After reaching an agreement with Governor Pawlenty late on Sunday, the legislature went into a brief special session to formalize the terms. The good news is that Pawlenty’s insistence on no new taxes won the day; the legislature had to find the funds within the existing revenues. Moreover, most of the “unallotments” made by Governor Pawlenty in 2009 that were disallowed by the Minnesota Supreme Court have been enacted (but not made permanent). Like many businesses and families, our elected officials had to figure out how to live with less. The state is still left with a projected deficit of about $5.8 billion for FY 2012-13. That number will be higher if the nearly $2 billion shifted from K-12 education in 2011 is not repaid.
MINNESOTA
FREE MARKET INSTITUTE
P.O. Box 120449
St. Paul, MN 55112
651 294 3593 • phone
651 294 3596 • fax
Minnesota’s Budget Impasse Resolved With No New Taxes
May 17th, 2010 by Kim CrockettMinnesota Budget Solutions Coalition; Balance Minnesota’s Budget Without Raising Taxes
May 11th, 2010 by Kim CrockettThe Minnesota Free Market Institute is a proud member of the the Minnesota Budget Solutions Coalition. The Coalition is an informal alliance of non-profit organizations formed to solicit ideas from the public and members of the coalition on the state budget.
The Minnesota Budget Solutions Coalition released a brief in 2009 demonstrating that the budget can be balanced without raising taxes (for a copy go to http://www.mnbudgetsolutions.com/) . Now more than ever, innovative ideas are needed in St. Paul to balance the budget and get us on the road to recovery and prosperity. Raising taxes during an economic recession will have dire consequences. As our legislators debate in St. Paul, employers all over the state are deciding whether to hire (or fire) a new employee, invest in new equipment, or leave the state for a friendlier business climate. Minnesota already has one of the highest per-capita tax burdens in the nation. Taxing the so-called “rich” will not solve our budget problems. Every time we raise taxes on individuals and business, we are showing people the door. Our policy brief contains creative ideas that both parties can embrace if they are serious about living within our means. It also contains some strong medicine that will be hard for any politician to swallow. Please share these ideas and encourage our leaders to return Minnesota to economic health.
Note: The Coalition is busy updating the policy brief with figures from the current budget. Watch for its release this summer.
Congress to Raise Debt Ceiling by $1.8 Trillion
December 11th, 2009 by Adam Axvig
Congressional Democrats are poised to vote on raising the national debt ceiling from $12 trillion to $13.8 trillion. The vote could come before the end of the year, an effort to minimize possible political blowback in the 2010 midterm elections. The story elicited a number of comments by lawmakers. In an interview with Politico, House Appropriations Chair David Obey said, “…the credit card has already been used. When you get the bill in the mail you need to pay it.”
Groups of conservative Democrats critical of runaway spending have emerged in both the House and Senate. One such member is North Dakota’s Sen. Kent Conrad, chair of the Senate Budget Committee. Conrad teamed up with New Hampshire Republican Sen. Judd Gregg to introduce legislation to create a budget task force (press release) to plot a more sustainable fiscal course.
The legislation has 31 co-sponsors including Minnesota’s own Sen. Amy Klobuchar. In a press release yesterday, Klobuchar said:
“We have already seen what happens to our economy when Wall Street is fiscally irresponsible. We cannot let our federal government do the same thing,”
“We need to change the way Washington works when it comes to our long-term fiscal outlook. This is not about being a Democrat, a Republican or an Independent. The Bipartisan Fiscal Task Force is about trying to get something done to stop unsustainable spending and restore our financial stability.” (Press Release, “Klobuchar Sponsors New Bipartisan Fiscal Task Force Legislation to Confront Nation’s Budget Crisis”)
The task force would have 18 members, ten Democrats and eight Republicans. The committee would also have bipartisan co-chairs.
Senator Gregg posted a fact sheet on the legislation here. For more information on the Bipartisan Task Force for Responsible Fiscal Action Act of 2009, click here.
The Value Added Tax
I posted on the Value Added Tax (VAT) back on October 9th when House Speaker Nancy Pelosi said in an interview that the controversial tax was on the table.
The Value Added Tax is in the news again this week because of an article in yesterday’s New York Times suggesting a VAT is gaining support on and off Capitol Hill. According to the article, the VAT is gaining support as the only feasible way to raise enough revenue to keep up with runaway federal spending.
Pelosi isn’t the only influential lawmaker eyeing a value added tax. Senate Budget Committee Chair Kent Conrad also believes a value added tax should be on the table. In an interview with the Washington Post in May, Conrad said,
“There is a growing awareness of the need for fundamental tax reform…I think a VAT and a high-end income tax have got to be on the table.” (Washington Post, “Once Considered Unthinkable, U.S. Sales Tax Gets Fresh Look,” May 27, 2009)
Whether through spending cuts, a new task force or a national value added tax, it is becoming clear that the cure for paying off the federal credit card isn’t as simple as raising the credit limit.
Pelosi Says Value Added Tax on Table
October 9th, 2009 by Adam AxvigIn an interview with Charlie Rose this week, House Speaker Nancy Pelosi said that one of the the options on the table was the value added tax (VAT). Pelosi believes that the current tax system puts American industry at a significant disadvantage in the global economy and that a value added tax would help level the playing field.
Senate Budget Committee Chairman, Senator Kent Conrad of North Dakota agrees. In an interview with the Washington Post, Conrad said, “I think a VAT and a high-end income tax have got to be on the table.”
The tax would represent a major shift for the federal government toward a more European system of taxation; the value added tax is compulsory for European Union member states. The tax is seen as a remedy to the United States’ fiscal woes.
Indeed, the value of the tax as a revenue generator is substantial. In fiscal year 2000, each 1% VAT would have generated $37.8 billion in revenue, according to a Congressional Research Service report. Leonard Burman, director of the Tax Policy Center claims that a 25% VAT could pay for health care for every American (pdf pg 14).
The VAT does have significant drawbacks. According to the Washington Post, the price for a gallon of milk would jump from $3.69 to $4.61 under the 25% VAT. The price increases would fall hardest on the poor, making many on the left wary of instituting such a regressive tax.
The White House indicated it would consider the tax but acknowledged the political realities of attempting such sweeping reforms.
A Hiring Tax Credit?
October 7th, 2009 by Adam AxvigThe federal government is tossing around the idea of creating a tax credit for businesses hiring new employees. The bipartisan credit has been gaining momentum as employment numbers continue to frustrate economists. According to the New York Times, several key economists, including Nobel laureates and former cabinet members, support the measure.
The credit could cost upwards of $20,000 per job, according to research by the Upjohn Institute for Employment Research, a relative bargain when compared to the hefty price tag of $92,000 per stimulus job.
The measure is likely to have some clear opposition from both sides of the aisle. Many on the right do not like tax breaks with strings attached, while many on the left will see it as just another corporate handout lacking a guarantee of results.
Many states have implemented similar programs with varying degrees of success, though some question the sustainability of such a program. Others question whether the dangled carrot (a few thousand dollars) is big enough to entice an already imperiled business sector to hire additional employees, or would they just be getting an extra few thousand dollars for employees they were going to hire anyway.
The White House is said to be seriously considering the proposal.
A Good Time for a Pause in State Spending Spree
May 29th, 2009 by John La PlanteBoth legislative leaders and opinion leaders have criticized Gov. Tim Pawlenty for “not compromising” with the legislature-for refusing to increase marginal tax rates. But as citizens are making do with less, it’s time for state and local governments to do the same.
Let’s review a few of the ways in which the recession is already affecting people in the private sector-that is, people who pay for government.
We’re getting pink slipped. Nationally, unemployment is at a 25-year high, and the possibility statistic may increase is haunting everyone who is not a government employee.
We’re taking furloughs. Companies that prefer not to lose workers, especially highly skilled ones, are using furloughs. A survey earlier this year by the firm Watson Wyatt Worldwide Inc. found that 17 percent of companies had used furloughs. Some companies are using both furloughs and other temporary pay cuts, together with layoffs, to survive the recession.
We’re watching our dollars and buying less. We’re shopping less at Best Buy and more at Wal-Mart, replacing vacations with “staycations,” and repairing consumer products rather than replacing them.
On the other hand, the recession isn’t so bad if you work for government. That’s because it has been a tale of two workforces, one subject to the vagaries of the market and the other not. Steve Malanga, a senior fellow at the Manhattan Institute, drew this contrast in a recent op-ed in the Wall Street Journal:
“Some five million private-sector workers have lost their jobs in the last year alone, and their unemployment rate is above nine percent according to the BLS [Bureau of Labor Statistics]. By contrast, public-sector employment has grown in virtually every month of the recession, and the jobless rate for government workers is a mere 2.8 percent.”
Here in Minnesota, major private companies such as Best Buy and Thomson Reuters are laying off people, offering buyouts, and generally shrinking their workforce. Medtronic announced Tuesday it was parting ways with 1,500 to 1,800 companywide, about 600 in the Twin Cities. By contrast, the American Federation of State, County and Municipal Employees and the Minnesota Association of Professional Employees, two large unions for state workers, recently accepted a two-year contract. True, it calls for no increase in the pay scale. On the other hand, the unions have resisted any talk of furloughs.
The union leaders are doing their jobs - protecting the financial interests of their members. But when your income is down, you re-evaluate your spending priorities. It’s time for legislators, acting as the agents of the citizens, to apply the same discipline that we apply in our personal lives.
Since at least 1960-the earliest year for which I could find records-spending in Minnesota has gone up each biennium. This is true of both the general fund and of all funds as a group.
In the average biennium since 1960-61 in this state, all-funds spending went up 19 percent, and general-fund spending increased 20 percent. Over this same time, by contrast, personal income has gone up an average 13 percent per biennium. In other words, Minnesota residents are devoting a greater portion of their well-earned income to government.
All-funds spending went up 28 percent each biennium, until the Reagan area. Since the 1980-81 biennium, the average increase has been “only” 12 percent for both general and all-funds spending. Even more encouraging, personal income has actually grown faster than spending on government: Since 1980-81, personal income has grown 13 percent every two years, just slightly outpacing spending on government.
Still, the historic trend is clear. For every dollar Minnesotans earned in 1960, they earned $29 in 2007. But they have had an unsustainable appetite for government: For every one dollar Minnesota spent on state government in 1960, it spent $49 in 2007.
Minnesota has a long history of creating taxes, including an income tax in 1933 and a sales tax in 1967. It has continued to tighten the screws on taxpayers by extending measures such as ones requiring withholding (1961) and taxing out-of-state professional athletes (1989). Along the way, the states has enacted surtaxes (1949, 1981), increased them (1982) and extended them again (1983). It even put a surtax on the bonus our country gave to people who were drafted by the military (1957). And of course rate increases are nothing new, either: The first increase in the income tax came a mere four years after the tax itself was established.
Raising tax rates would certainly be consistent with Minnesota history. But it would deny citizens the opportunity to let the growth of government match (or better yet, lag) the growth of the private sector rather than exceed it.
Government should borrow a page from the private sector, in which hard times focus leaders’ minds on reevaluating business methods and jettisoning non-core functions and activities.
Should opponents of tax increases “compromise”? Only if they wish to waste the opportunity presented by the recession to bring the relationship of the political sector and the private economy back into balance.
Many of us have had to make do with less-and do less. It’s time for Minnesota and other governments to do the same.
(A slightly different version was printed in the May 21 Saint Paul Legal Ledger Capitol Report.)
What Good Government Looks Like
May 28th, 2009 by Margaret MartinHennepin County Commissioner Jeff Johnson was elected last year and began his term in January. He’s already figured out that County Government has one of the most sweeping powers to levy taxes and yet has the least transparency and accountability of any level of government in how it spends taxpayer money because much of its activity goes unreported in the media. In a bid to rectify that in his own county, Johnson has decided to blog about his experiences and what he finds at Hennepin County Taxpayer Watchdog. Watch this space.
Interest-Group liberalism — Root, Root, Root for the Home Team
May 28th, 2009 by Craig WestoverWeary of watching the Twins’ futility in the home of those damn Yankees last week, I looked for a winner on my bookshelf. I seized upon the optimistically titled ‘The End of Liberalism.’ Although its predictive value is somewhat depreciated by its 1969 copyright, the classic text by political scientist Theodore Lowi is as insightful today as in the heyday of ‘The Great Society.’
Lowi coined the term “interest-group liberalism” to describe policy-making through deference to organized lobbies. Interest-group liberalism rests on two fundamental beliefs: Government is a positive force and a champion of good, and virtually all interest-group demands are legitimate. Consequently, a primary function of government becomes balancing and advancing any and all organized petitions.
The “end of liberalism” comes about when the appeasement process evolves the perfect storm of unrestrained bureaucratic growth, an unmanageable web of conflicting regulations and an unsustainable skyrocketing budget. Are we there yet, at the end?
Not by a long shot, and the reason is simple: Interest-group liberalism is the prevailing political philosophy of the American public, of Democrats and of Republicans — all the post-election Republican talk of a return to “conservative values” and “conservative principles” notwithstanding.
Slate writer Jacob Weisberg picked up on Lowi’s theme in a 2005 piece analyzing the governing philosophy of then President George Bush. When Democrats were in power, Weisberg noted, they were beholden to unions, lobbies for women’s rights, civil rights and gay rights, senior citizens lobbies, welfare advocates, Hollywood and trial lawyers. The hallmark of Democratic governing was a focus on policies that meant more to those groups than mattered to the welfare of the country at large.
When Republicans assumed power in 2000, the implied promise was the end of liberalism. Instead, Bush-era Republicans practiced their own brand of interest-group liberalism. Out with the old and in with military contractors, evangelical Christians, wealthy investors, gun owners and an alternative conservative media — new regime, new supplicants, but the same process.
Like the repentant weight-watcher who will do whatever it takes to slim down except diet and exercise, after getting hammered in the past two election cycles Republicans seem willing to do whatever it takes to restore conservative “values” — except adhere to conservative “principles.” Consider the touting by Republican Rep. Erik Paulsen of a legislative amendment he authored.
“Our military veterans who own businesses face unique challenges, and government must ensure the policies in place to assist them are achieving their goals,” Paulsen said in a press release. The “Job Creation through Entrepreneurship Act,” to which Paulsen’s amendment ensuring benefits for veterans was attached, also includes specific largess for women, Native Americans and a new grant program for Small Business Development Centers. It passed the House 406-15.
Paulsen and Republican Rep. John Kline voting for a bill that champions small business and veterans is certainly in keeping with “conservative values” (GOP Rep. Michele Bachmann did not vote). But using public funds to create private benefits for multiple interest groups by expanding the federal bureaucracy and deficit spending most certainly violates the conservative principles of limited government and fiscal responsibility (not to mention constitutional fidelity).
Such interest-group liberalism turns logrolling (legislators trading votes) from “a necessary evil into a virtue.” So at a state level, when southern Minnesota legislators earmark state funds for an international volleyball center in Rochester, there is nary a peep from their Arrowhead compatriots who expect reciprocal support in anticipation of a photo-op at a Duluth arena expansion. Both outstate areas support a budget-draining light-rail system between Minneapolis and St. Paul. A combined financial obligation on all Minnesotans, these projects respectively mean more to Rochester, Duluth and the Twin Cities than they matter to the welfare of the state at large.
The irony is that by practicing interest-group liberalism, both Democrats and Republicans are conservatively protecting an unsustainable status quo. Chances of actual reform — say, replacing the inefficient corporate income tax with a more efficient broad-based, low-rate sales tax — is problematic, not because of any flaw in economic logic, but because Democrats and Republicans both have supporters threatened by the reform. Their here-and-now concerns matter more, politically, than the future economic welfare of the state.
While many are outraged at government largess to interest groups other than their own, few are eager to gore their own oxen for the sake of principle. Nonetheless, unless we the people demand reform, it’s more likely the Twins will sweep a series in Yankee Stadium than we will ever achieve an “end of liberalism.”
This commentary originally appeared in the St. Paul Pioneer Press Thursday, May 28, 2009.
Taxing the Rich to Compensate the Rich
May 1st, 2009 by Craig WestoverIn Part 2 of its series on the University of Minnesota, the Star Tribune writes “Being a world-class research institute requires top-notch faculty and facilities.” It notes a specific example –
Mikhail Shifman is the kind of professor universities fight over. His discoveries, research and teachings are key reasons the University of Minnesota’s physics department is highly regarded.
So when Penn State tried to recruit him, the U countered with a bump in salary, a renovated office and $25,000 per year for five years to pay a research collaborator. In total, it was less than Penn State’s offer, Shifman said, but the U won out.
The article also notes the national and international competition for star-power professors.
In its effort to be among the top-three research universities, the U has focused on hiring superstar researchers who require “compensation, plus facilities, plus support staff, plus instruments,” said professor Judith Martin, chair of the University Senate Finance and Planning Committee.
“This isn’t a local market,” Martin said. “Particularly in the sciences, it’s an international market. That’s not always well-understood by students and, from my perspective, the public. People think anybody could teach a class.” …
Recently, the U has faced “a real escalation” in competition to keep the star professors, said Provost Thomas Sullivan. “The reputation of a university rests on the reputation of its faculty,” he said.
During the 2007-08 school year, the Twin Cities’ faculty of about 2,300 received 111 offers from other universities that the U countered. The year before, there were fewer than 100. The counter-offers usually include a mix of “additional salary, additional lab space and greater support for graduate students,” Sullivan said, and their cost is borne by individual colleges or departments.
An inference from the STrib story that will certainly be made by the tax increase crowd, is that the state needs to generate more tax dollars so it can spend more on higher education to keep the University of Minnesota competitive. The state needs to provide more tuition aid so that students aren’t faced with tuition increases. And of course, those tax increases must be paid for by “the rich” – you know, like those highly sought after college professors that the University is paying well over six figures to attract and keep.
So, when the University increases student tuition, not all of the increase goes to pay a highly skilled professor for the actual value delivered to the student and the University; the student also pays increased tuition to cover Minnesota’s higher individual income tax rate on high earners. Lab technicians, professors without tenure, cafeteria workers and other University employees with relatively interchangeable skills, receive lower wages than they otherwise might because the University is not just compensating the star-power professor for his value students and to the University; the University must overcompensate the professor for his actual value to compensate him for Minnesota’s tax code.
There’s an ironic circularity in all this: The state, we are told, needs to raise taxes on the state’s highest earners so the state has the money to invest in higher education and student tuition aid to compensate for increased costs of attracting star-power professors – who require salaries that put them among the state’s highest earners.
As I noted in a recent Pioneer Press column -
A uniquely skilled individual commanding a high salary can work just about anywhere he chooses. The mobile worker, the kind who pays the most taxes, will gravitate to where his net income, not gross income, is highest. To lure and keep highly productive individuals in Minnesota, Minnesota employers, including school districts looking for superintendents and universities seeking nationally known professors, must pay higher gross salaries to compete with low-tax states.
Higher salaries for those already earning top dollar don’t just increase the salary gap; they contribute to higher consumer prices and lower wages for non-mobile workers — the rest of us. When a company pays top-earners more to compensate for high tax rates, it means fewer dollars available to pay the rest of a company’s employees, further increasing the real wage gap irrespective of what the Tax Incidence percentages indicate.
Sensible, economics-based tax reform, “economics” being one of the subjects taught at those institutions of higher learning, might consider reducing income-taxes to make Minnesota more attractive to highly skilled and mobile individuals. Certainly we should not make it even more difficult and expensive for the University by raising taxes on the people it is trying to hire.
DFL spins tax talk away from the real issues — tradeoffs and reform
July 15th, 2009 by Craig WestoverIndeed, before the Legislative Advisory Commission, state economist Tom Stinson estimated Gov. Tim Pawlenty’s spending cuts will cost Minnesota 3,000 to 4,700 jobs. He also modeled the impact of a tax increase on job loss. The Pioneer Press reported “the $1 billion income tax increase that the Democratic-controlled Legislature passed and Pawlenty vetoed in May would have cost the state an estimated 1,000 jobs over the next two years.”
Unfortunately, in eagerness to report or spin Stinson’s numbers, the press, progressive think tanks and DFL legislators misunderstood the purpose of Stinson’s work and didn’t get the basic story straight. In the measured terms of a professional, Stinson confirmed to me that the coverage of his testimony was “not entirely accurate” and interpretation of his data was somewhat “simplistic.”
His job as an economist is not to make political or policy judgments, Stinson said, but to provide a common basis of information and understanding from which better political and policy judgments can be made.
I fear he misreads the motivation of the DFL-dominated commission.
When House Majority Leader Tony Sertich, DFL-Chisholm, declares that “Governor Pawlenty’s budget proposal is going to cause three to five times as many job losses in the state as the legislative proposal,” he is “not entirely accurate” and “simplistic.” In his eagerness to exploit Stinson’s data, he misses larger policy implications. And that is the problem.
First, Stinson’s research did not analyze the DFL bill vetoed by the governor (as reported and repeated). The vetoed bill included income tax increases and pass-through tax increases on credit card companies and on alcohol products. Stinson was asked to evaluate the governor’s unallotments in terms of job loss. A professional, he also modeled a hypothetical $1 billion income tax increase (over two years) because he was “trying to make sure people understood that there are no easy answers.”
In other words, Stinson came not to praise or bury Pawlenty. Short-term job loss is one data point among many trade-offs inherent in the budgeting process, but it is not the only trade-off. In fact, the trade-off between tax increases and spending cuts results from a higher-level trade-off — between a balanced budget and making a recession worse.
Progressive think tanks often quote Nobel laureate and Columbia University professor Joseph Stiglitz saying that a reduction in government spending is more harmful to the economy in the short run than an increase in taxes. What they fail to note (but Stiglitz emphasizes) is the balanced-budget trade-off that puts policy-makers in a situation that is ultimately harmful to the economy.
“It is worth emphasizing,” Stiglitz writes, “that any state spending reductions or tax increases are counterproductive at this time: they restrain the economy at time when it is already slowing.”
So, let’s be honest: The debate over tax increases or spending cuts is not about improving the state’s economy. The choice is not between “good and bad” or “better and worse”; the choice is between “bad and worse.”
Stinson’s model does not make value judgments about how the loss of specific job types affects the state economy. Nor does it consider the value of freeing unproductive resources for other uses, nor does it provide any criteria for making those judgments. Those are among the political and policy questions that must be addressed on a case-by-case basis, which won’t happen while the Legislative Advisory Committee remains intent on misusing data to beat up the governor.
The legislative end game is neither “stupid” DFL tax increases nor “evil” GOP spending cuts (nor some really stupid and evil “bipartisan” combination); the end game is enabling Minnesota to be a competitive player in the global competition for the capital that creates productive jobs in the private sector. To correct that problem requires reform of the tax system and a redefinition of the role of government, and that won’t happen if the Legislative Advisory Council stubbornly continues turning data points into talking points, which makes for provocative newspaper headlines but precious little progress.
Craig Westover is a contributing columnist to the Pioneer Press Opinion Page, a senior policy fellow at the Minnesota Free Market Institute (mnfmi.org) and a member of the Republican Party Liberty Caucus. His e-mail address is [email protected].
This commentary originally appeared in the St. Paul Pioneer Press July 15, 2009.
Posted in Blog Posts, Commentaries, Craig Westover, Tax Policy | 1 Comment »