As a weary Minnesota battles its way through a pandemic that is entering its second year, the state has many tasks ahead.
It must find a way to bolster small businesses battered by prolonged closures and to aid the many families fighting illness and scarcity. It must reopen schools and remediate students who have fallen behind. It must also figure out a way to vastly accelerate distribution of the COVID-19 vaccine.
All those things cost money.
This week Gov. Tim Walz proposed a budget that would wipe out the state's projected $1.3 billion deficit and generate $1.6 billion in new revenue by raising taxes on the state's wealthiest earners, along with corporations and tobacco and vaping products. That's a lot of money, but Walz says it is needed to aid lower-income families, students and the small businesses that have suffered the most during the pandemic.
Certainly there is little question of the pandemic's devastation. But the state has a delicate balancing act here.
Raising taxes always raises questions. How would it affect the business climate? Would it ultimately cost jobs? Walz's proposals would push the state's tax rates to some of the highest the country.
Economist Louis Johnston, a professor at St. John's University, said businesses seldom leave states because of tax increases unless other, more powerful forces come into play. But decisions about expansion can be affected. Individuals are more mobile, he said, now more than ever. "It's a question of degree," he said. "What the governor has done is set out a budget that says if you want to maintain state services and invest in things you say you need or want, this is what it will cost. It's only about a 2.5% increase in spending. That's roughly the rate of inflation over two years." Johnston added that so-called S corporations, typically small businesses whose owners report profit and loss through individual tax returns, could get socked.
Charlie Weaver, of the Minnesota Business Partnership, which represents the state's largest corporations, said none of those companies want to leave Minnesota. "And none are asking for a tax break," he said. "But what we'd like to see is a careful and serious examination of the state's greatest needs and the most effective and targeted ways to address them. If we need money to deal with the pandemic, fine, but let's make it targeted and do it in a way that keeps the state competitive."
Still unknown is how much Minnesota might get from the promised round of stimulus under President Joe Biden, along with a fresh economic forecast in early March that could shrink the state's projected deficit. Walz told the partnership that if the numbers look good, he would dial back his tax hikes.
That kind of flexibility will be important. Walz may well have to make deeper cuts than what he has proposed and keep spending to the highest priorities. For their part, Republicans should acknowledge that reopening schools, vaccinating an entire state, and helping businesses and families weather the downturn is going to demand adequate resources. Three quarters of the state budget goes into just two areas: education and health care — the two areas most in need from the pandemic.
This is a crisis, and it will require the best efforts of all involved to get through it.