Proposals to spend the state’s $1.9 billion surplus in this year’s legislative session are quickly being framed as a choice between tax relief for overburdened businesses and individuals or investments in the common good. In fact, there are persuasive cases to be made for both thoughtful tax reform and smart spending. But the best choices will be made if Minnesotans treat the surplus for what it is — a temporary windfall symptomatic of the state’s antiquated tax system.
If the way to measure the success of Minnesota’s recent “tax-the-rich” policy is the progressivity of the state income tax relative to other states, then the 2013 tax-law changes enacted by a DFL Legislature and Gov. Mark Dayton are a ringing triumph. An in-depth analysis conducted by the nonpartisan and highly regarded Minnesota Center for Fiscal Excellence (MCFE) shows how dramatic the impact of higher taxes has been on the state’s wealthy.
For example, a Minnesota married couple with an income of $500,000 was paying state income taxes at a rate about 19 percent above the national average before the 2013 tax changes. Today, that same couple has a state income tax burden that is more than 40 percent above the national average.
Certainly, though, the gauge of a policy that puts Minnesota so far out of line with other states should be more than just whether it produces additional revenue for government to spend. The most important measures are whether the revenue is needed, collected fairly and used wisely. On those points, the policy of imposing new taxes on the wealthy is a mixed success.
By some measures, many Minnesotans are better off today than they were in pre-tax-the-rich days (to the extent such days ever existed in high-tax Minnesota). More people have access to health care, homelessness has been reduced (including, most significantly, among families with children) and more at-risk kids will receive the early education they need to improve the likelihood of school success. An improving economy has helped many Minnesotans, but the positive results of more government spending also can’t be ignored.
Neither, though, can we ignore the cost of those gains. While the ideological debate between “tax the rich” and “no new taxes” will rage as long as there are Democrats and Republicans, the more important discussion is whether Minnesota can continue to be successful with its excessive reliance on individual income taxes — a dependency that has become much greater since 2013.
The state now gets about half of its operating revenue from individual income taxes, more than three times the national average. That is an unsustainable reliance on “the most unstable and unpredictable” source of revenue, as Dayton’s own Department of Revenue stated in a 2013 briefing paper. The income tax produces a lot of revenue in good economic times — especially during bull stock markets — which falls precipitously during slowdowns.
Minnesota’s aging demographics will add to the state’s challenges not just on the spending side (huge new expenditures for health programs), but on the revenue side as well. As economists have pointed out, when more people move from their earning years to their retirement years, revenue from income taxes drops.
These arguments have been made before by economists, tax reform commissions and some gubernatorial candidates — and largely have fallen on deaf ears. The MCFE analysis, though, raises a critical point that should unite liberals and conservatives.
The center’s study concludes that the state “has reached a practical limit in advancing further income equality objectives by raising revenue through the income tax system.” The report says that any increases in spending on public programs to reduce inequality will “almost certainly need to be supported by new revenue streams from … more regressive forms of taxation.”
To put that conclusion in the language of nonwonks, our income tax system is tapped out. If yet more government spending is the solution needed to close economic and education disparities, Minnesota would need to take a chapter from the social democracies of Europe and employ a tax system that can collect a lot of revenue without harming economic growth — a system that emphasizes broad-based consumption taxes, which fall heavily on the nonwealthy.
In Minnesota, there is little political or popular appetite to go down that road. So the state has a problem.
Yet solving the gaps in educational achievement and economic opportunity is not optional. Minnesota’s population is projected to grow by about half a million in the next 15 years. Virtually all of the growth will be among people of color. Minnesota’s future wealth — the money needed to maintain roads, protect the environment, hire and retain quality teachers and do all the other things we deem important — will depend on growth in the private-sector workforce. We will need those new workers, largely people of color, to have the ability to move into the higher-skilled, higher-paying jobs of the future.
Yet, despite the economic recovery and state government spending that has increased by about 50 percent from the first year of Gov. Tim Pawlenty’s term through the current fiscal year, poverty is increasing in Minnesota, especially among children of color. About half of African-American children, 38 percent of American Indian children and 30 percent of Hispanic or Latino children live in poverty. And, not unrelated to these levels of poverty, the state’s academic achievement gap remains stubbornly large.
The state’s tax system should be overhauled to make it less dependent on taxes on income and investments and more balanced with consumption taxes. But that is a political hurdle too high to climb in these contentious days. There should be bipartisan support, though, for three questions that, if asked by legislators and the governor about every state program, could help close the economic and academic gaps by making more efficient use of public and private resources.
• Compared with what? Policymakers too often frame complicated issues as bilateral choices: Should we spend money on program X or not? In fact, rather than a simple yes or no on a single program, policymakers would do well to identify clear goals, then zero in on the most effective solutions.
Gov. Dayton’s pitch for making pre-K available to all Minnesota 4-year-olds is a case in point. Few argue against the general benefits of universal pre-K. But Dayton’s proposed $150 million expenditure is merely a first-year down payment on the program’s total cost to the state and school districts, with much of the money benefiting middle- and upper-income Minnesotans. It would absorb resources that could better be spent to help the kids most in need.
Universal pre-K may be a worthwhile discussion, but only after the state assures that resources are targeted to the most critical efforts, assuring that every child enters kindergarten with basic preparation for success.
• Is it working? There are all kinds of explanations for the double-digit increases routinely seen in state government spending, and some of them are valid. But a key cause is that politicians are better at adding than subtracting. Too many programs are funded despite unclear or unrealistic measures, then never held accountable.
Worker training programs are a good example. A well-trained workforce is one of Minnesota’s greatest economic assets, and the state has wisely invested heavily in programs to develop marketable skills. But rarely are questions asked about the effectiveness of these programs. Legislators would do well to take a step back and evaluate what’s working and what’s not, whether publicly subsidized programs are doing the training that employers should be doing at their own expense and whether programs are reaching those most in need with the training that will be most valued in tomorrow’s marketplace.
The same could and should be asked of every government program.
• Are we curing the disease or just treating the symptoms? Earlier this year, New York Times columnist David Brooks argued in a television interview that “the problem is not that we don’t care (about poverty). We don’t know what to do.” He is only partly right. On one hand, many policymakers aren’t sure what to do, so they try a little bit of everything, often spending a lot of money to, at best, nibble at the edges of meaningful solutions.
More difficult is acknowledging that many solutions are known; it’s just that they are difficult or politically unpopular. And they sometimes aren’t obvious.
A Harvard study found that access to transportation is more strongly correlated with social mobility than are other factors more commonly acknowledged — more than levels of crime, student test scores or the percentage of two-parent families in a community. Affordable housing is another long-term solution to ending poverty and promoting academic success. A study by the University of Minnesota found that math proficiency among fifth-graders in families lacking stable housing was about one-third as high as among all students.
Transportation, housing and other “upstream” solutions carry not just political but cultural baggage. They open the door to less concentration of the poor in urban centers. They require leadership from policymakers who both care about ending poverty and recognize the scope of the solutions that will be required.
The political debate over “tax the rich” and “no new taxes” is almost irrelevant to these larger questions of economic and academic disparities. Minnesota taxes its wealthy. The money largely has been spent — sometimes wisely, sometimes poorly. And the challenges of poverty and school success remain.
We need to ask better questions and demand real answers.
Tom Horner is a public-relations consultant and was the Independence Party of Minnesota’s 2010 candidate for governor.