Let's make Minnesota competitive again

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Minnesota legislators and Gov. Tim Walz have a phenomenal opportunity to enhance Minnesota's competitive position due to the huge budget surplus and rosy fiscal forecast. They have three tools: 1) spending, 2) taxing and 3) systems redesign to save on spending and reduce the need for taxing. Part of the surplus could fund transitions to redesigned systems.

On spending, making high-speed internet available throughout Minnesota would improve competitiveness. Doing better by the most vulnerable among us — effective mental illness treatment, stable housing for all, affordable child care and health care, helping kids catch up on reading, math, social studies and social skills, improved services for at-risk children — would increase spending, but would also expand the labor force (now a serious need as baby boomers retire and families can't afford child care).

Such efforts would make vulnerable people more productive and reduce costs for public safety and criminal justice.

Legislative consideration of systems redesign is extremely rare, but could make better use of tax dollars. The advances over 150 years in transportation, communications, access to information, and specialized knowledge create opportunities. Government services could be delivered more efficiently through a regional approach involving, say, 10 or so regions, instead of a fragmented array of about 85 almost exclusively county-based delivery systems.

Minnesota's state sales and income taxes also could be changed to make Minnesota more competitive as a place to do business and to live. This is particularly worthy of mention because the state's fiscal bounty is fueling calls for big tax cuts and an apparently likely target is to fully exempt Social Security benefits from the state income tax.

It's understandable that full Social Security exemption would be considered. After all, Minnesota is one of only 12 states that taxes Social Security. The fact that seniors tend to vote increases the temptation.

But the idea that exempting Social Security would help hard-pressed seniors living on fixed incomes ignores the facts that the Social Security benefits of lower income seniors already are 100% exempt at incomes up to $32,000 for married couples and then 50% exempt at incomes up to $44,000 — and that many thousands of Minnesota Social Security recipients are much more financially secure than several million younger Minnesotans. The Social Security Administration estimates that only 56% of recipients pay any federal income tax on their benefits.

If there is to be an income-tax cut, the first priority should be to reduce the lowest two rates — the 5.35% rate up to $39,810 and the 6.8% rate up to $158,140 for married joint filers. Lowering these rates would help the roughly half of Minnesota Social Security recipients who pay some income tax on their benefits, and the much larger number of younger Minnesotans whose economic situations are being compromised by inflation. Similarly broad benefits would be produced by increasing the standard deduction.

Such changes would benefit all income taxpayers, including higher income taxpayers. If that were deemed undesirable, the rate changes could be made revenue neutral by slightly increasing the rates that apply only to higher incomes.

The misperception about Social Security taxation is similar to contentions that Minnesota's relatively high income and sales tax rates are competitive problems. When it comes to competitiveness, perception can become reality. But there is an easy fix to this issue.

One solution could be to expand the sales tax base — the types of purchases on which the tax is levied — and use some or all of the new revenue to reduce sales and income tax rates. Because the sales tax is regressive, such a change should be accompanied by a refundable income-adjusted household credit against the income tax.

Similar results could be achieved by repealing the standard and itemized personal income tax deductions in favor of income-adjusted credits for such costs as medical expenses and charitable contributions.

Changes like these would reduce the perception of Minnesota as a high tax state, thereby making it more competitive. Technically simple, they might have bipartisan appeal.

Competitiveness, government effectiveness and environmental protection might all be enhanced if our political leaders took a serious look at transportation funding, the property tax system and the state-local government relationship. I analyzed these systems a decade ago when Minnesota was in fiscal crisis. My key findings were that the property tax and local aids systems produce bizarre results that waste general fund resources, and that Minnesota's business taxation penalizes production in Minnesota. It would be possible to shift the business tax burden more onto firms that exploit the Minnesota market but do not produce here.

The systems redesign needed to achieve these results would be complex and probably would require study, with specific recommendations aimed for consideration in the 2024 or 2025 legislative sessions.

I raise these issues due to the highly disconcerting revelations reported by Minnesota media regarding inadequate Department of Human Services performance, the increasing problems with homelessness, affordable housing, and mental illness treatment, the failures in our juvenile justice system, the lengthy criminal records of the typical violent criminal, the seemingly increasing incidence of young Black men recklessly shooting each other and innocent bystanders, and the need to help our kids recover from the academic and social learning deficits from the pandemic and a questionable approach to teaching reading.

Each of these problems seemingly calls for more public spending. I am saddened that legislators would consider exempting all Social Security benefits from taxation under these circumstances. I think we are better than that and offer the foregoing thoughts as one small contribution to reducing human misery in Minnesota while nudging us in a more competitive, and kinder, direction.

John James is an attorney who was Minnesota's commissioner of revenue, 1987-91.