MINNESOTA
FREE MARKET INSTITUTE

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The Utter Folly of ‘Taxing the Rich’

March 13th, 2009 by Pat Anderson

This article originally appeared in the Star Tribune on February 23, 2009. Comments welcome there.

To date, legislators who eventually must resolve the looming $6 billion state budget deficit have been trial-ballooning spending cuts and tax increases while looking over their shoulders with fingers crossed hoping that the federal stimulus package will help bail them out.

The bill President Obama signed last week promises about $2 billion in general-fund dollars for Minnesota in one-time money. That will certainly help with the 2009-10 budget cycle, but one-time money doesn’t address the sustainability, or lack of sustainability, of current and projected levels of state spending.

Certainly state government can work smarter and improve efficiency, but given current spending levels, it is also imperative that Minnesotans rethink how and what services government is meant to provide. Reform is not simply one option.

Nor is it an option, as some on the left are suggesting, to maintain state spending at current levels, use the bailout money to help plug the budget hole and increase income taxes on the top wage earners to fund the rest. That doesn’t solve the systemic gap between revenue and spending, and it’s bad policy in a recession.

Under Minnesota’s progressive income tax, the bottom half of filers, those households making under $45,000 per year, pay about 5 percent of all state income taxes. Overall, they pay less than 2 percent of their household income to the state for income taxes.

The top 10 percent, households earning over $130,000, pay an average rate three times higher. It’s about 6 percent individually and 55 percent of all state income taxes collected. These households are generally two-income professionals with children. They are middle-aged families making house payments and saving for college tuition and retirement while meeting day-to-day expenses.

A progressive system? Absolutely. So why are some folks proposing to raise the top tax rate again?

The progressive argument is that high wage earners “can most afford” to “pay for a better Minnesota.” The fact is they can’t. Not now. The reason the state has a deficit is because, given our progressive income tax structure, in times of recession when higher earners see investment earnings tumble or lose their jobs, state revenue is hit disproportionately hard.

The top 5 percent of households have incomes over $180,000 and pay 43 percent of all state income taxes. This group includes many small- and medium-size businesses whose owners who run their businesses as S corporations. This means that business income is passed directly through to them on their personal tax returns.

According to the Minnesota Chamber of Commerce, 92 percent of all businesses flow their business income through a personal tax return, where it appears as personal income. In fact, from that “income,” the owner must take his personal income and find money to plow back into the business to make it grow.

Today, when many employers are simply trying to keep the doors open and the staff employed, increasing already high taxes is not a tax on the wealthy so much as a tax on a struggling small-business owner, which puts his working-family employees’ jobs at risk. In a recession, tax increases equate to layoffs. The employer’s tax burden has to come from somewhere.

Taxes on the “wealthy,” like so many progressive policies, actually work against the stated objective. If the tax burden gets too high, the “wealthy” simply pick up and leave for warmer climates. Homes are cheap in Florida, and a dollar stretches a lot further when there are no state income taxes. When these people move, they take the jobs they provide and the taxes they pay along with them. And, ironically, to woo new high-earners with job mobility to the state, companies must offer higher wages to offset higher income taxes, in effect increasing, not decreasing, the wage gap that seems so “unfair.” Mobility is much easier for citizens and businesses in the 21st century.

I would hope that before any legislators consider a class-warfare offensive, they remember who pays for state programs. Punishing hard work and ingenuity does not bode well for the long-term health of our economy.

Punishing job creators so that we can expand non-sustainable government programs makes no economic sense. Even President Obama has stated that raising taxes is not an appropriate action to take in a recession. I urge his Minnesota disciples to take him at his word.

Pat Anderson is president of the Minnesota Free Market Institute. She is a former state auditor.

Pioneer Press “Pat Anderson: A Risky Venture for North St. Paul”

February 19th, 2009 by Pat Anderson

There was a time when being a city official was fun. You never had to really worry about where revenues were coming from. Property values increased every year and tax revenue, too, even without higher tax rates. Those days are gone, and state-aid cuts are coming with a flurry as the state scrambles to balance its own budget. The recession has hit city hall.

Most city officials are trying to figure out how to cut their budgets permanently without harming essential services. It’s not much fun, but it’s the right thing to do.

In this environment, you’d think the idea of spending millions on a new nonessential service would be off the table, especially when several private companies already provide this service.

Not so in the city of North St. Paul. The city council proposes to build a cable/voice/ Internet system they call “Polarnet” to compete with private providers. On Feb. 24, North St. Paul voters will decide whether to authorize the city to sell $18.5 million in general obligation bonds to pay for it.

As a former mayor, I understand why cities might contemplate the idea of trying to expand wireless or broadband service. There may be concerns about having the “best” technology available to every home and business. There may be the misguided idea that they could make money from a city-owned system.

But where it’s been tried, it’s usually failed, and taxpayers end up on the hook for millions of dollars.

Cities are allowed to create certain enterprises, such as a self-sufficient water/sewer system or an ice arena. They create a business model at break-even or better, sell revenue bonds for capital costs (such as building the water tower and pipe systems) and charge rates to customers that cover operating and debt-service costs. In other words, your city water system usually supports itself through your water bills rather than your tax dollars. Should the water system fail financially, taxpayers are not responsible for paying off the bonds. The bondholders simply lose their investment.If a city gets into a business where it cannot break even, it usually sells general obligation bonds. This means the city guarantees that taxpayers will pay off the bonds. This is the case for the North St. Paul “Polarnet” proposal. This is why a referendum election is required. North St. Paul taxpayers are being asked to go into debt to lay their own fiber network to compete against the current private providers.

Several cities have looked at this issue, and most ultimately scrapped their plans.

The city of North St. Paul is proposing to dig up the roadways, lay miles of fiber and then compete with the ever-expanding number of private providers. According to the city’s consultant, if the plan is to work, 70 percent of all homes in North St. Paul not only will have to pay for these services but also will have to choose to switch from their current provider (Qwest, Comcast or satellite) to the city-owned provider.

Beyond the philosophical debate on whether this is even the role of government, the real questions for North St. Paul have to do with financial ramifications. Is the proposal realistic? If it fails to meet projections, what is the downside to the city and its residents?

According to the city’s projections, even with a 70 percent hook-up rate, it will take until 2016 for the system to turn a profit and another nine years before all the previous years’ losses are paid and the system becomes a net positive. The year 2025 is a long time from now.

Should the system fail to meet projections, it would have to be subsidized by tax dollars or sold at a loss.

Even running the North St. Paul numbers out to 2030, the best-case scenario (70 percent hook-up) is that the city will “make” $7.5 million over the life of the project. This assumes revenue of a little over $150 million, which means if usage is below 65 percent, the project will be a money loser, short-term and long term.

Perhaps we now know why Windom (population 4,500) is Minnesota’s only municipality with an operational fiber-to-the-premises enterprise offering voice, video and data services. In 2003, Windom was the first to try this, but by 2008 it was considered a financial failure.

Given these recessionary times, no city should be venturing into anything that could be a net negative to its budget. North St. Paul should follow the lead of other cities and cancel the project. In this case, the voters can cancel it for them.

Pat Anderson is president of the Minnesota Free Market Institute. She is a former state auditor of Minnesota and mayor of Eagan. Her e-mail address is pata@mnfreemarketinstitute.org.

And you thought the spending in the stimulus package was bad….

February 12th, 2009 by Pat Anderson

There is so much in the Stimulus Package that we are only now learning about and likely to learn about after it passes.  And don’t feel that you are the only one uninformed. According to a recent Rasmussen poll, 58% of the American people believe that most members of congress don’t know what’s in it either.

And there’s more than just 800 billion dollars of spending to grow government. There is a wealth of new programs, expanding government and eroding our freedoms in this new piece of legislation.  It creates new avenues of dependency and strips away our rights to privacy by growing the welfare state and bringing us socialized medicine through the back door.  To read more about how the Stimulus bill reverses the 1996 welfare reform read “Stimulus Bill Abolishes Welfare Reform and Adds New Welfare Spending” by Robert E. Rector and Katherine Bradley at the Heritage Foundation.  The healthcare portion of the bill alone should be a shocker for conservatives of all stripes and it’s worth taking a serious look at.

A new partial subsidy for COBRA coverage is part of the bill. (COBRA is the federal law under which unemployed workers are allowed to buy into their previous employer’s health plan.)  Since they are paying both their own and what the employer’s contribution was formerly, many workers do not opt for COBRA due to the expense.  If COBRA were a worker’s only option for insurance this might make some kind of sense but it isn’t.  Most workers can qualify for other plans that better suit their needs and have costs that are aligned to their expenses.  By subsidizing what may be an unemployed person’s LEAST COST EFFECTIVE health insurance choice, the federal government is now underwriting group health insurance plans, with varying levels of coverage and cost at the expense of taxpaying employers and workers. This  further burdens them and increases the likelihood of more layoffs and more employers going out of business.  Yes, it’s entirely possible that you could have your employer benefits cut or lose them entirely so that somebody else can “afford” their Cadillac healthcare plan.

The House bill expands Medicare to the unemployed.  Medicare has been expanded many times in recent years and together with the expansion of S-CHIP, which was originally intended to cover children in poverty, we are fast coming to the point where everyone qualifies for federally funded healthcare under one mandate or another.  Once enough people fall under these mandates we will see employers finding ways to jettison health insurance coverage.  If the Feds will pay for it, why should they?

And let’s not forget that what the government spends money on, it controls.  Both versions of the stimulus bill have measures that establish programs to fund “comparative effectiveness research”.  There is even a “Federal Coordinating Council for Comparative Effectiveness Research” whose purpose is to mandate what treatment will or won’t be given.   The House Committee Report states “those [items] that are found to be less effective and in some cases, more expensive, will no longer be prescribed.”  A clearer statement that the Federal government will be deciding what treatment you will receive could not have been made.   Good luck to you if what works for most people doesn’t work for you.

It shouldn’t surprise anyone that the new administration thinks that it knows what’s best for us in healthcare.   President Obama’s  appointee for Health and Human Services Secretary (before he was bounced for  non-payment of his own personal income taxes)  former Senator Tom Daschle wrote a book published last year  entitled “Critical: What We Can Do About the Health-Care Crisis.”  In it, Daschle unleashes such gems as doctors need to “learn to operate less like solo practitioners.”  He wants us to forgo expensive treatments and not to expect medical progress to continue to advance because it’s driving up costs.   Forget about quality of life enhancing treatments if you are a senior citizen.  Daschle thinks that you should learn to embrace old age like the Europeans do.  In the United Kingdom, a government board approves or rejects treatments using a formula which includes the age of the patient. Treatments for younger patients are approved more often than treatments for diseases that primarily affect the elderly.  That’s pretty much the same thing as saying “suck it up seniors, you’re on your way out anyway!”  What’s cost effective for you and what’s cost effective for the government could wind up two very different things and with the government controlling the entire system, you’d be out of luck.

The Health Information technology portions of the bills are also chilling for anyone who cares about their privacy and the right to control who has access to their health data.  In order to conduct research on what treatments are effective, widespread use of patient information will be necessary.  And no longer would you simply be an anonymous data-point.  The government will track you, your treatment and your doctor in order to mandate the compliance that will be required with treatment standards. Currently, for hospitals to use your private information, you must give your consent, but what if the Federal government mandates your consent to use your personal information in order for you to be treated?

Once the Federal government controls the entire healthcare system, from payment to treatment, we’ll have no choice.

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