dire situation and it makes no sense to tax them for it. Since these federal programs (as mentioned in this article) contributed heavily to Minnesota’s unexpectedly rosy budget situation, it should be part of the next budget bill to eliminate any taxes for those who received this aid. Doing so shouldn’t make too big a dent in the expected surplus, but even if it did, it seems like the ethical thing to do.
While the PPP program largely remains a massive corporate bailout on the federal level, struggling Minnesotan businesses (small to mid size at least) shouldn’t have to pay taxes on it. Perhaps Garofalo’s proposals could be incorporated into a broader compromise bill.
While we’re at it let’s just eliminate income tax on all unemployment. At minimum for those under a certain income threshold, maybe $50,000 for single filers and $80,000 for married filers.
This would be a small step to reduce income inequality.
I don’t understand why the DFL always wants to raise taxes. That seems to be the standard no matter what. With all the extra billions, I think it should be targeted to all the businesses forced to shut down yet again. Restaurants, fitness clubs, and the like. And which, by the way, are still subject to capacity limits. That’s who deserves the money. If they want to address disparity issues, raise the minimum wage.
Uh, actually Wala plan cuts taxes on the folks at the bottom.
So you are incorrect.
Right. The DFL has never tried to address income disparities by increasing the minimum wage.
Sure Betsy. Just call it Socialism for businesses. You Republicans love to use that word
Let’s face it. Republicans just like to gripe about taxes. In their world, there is never a good excuse NOT to cut taxes.
Is the economy in a slump? Cut taxes! People need money in their pockets! They may need financial help beyond what a tax cut would give, but they should have thought of that and gone into more lucrative careers so that they could live off their savings!
Is the economy booming? Cut taxes! The state/country spends too much money anyway! Especially on things that don’t benefit ME!
Low and average income families face many burdens. For the most part they accept that as part of life. Very high income households face fewer burdens, but are constantly defending a situation when they pay a lower percentage of their income in state and local income than the merely well off. A small state income tax increase when their wealth has skyrocketed during the pandemic is little to ask.
Well, it goes without saying that no reality of any kind can escape the Republican impulse to re-enact any of it’s various debate games, be it voter fraud or budgets. One cannot imagine any scenario wherein Republicans would NOT demand tax cuts, I don’t think there’s been a single budget cycle in the last 40 years wherein Republicans didn’t demand some kind of tax cut regardless of budget projections.
Of course that doesn’t mean taxes should NEVER be cut or reduced, but it’s always the first and most basic “explanation” for our arguments about tax cuts.
Just as any DFLer would never want to decrease spending and never wants tax cuts. Our state runs spending increases much higher than the rate of inflation for a long, long time now. If we didn’t have that, then the state wouldn’t need to take more and more of our money. We are one of the highest taxed states in the nation and in both good times and in bad, those in the DFL say is more reason to raise taxes. Every time.
Our high wage earners pay more in tax revenue than the ones on the bottom. When does it end?
Bob, the problem with debate games is that they are on a basic level inherently dishonest since they don’t actually require any intellectual integrity or real understanding of the subject matter. Thanks for providing an example.
I don’t play debate games so I’m not going to join you in this re-enactment but I will point out a couple facts:
1) Democrats and DFLers have in fact proposed, enacted, and voted for many many tax and spending cuts over the decades. You’re making a false claim when you declare otherwise.
2) I’m not a big a fan of Bill Clinton, but he had a point when he explained that the difference between his ability to balance budgets and erase deficits and the Republican talent for creating fiscal crisis was: “arithmetic”.
Simple arithmetic dictates that 5% of a million dollars will ALWAYS yield a higher number than 10%, 20%, or even 30% of fifty or even one hundred thousand dollars, but that doesn’t mean the millionaire is being crushed by taxes. Your claim may score a point in a poorly judged debate game, but in real world those who pay a higher percentage of their incomes are the ones with the highest tax burdens, regardless of the dollar amounts.
All you have to do is look any of the Tax Incidence studies and you’ll see that those making more than $250k pay a smaller proportion of their incomes in taxes than everyone else. Not to patronize, but you realize that this means the vast majority of wealthy are left with their net income in tact despite the dollar they put into our tax coffers. 5% of a million leaves 95% of million behind whereas 20% of $50k leaves 80% of $50k behind. Do the math and tell us that the millionaire is more impoverished than the other guy.
These Republican attempts at debate re-enactments always reveal a basic basic basic failure to understand the fundamental characteristics not only of arithmetic, and basic facts in reality, but government, tax policy, and fiscal reasoning. This idea that merely being required to pay taxes coverts every citizen into a victim of oppression is defies the very logic of the US Constitution, so these guys never get to pretend to be the big patriots in the room.
Republicans and “conservatives” ALWAYS step up with the same fallacies and stereotypes because they never get tired of being wrong, or losing. We’ve seen this exact same false claim hundreds of times in the last 50 years (or even longer).
By the way, the: “where does it all end?” gambit is what we call in Logic a “slippery slope” fallacy because it pretends that the mere existence of an observation negates itself. So… no points for that one.
Another observation well worth making is that on basic level, the Republican tax debate re-enactments have been encouraged by “moderate/centrist” neoliberal Democrats for decades. On basic level these Democrats actually bought into the small government fantasy and aligned themselves with the Republican stereotype.
For decades neoliberal economists actually taught their students to view taxes and government revenue as capital being withdrawn from the economy rather than capital being invested and circulated within the economy. This is/was clearly irrational and inconsistent with economic reality. The mental gymnastics required to support this conclusion were quite a marvel to behold until Greenspan ended up admitting that he never imagined self regulating markets that actually self destructed. And so it goes.
The absence of a truly liberal perspective on the American political landscape essentially left the field in the hands of Republicans and Republican sympathizers (i.e. “moderate/centrist” Democrats). Had this Republican debate game met with appropriate and rational responses rather than defacto sympathy it may have collapsed long ago.
The argument that taxes “withdraw money from the private economy” doesn’t stand up to even a moment’s thought, but it is a convenient argument to use when propagandizing people who don’t do a lot of thinking.
It conjures up visions of governments soaking up money from the private sector and hoarding it basement of the city hall, state capitol, or U.S. Capitol, just because they’re mean and greedy. (Projection, anyone?)
In fact, what governments do with tax money is buy goods and services, almost entirely from the private sector, and pay people to do things. Now government employees get a lot of bad press from the right wing, but they’re just people, and unless they’re military personnel living on a base, they buy their groceries, clothes, cars, houses, and entertainment from the same places that private sector employees patronize. Lund’s doesn’t care whether its shoppers work for Best Buy or for the Minneapolis public schools.
“The argument that taxes “withdraw money from the private economy” doesn’t stand up to even a moment’s thought,”
Exactly, yet this is what economics professors at most universities were (and still are in some cases) actually teaching their students. This tells us how irrational an established academic discipline can actually be. This wasn’t politicians, it was economists writing textbooks. And NOW these guys have decided to take their “expertise” out into the “real” world and explain everything from behavior to pandemics. Good luck with that.
It does redistribute money to the government – not my choice on who I’d pick to figure out the best way to spend money.
I’d love to be able to dictate all or some of my tax dollars – military and infrastructure. Then I’d be willing to pay more. But MN Dems are not very careful with our money
Something seldom mentioned in any of these articles is that an increase in the state income tax affects small businesses as much as individuals. Most small businesses are taxed by adding their income to their owner’s salary and taxed at that highest tax rate. The highest rate was increased by 25% back in the Mark Dayton days and now it’s slated to go up again with Watz which will have a huge effect on these small “pass-through” businesses.
I don’t understand your comment. A pass-through business (LLC or S Corp) doesn’t pay income taxes unless, for some reason it elects to be taxed as a corporation. The members/owners are taxed individually on their share of the business’s income.
As an owner of a business you pay yourself a salary for which you pay income taxes. The business itself has an income and the state extracts its income tax from the business by adding the business income to your salary. So in the end the tax you pay as an owner includes your salary (which you enjoy) and your business income (which is used to make future investments, hire employees, etc and for which you don’t personally benefit from until you cash out of the business).
The big problem with this is that the business income is added to your salary which means the business income is invariably taxed at your highest tax bracket. When the state increases the higher brackets to “tax the rich” they are also increasing the tax on the small business.
Small business income isn’t something owners use to vacation in Florida. They use their salary for that. The business income is separate, in a different account, and needed to make sure the business survives.
I’m not saying small businesses should be taxed, just that people should be aware that “taxing the rich” affects the local drug and hardware store, too.
“As an owner of a business you pay yourself a salary for which you pay income taxes.”
Yes.
“The business itself has an income and the state extracts its income tax from the business by adding the business income to your salary.”
No. The pass-through entity pays no taxes, so the income of the business is regarded as flowing through directly to the owner(s). It is up to the owner to decide if her share of the profits will be counted as a distribution of dividends or as salary.
“So in the end the tax you pay as an owner includes your salary (which you enjoy) and your business income (which is used to make future investments, hire employees, etc and for which you don’t personally benefit from until you cash out of the business).”
The owner also takes the same deductions for business expenses and losses that the business would be allowed to claim if it were a taxed entity.
I have been the sole proprietor of my editing and translation business for 26 years. I could incorporate, but it always seemed like an unnecessary complication.
At tax time, the profit or loss (so far, it’s always been a profit) from my business is reported on Schedule C. This amount is one of the income sources listed on my 1040, and it is simply added to all other sources of income to compute my total income.
There is no additional tax on my business per se. In fact, self-employment allows me to deduct all kinds of business-related expenses on Schedule C, and the main disadvantage is self-employment tax, which makes me pay both the employer’s and the employee’s portion of FICA. But the business itself is not required to file a tax return, although it would if I were incorporated.
So far, the IRS has not complained about that point, although they caught a few mistakes in the early years of this particular career.
Yeah, I likewise don’t understand Mr. Quinn’s comment. Even if you’re a DBA and not incorporated you’re personal “income” isn’t added to the business revenue, it’s what’s left over after all business expenses and deductions. You’re not getting double taxed or compounded taxed and your household income is subject to the same tax deductions as everyone else. Yeah, there may some advantages to being and LLC, but then you just convert into an LLC.
The only point I can imagine Quinn might be trying to make is that your salary is taxed as individual income, and your company is taxed as a corporation, but that’s not increasing your personal income tax, it’s just paying a separate tax, just like you pay sales taxes in addition to income taxes.
I’m sorry that I’m not making my point more clear. I suppose it’s all a matter of how you look at it.
I owned an S-Corp for 20 years with another person. We paid ourselves a reasonable salary, similar to what that same job would have been in the corporate world. Every year the profits of the business, after all of its business deductions, were split and added to my and my partners personal income for the purposes of paying tax. None of this money was ever actually put into our personal accounts or used for personal reasons. It stayed in the business account and only used for future repair of equipment, legal fees, health care for employees, and generally to fund growth. Yes, we could have taken this money and moved it to our personal accounts in the form of a distribution, but we never did that. To spend this money for personal reasons would have been like “eating the seed corn” and hurt the business and employees. Ultimately, if you can sell the business this accumulated money is there is some form and you can reap the benefit, but then you have to pay a tax on that gain all over again.
But back to my only point. Small businesses pay tax at their owner’s highest tax rate which when raised to “tax the rich” also raises taxes on small S-Corp businesses. Big corporations, the C-Corps, pay a much lower rate of tax.
“Yes, we could have taken this money and moved it to our personal accounts in the form of a distribution, but we never did that.”
You could have done that, which is the essential point. You had the right to take those profits and do with them what you wanted to. The fact that you chose to be prudent does not diminish the fact that it was still your choice.
My father used to put aside his pocket change and saved it towards taking a vacation every year. He was still taxed on that pocket change when he earned it.
You obviously never owned a business. If you take that money, what happens when business slows down? Or you need a new piece of equipment. Or hire someone?
You obviously missed my point, and I’ve lost interest.
Incidentally, I did run a business for a time. That confers no special wisdom on anyone.
Well, so you paid yourselves salaries and parked some of that money in personal accounts that were held as cash reserves for you business. So… yeah that can lift your income into the next tax bracket depending on how much money we’re talking about. You can park reserve cash in personal accounts if you want to, but you can’t get it there without declaring it as income.
I’m not a tax guy or an accountant so I don’t know if your strategy costs you more or less in taxes, or what alternatives you may have, but we all pay taxes.
You guys are refusing to read my one and only point. I am not arguing that small business should not pay taxes. MY ONLY POINT is that when taxes are raised for individuals THEY ARE ALSO being raised for small businesses and that is seldom mentioned in news articles.
Although workers in large C-Corps may have their income taxes go up, the corporations they work for (think 3M) do not.
Enough of this.
Sorry Mr. Quinn, I don’t mean to obtuse.