Some budget solutions are a breeze

  • Article by: LORI STURDEVANT , Star Tribune
  • Updated: May 7, 2011 - 5:56 PM

Hint: We're talking about the state equivalents of yacht subsidies.

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A worker climbs aboard a super yacht at Trinity Boats in New Orleans.

Photo: David Martin, Associated Press

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Into my "obscure-but-maybe-useful" file went this May 4 item: U.S. Rep. Tim Walz, D-Minn., introduced legislation to eliminate taxpayer subsidies for the purchase of luxury yachts.

My bet: Even if you're the biggest tax detester on your block, you're receiving that news with this reaction: Huh? Yachts are subsidized by federal taxpayers?

Yep. If your yacht has a bed, a toilet and a kitchen, it's a second home for federal tax purposes, with deductible home mortgage interest. Unless it's your third or fourth "home," of course. You can only deduct interest payments on two.

If you're in the yacht business, you're probably going to accuse Walz of calling for an evil, job-killing tax increase.

But if you're everybody else, you likely agree with Walz: "We're going to have to make some hard decisions to tackle our national debt, but this isn't one of them."

Permit a paraphrase of that point for state lawmakers' consumption: You've got to balance the state budget in the next few weeks (or not, in which case you'll be inflicting more misery on yourselves and this state than you expect).

You'd do well to start scouring the state tax code for the Minnesota equivalents of yacht subsidies. Look for the breaks embedded in the tax code that benefit people who don't need taxpayer assistance, and root 'em out.

It must be acknowledged that the official line from the Legislature's GOP majorities is that they don't need to look for more revenue for the state's 2012-13 budget, even though it's $5 billion short.

But it also must be noted that the GOP's proposed fix to said budget contains a little north of $1 billion in presumed cost savings that no credible nonpartisan analyst will vouch for.

And that plugging that hole with something other than wishful thinking is only the first step toward the somewhat larger budget that legislators will likely have to send eventually to DFL Gov. Mark Dayton to win his signature.

It looks to me like legislators could use some yacht subsidy eliminations -- some ways to raise revenue that don't bump up tax rates, don't hit the poor and middle class, and don't make (most) Minnesota businesses less competitive in the national and global market.

Fortunately, the crackerjacks at House Research prepared a guidebook in 2009 that identifies those very possibilities. "A Review of Selected Tax Expenditures," prepared at the request of then-taxes committee chair Ann Lenczewski, DFL-Bloomington, was suddenly a hot document last week among a nerdy bunch of state tax policy wonks and the journalists who cover them.

It examines several dozen tax breaks -- income tax subtractions, deductions and exemptions, and purchases that are spared from the state sales tax. How much money would the state treasury gain if they were gone, and who would pay it?

The box at right describes some of the answers. It turns out that there's quite a difference between, say, ending the sales tax exclusion for grocery purchases, which would sock the poor and middle class, and ending it for legal services, which are more like yachts.

Or ending the income tax's working family credit, which plainly helps the poor, and the exclusion of interest income from state and local government bonds, which lower-income people typically don't buy.

That bond income exclusion deprives the state treasury of $114 million in 2010-11. It belongs at the top of legislators' "junk it" list, argues University of St. Thomas associate professor of business economics John Spry.

Eliminate it, and government bond interest rates would rise. Governments would pay more to borrow. But the tax exclusion denies government more than those borrowing costs.

Spry says it also invites excessive borrowing. "If you said you wanted to give LGA [state aid] to the municipalities that run up the most debt, you'd be run out of town. Yet that's what we are doing with this exclusion," he said.

This and other "tax expenditure" policies do something more. They raise the taxes paid by everyone who can't benefit from them.

The next time you buy a washing machine or lawn mower, you'll pay a relatively high sales tax in Minnesota compared with other states in part because purchases of legal services and clothing aren't taxed here.

Your income tax rate is as high as it is in part because Minnesota gives favorable tax treatment to government bond interest income.

A DFL governor who wants to shift the state tax burden toward upper-income earners should appreciate how doing away with tax breaks could achieve that goal.

Republican legislators who want to avoid raising tax rates and dream of even reducing them in a deficit year should see that eliminating tax breaks might make that possible.

And all who care about getting the most public good from the public purse shouldn't think only about how the purse is spent.

They should think about what's being withheld from that purse, and for what reason. They should ask whether the withholding is buying a public good, or a privte yacht.

Lori Sturdevant, editorial writer and columnist.

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  • THE POSSIBILITIES

    Ending these tax breaks would primarily affect upper-income taxpayers:

    •Sales tax exclusion for legal services.

    •Interest exemption for state and local government bonds.

    •Charitable contribution deduction.

    •JOBZ business tax breaks in selected zones.

    •K-12 education expenses income tax subtraction.

    •Marriage credit.

    Ending these tax breaks would disproportionately affect lower-income people:

    •Sales tax exclusions for groceries, drugs, home heating fuel and water/sewer services.

    •Working family tax credit.

    •Child care credit.

    Source: House Research

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