The case for paying higher taxes, happily

  • February 20, 2010 - 4:15 PM
Put down your coffee cup. Minnesota's state government needs to raise taxes by as much as $1 billion a year. Pick the cup back up. That's only four-tenths of 1 percent of our annual $230 billion in personal income. And it would still leave the total portion of our income paid in taxes smaller than it was a decade ago.

What's good for General Mills usually is good for Minnesota. And despite the state's gigantic revenue shortage, some proposals at the Capitol to give further tax cuts and credits to businesses deserve a serious look.

But the assumption that more tax cuts are the only way to strengthen the state's economy is just plain wrong. It misses the truth on the flip side: What's good for the public also is vital for business in the long run.

Consider these crucial economic assets, delivered via government and paid for with taxes: Education, unlocking human potential and productivity. First-class transportation systems. Speedy, impartial courts. Healthier children and workers, with elderly folks living in dignity.

For the past decade in Minnesota, we tried to have it both ways. We thought we could keep what is essential to our general prosperity without having to pay for all of it. Instead, we were told by antitax conservatives that job growth fueled by lower taxes would pay the bills.

Instead, our economy is weaker, and our once-famous quality of life is in decline.

Proponents of "no new taxes" continue to insist Minnesota is a big-government state, inhospitable to business growth.

In fact, no state has cut government revenue and spending more than Minnesota since 1999. A 2008 Revenue Department analysis concluded that Minnesota is "just about average" in terms of its combined state and local tax burden.

By the state's high standards, public investment is at a modern low. State Economist Tom Stinson often displays a chart showing that Minnesota's "price of government" (total state and local revenues as a percent of personal income) has dropped from a high of nearly 18 percent in the mid-1990s to about 16 percent now. That amounts to $4.6 billion a year less than if we had kept the public sector financed at the 1990s level -- a period when our economy was outperforming almost every other state in the Midwest.

After a decade of cutting corners and underinvesting, our state's public structures are showing the strain, in ways that damage business interests. A few examples:

•Supreme Court Chief Justice Paul Magnuson has been traveling around the state to make the case personally for no new cuts to Minnesota's stressed court services -- taking on the governor who appointed him. Courts and the rule of law are essential not just for public safety but also for conflict resolution and contract enforcement for businesses.

•Delays and deteriorating roads -- due to the state's fast-growing congestion and crumbling transportation infrastructure -- build higher costs into the prices of products produced or sold here.

•Our public schools are being forced, in effect, to loan money to state government. Students at Minnesota's two-year colleges pay the third-highest tuition and fees of all 50 states. And Minnesota faces a growing achievement gap between white and nonwhite, and between affluent and poor households. These trends represent an erosion of Minnesota's educational advantage, the bedrock of our economic success.

•We now have the largest percentage of Minnesotans without health insurance in recent history. Some 480,000 children, men and women now lack health insurance, and that population is expected to increase this year. State assistance with medical coverage, a program slashed deeply by budget cuts, actually helps remove pressure on employers to cover this expense.

From the current depleted baseline, the governor proposes to cut the state budget by another $1.2 billion. More tax cuts would inflate that damage.

A time-tested tool

Here's a wiser, sustainable course toward restoring the economy and closing a three-year projected shortfall of about $5 billion: Cut more judiciously, vigorously pursue government redesign to improve efficiency and raise taxes by as much as $1 billion a year.

Raising taxes is a time-tested budget-balancing tool that has directly led to fiscal stability, higher bond ratings and economic growth. Since the 1960s, every Minnesota governor -- including two Republican governors who have repeatedly criticized the no-new-taxes strategy -- raised or tried to raise tax revenues when facing crisis-level shortfalls. So far this year, 29 other states have raised rates or broadened taxes to address budget imbalances.

The first and best option should be to restore personal income tax rates closer to 1999 levels. Nationally, those fortunate to be at the top of the income ladder are enjoying a greater share of income and wealth than they've had in almost a century. Wealthy households actually pay a smaller proportion of their incomes in state and local taxes than any other income group.

Substantial increased revenues also could come from broadening the sales tax base, which currently exempts services and clothing, or by repealing other tax breaks. By taxing more-diverse items in the growing service economy, the overall rates could actually be lowered, and tax credits or thresholds could be employed to reduce any disproportionate impact on low-income consumers. Politically, it might help to adopt these changes in stages or as temporary rate increases.

Minnesotans are right to want the right price for government and the best quality possible. We need to set goals and improve government performance. Initiatives by foundations and civic groups are underway to redesign our most costly governmental systems so that we get better results for the dollars we spend. And we must insist that our new governor bring energy to restoring Minnesota's tradition of good-government innovation.

But it's also time to reaffirm the connection between intelligent investment for public benefit and the state's wealth and quality of life. Minnesota's enviable economic performance didn't spring entirely from individual effort, private capital and low business and labor costs. It came from community-minded people who built and preserved public assets -- and who gladly paid for them with taxes.

Charlie Quimby is a former small-business owner and a communications fellow for Growth & Justice, a nonprofit research organization that advocates for greater economic equality. Dane Smith is president of the group.

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