During the coming gubernatorial campaign, taxes will be a frequent subject. But the discussion should beabout the principles that guide tax-policy decisions.
Minnesota's three major political parties have held their nominating conventions, and the endorsed candidates of the Republican, DFL and Independence parties -- Tim Pawlenty, Mike Hatch and Peter Hutchinson -- agree that general tax increases are off the table.
But that's where agreement ends. How revenue should be raised and the purposes for which taxes are used still will be very much the focus of the 2006 gubernatorial campaigns.
Each of the three candidates acknowledges the need for investments in the infrastructure and institutions that are important to Minnesota. Pawlenty, Hatch and Hutchinson all call for reform, for moving to a tax system suited to today's economy and the international marketplace.
But voters must listen carefully and ask questions that matter. Far more important than funding one program over another are the principles that will guide their tax-policy decisions if they are elected. Minnesotans would do well to evaluate the tax proposals of candidates against five principles of a fair and efficient tax system.
Principle 1 -- Tax policy must reflect tomorrow's economy, not yesterday's headlines. Be very wary of election-year gimmicks. Promises of one-time rebates or tax holidays undermine the most essential element of any tax code: predictability. Minnesota's tax system should give as much certainty to businesses making long-term capital investments as it does to individuals saving for retirement.
Principle 2 -- Don't confuse deferred payments with tax cuts. Tax reforms that reward investment and savings strengthen the economy. History has shown that smart tax policy will support new jobs and higher payrolls. These returns, though, come over years, not overnight. It takes time for economic stimuli to work. When tax reform -- often meaning tax reduction -- isn't accompanied with spending cuts, deficits mount. And when deficits mount -- and right now, the federal government is adding nearly $1.8 billion every day to the national debt -- someone will pay.
Unlike Washington, Minnesota can't just run a tab. The state, though, has its own ways of ignoring gaps between tax collections and spending. The result? A portion of today's tax cuts gets deferred to future generations in the form of taxes and higher interest rates on everything from their student loans to mortgages. Tax reform is good. But accountability demands that tax reductions come with spending restraint.
Principle 3 -- Tax rates alone don't measure fairness. Both the perception and reality of fairness are essential to gaining and holding public support for any tax system. But fairness isn't recorded only on April 15; it's not just how much each of us pays in taxes, but how the benefits derived from taxes are distributed. Our goals should be lofty: providing a world-class education for all children, assuring that everyone has access to affordable, high-quality health care and creating roads and transit systems that make short commutes the norm. What we really should be discussing isn't just taxes, but what we expect government to do. Taxes are just the means to pay for government's role.
Principle 4 -- Love and justice are blind, but tax policy should have 20-20 vision. Tax policy drives behavior, and that's good. A tax on tobacco, for example, discourages smoking and in the long-run reduces the costs we all pay for health care. That's a good thing. Other tax policies, though, insulate many of us from the real cost of health care. Workers who receive health coverage as a tax-free benefit from their employers don't always have a visible stake in making cost-effective decisions. Those who pay for health care out of their own pockets know the value of preventive care. Tax policy shouldn't hide the true cost of any purchase. Subsidies -- whether they provide health care for an individual or a new facility for a business -- should be up-front and obvious.
Principle 5 -- Honesty is the best tax policy. Survey after survey shows that Minnesotans would tax themselves more for public investments like education, health care and transportation. But among the voting public, anti-tax sentiment prevails. One reason is the public's lack of trust that new taxes will be spent efficiently or even for the stated purpose. Creating dedicated funds isn't the right answer. Dedicating general taxes for specific uses simply locks in narrow purposes in good times and bad. The better answer is for policy makers to be transparent in setting tax policy, to engage the public in making decisions and to be willing to stay the course, even when political winds are blowing in the other direction.