Gridlock at the Minnesota State Capitol over transportation funding, disposition of the surplus and bonding can be ended with six simple steps.
First, expand the consumer sales tax base and slash the rate. Tax essentially all consumer purchases, including clothing, services, food and health care. The rate might fall to as low as 4 percent and still provide ample transportation funding.
Second, protect low-income Minnesotans against sales tax regressivity with an income-adjusted household credit against the income tax. If this is too complicated to complete in the next week before adjournment, don’t extend the sales tax base as far (e.g., leave food and health care out) or cut the rate as much, pending a hard look at long-term options.
Third, set the budget reserve at 5 percent of forecast biennial revenue and use the surplus to get there. If there is money left over, spend it on infrastructure.
Fourth, pass a gargantuan bonding bill. This would reward legislators of both parties for their courage in expanding the sales tax base. Interest rates are low, and the bonding project activity would both provide needed infrastructure and boost employment.
Fifth, slightly reduce the top income tax rate. This would reward Republicans for extending the sales tax and spending more on infrastructure than they would otherwise do, just as that spending would reward DFLers for broadening the sales tax base and slightly cutting the income tax, which they would not otherwise do.
Sixth, convene a hard look at long-term options for redesigning Minnesota’s state-local fiscal system for the 21st century. This could be timed to yield proposals for election debate, or after the election. Either way, we could have an interesting election season — Republicans arguing for more emphasis on the sales tax, or for cutting all taxes and spending, and DFLers arguing to restore the income tax cut, either for more spending or to reduce the sales tax.
I could present such a long-term plan within days of being asked. I probably am not alone. Here are elements of state-local fiscal system redesign that the hard look should consider.
• Repeal the gas tax and perhaps the Highway User Tax Distribution Fund.
• Redesign property tax incidence and use. Eliminate class rates, using tax credits to encourage owners to treat their land right to help solve Minnesota’s water-quality crisis. Repeal the state property tax on business property and cabins. Eliminate use of the property tax for human services and diminish its use for schools (or eliminate it in favor of a local income tax). Eliminate the incentive to develop outside cities through an urban development encourager taxing newly developed property outside cities at a higher, citylike rate. These changes would free up property tax base to fund transportation and other infrastructure.
• Reduce local and increase state business taxation by coupling property tax redesign with a state business activities tax on apportioned gross margin. This would reduce the need for local development subsidies; reduce the business property tax differences between cities with high and low property wealth (automatically encouraging business expansions where they are most needed), and shift business tax burden off production in Minnesota onto exploiting the Minnesota market, resulting in Minnesota producers paying less and out-of-state businesses selling into Minnesota paying more.
• Broaden the individual income tax base, and reduce some or all rates.
• Redesign the human-services delivery system to eliminate the county-based delivery system dating from the 19th century that makes no sense in the 21st.
• Finally, redesign local aids to protect taxpayers, not local governments, and to provide transitions.
Republicans are right to be wary of gas tax increases. The tax is a historical accident; increasing reliance on it virtually guarantees recurring transportation funding crises, because increased fuel economy and a gradual switch away from gas as a fuel will continue to plague it as a main source for transportation funding. The evidence suggests that it falls disproportionately on those who drive more, who are disproportionately found in Republican-leaning districts. Also, widely varying fuel economy undermines its rationale as a user fee, and much of the need for road repairs comes from heavy trucks, not autos.
Between the income-adjusted household credit and the property tax refund program, Minnesota’s tax system could be made less regressive than it now is. Or legislators and the governor could go in the opposite direction on the theory that job creators will create more jobs if those less able to pay, pay relatively more.
Minnesota’s transportation funding system is broken, the state has major infrastructure needs and it is in a strong fiscal position — and interest rates are low. State-local fiscal system redesign could make it more fair, reliable, understandable, efficient, environmentally friendly and competitive, in structure and in operation.
John P. James is a senior fellow with the Center for Policy Studies and an attorney who was Minnesota’s commissioner of revenue from 1987 to 1991 under Gov. Rudy Perpich.