Dane Smith: Three fundamental facts for Minnesota

  • Article by: DANE SMITH
  • Updated: December 3, 2008 - 6:58 PM

Governments shrank, the top got more and paid less, and the economy is underperforming.

During our decade-long experiment with disinvestment in the public square, Minnesotans have been asked to believe this: Government is the problem; it's too big, and less of it is the answer. And we can tax-cut our way to broader prosperity and balance our budget crises without new state revenues.

Brace yourself for more such bromides, spiced with fresh anecdotes and selective statistics, when we get a state government budget forecast today that projects billions less in revenue for the next two years.

Before we swallow that stuff again and proceed to slash the commonwealth further, keep in mind three fundamental facts:

First, our local and state governments already have been significantly downsized -- as a share of the economy, as a percentage of our income, and relative to other states.

Second, top-earning Minnesotans pay a smaller percentage of income in state and local taxes than other income brackets, even as their share of the pie has grown disproportionately, and can afford to pay modestly more.

And third, Minnesota, in its new status as an average-tax state, is chronically underperforming the national economy for the first time in decades. To elaborate:

1. Honey, we shrunk our public sector.

From overcrowded classrooms to closed bridges to reduced hours for essentials as basic as court services, the signs of a shabbier community and public disinvestment are proliferating.

The facts verify the perceptions. The most comprehensive measure of government size and scope is Minnesota's Price of Government (POG) index, maintained by Minnesota Management and Budget (formerly the Department of Finance). The POG shows that total state-local revenues as a percent of income stood at about 16 percent in 2008. That's a full percentage point lower than the typical POG that prevailed for much of the last three decades and all through the 1990s.

One percentage point difference amounts to more than $2 billion less per year, which would account for much of the projected latest shortfall of $4 to $6 billion over two years.

At a recent University of Minnesota conference designed to answer the question "Are We Becoming Average?'', the Minnesota Department of Revenue's answer was "yes" on taxes. From a typical ranking among the top 15 states in revenues as a percent of income, Minnesota has fallen to about 30th place in the most recent ranking based on Census Bureau statistics.

We reached that lower standard in part through large and permanent income-tax cuts in the late 1990s, benefiting mostly top-end households, followed by the hard-line no-new-taxes approach to balancing budgets that debuted in 2003-04 -- the last time we faced such a dire forecast.

That response was a dramatic departure from previous decades, when Minnesota policymakers raised taxes by modest levels during budget shortfalls. And in both the 1980s and '90s, the economic recoveries were more robust than in this tax-cut decade.

2. The myth of the overtaxed elite.

Taxes are lower than they have been for decades, but they are particularly low for those at the top end. And the unfairness, or regressivity, of the total system is substantial and widening.

The Revenue Department's 2007 Tax Incidence Study shows that those in the top 1 percent of incomes -- households earning more than about $350,000 -- pay about 9.6 percent in state and local taxes. Those in the top 5 percent of incomes -- households earning roughly $150,000 or more -- pay about 10.5 percent of their income in state-local taxes. Most everybody else pays about 12 percent of their income in taxes.

Back in 1990, those at the top also paid a smaller percentage of their incomes in state and local taxes, but the spread between them and the rest of the state's taxpayers was less than a point. Meanwhile, national studies show that those at the top have an unprecedented share of income and wealth, more than since the Great Depression.

We do not need to blame our most successful citizens for the widening gap; a complex array of factors, ranging from globalization to an economy that rewards higher education, comes into play. It is, however, fair to ask that they be part of the solution in the latest budget crisis.

3. From new car to jalopy.

Wealth and income disparities would not matter much if the economy were humming and at least some gains were being made by families at the middle and lower reaches of the income ladder. That actually was occurring during all those years when Minnesota stood out as a high-tax state. We had the most robust economy in the Midwest and held our own against high-growth, low-tax Sun Belt states, while maintaining top quality-of-life indicators that they lacked.

But a Star Tribune story on the budget forecasters' process ("Revenue forecast won't be pretty," Nov. 29) quoted one top economist as observing that the state's economy has become more of a "jalopy'' than the shiny new car we once boasted about.

Tax cuts and small government were sold to Minnesota as a jobs-producing proposition. Instead, on indicators from income growth to unemployment, we have become more like other states in their lackluster economic performance.

Minnesota has survived budget crises and will do so again. The real peril comes if we lose the memory of what made this a great state and the vision required of a smart investor. And as we refashion tax and budget policy, it shouldn't be hard to remember what happened the last time we shrank before a great challenge.

Dane Smith is the president of Growth & Justice, a progressive policy research group that focuses on economics and tax-and-budget issues.

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