Past Minnesota tax cuts are today's problems

You're going to hear a lot about state income tax rates between now and May 20, Minnesotans. It can't be helped.

That's what happens when the "no new taxes" rule that really meant "no income tax increases" is finally lifted at the Capitol, after a dozen years of keeping legislators' hands off the working levers of state government's most powerful revenue-raising machine.

DFL control of the House, Senate and governor's office, delivered by the voters of 2012, means that this year's question has not been whether rates would rise, but by how much and for whom.

Adjusting the rates and the incomes on which they fall was never exactly a routine matter at the Legislature, I'll admit. But the fact that Minnesota passed through the perils of two recessions and battled unrelenting budget deficits without fiddling with those levers is a testament to the chokehold that "no new taxes" had on this state's governance.

To illustrate how comparatively easy it once was to adjust the personal income tax, consider a tax rate tale of yesteryear.

The year was 2000 — the heyday of the dot.com bubble. A lot of seemingly smart people were wondering whether the Internet bonanza could keep good times rolling indefinitely.

The 1999 session was the first for third-party, "give-it-all-back" Gov. Jesse Ventura, and the first in 14 years in which Republicans controlled the House. It had produced a whopping $2.9 billion state tax cut that, among other things, took down the rates in all three of the state's income tax tiers. The bottom one went from 6 percent to 5.5 percent, the middle from 8 percent to 7.25 percent, and the third-tier rate — the one that gets the business community's attention — went from 8.5 percent to 8 percent.

The end-of-session negotiations seemed hopelessly stalled until Sen. Roger Moe, then serving his 20th year as DFL majority leader, trotted out a formula he had used to good effect when government was divided 19 years before — the one-third, one-third, one-third deal. Each of the three negotiating parties — the House GOP majority, Senate DFL majority and Ventura — would decide what to do with $569 million.

The deal was announced on a Sunday. By 7 a.m. the following Wednesday, the session was over, and the new state income tax rates were 5.35 percent, 7.05 percent and 7.85 percent. The big winners were the state's biggest earners. Married joint filers with state-median incomes would get a measly $42 income tax reduction, this newspaper reported. Defenders of the new rates shrugged. The rich are the big taxpayers, too, they said.

On a percentage-of-income basis, that wasn't true. It would become less true over time.

But for today's purposes, the salient flaw in the case for the 2000 rate cuts was its prediction that state government could easily afford them. Eighteen months later, the state was in serious deficit trouble. The 2002 session started a tide of red ink that, with scant interruption, continues to this year. The 2002 election brought a new governor and more legislators to the Capitol who had taken a "no new (income) taxes" vow. The 2000 rates held.

Absent their promise, what might have happened? It's a good guess that at least the 2000 rates would have been rolled back to 1999 levels, possibly as early as 2003. More adjustments likely would have ensued as lawmakers noticed that only the wealthy were experiencing income growth, while the share of total Minnesota income that flowed to the bottom 40 percent of earners dropped below 10 percent in 2006 for the first time since such records had been kept, and has been falling since.

The Department of Revenue's gurus couldn't tell me on short notice last week what a return to the rates of 1999 would do for the state budget today. But, interestingly, they had the impact of the 1998 rates at their fingertips. Those rates would bring state coffers an additional $2.45 billion in 2014-15 — approximately the sum that many DFLers want to add to the budget this year.

Gov. Mark Dayton's idea is to keep the 2000 rates for everybody but the top 2 percent of earners. They'd get nicked with a new fourth tier — 9.85 percent, falling on that portion of married joint filers' taxable incomes exceeding $250,000. House and Senate DFLers have different ideas involving lower rates applying to more filers.

No matter what numbers they settle on, you're bound to hear that the increase is too big. The critics will have a point. Tax changes ought to be made in mincing steps, not giant strides. Big changes often distort economic activity in unpleasant ways.

But "no new taxes" prevented a dozen years of more advisable tweaks. As the economy was transformed by two recessions, gaping income inequality and growing demand for the education state government provides, Minnesota kept collecting income taxes as if it were 2000.

So get ready for four weeks of news about tax rates, Minnesotans. You'll be hearing about "overreach." When you do, another word should spring to mind: "overdue."