The StarTribune’s front page today features a Minneapolis family saying, “We’re feeling trapped” by rising city property taxes. Mayor Rybak sounded like he was feeling trapped,too-especially by city pensions.
The front page also featured the last article in a series called “The Reckoning; Minnesota Confronts its Budget Crisis” that included the Minnesota Free Market’s Pension Reform Project and former State Auditor Pat Anderson (page A11), who has joined our effort to educate Minnesotans about public pensions, the state’s unfunded liabilities and other tough budget issues facing the state. Here’s Pat:
“There isn’t a push to get rid of pensions; it’s to lower dollars going in,” said former State Auditor Pat Anderson, a Republican who joined the Minnesota Free Market Institutes’s Pension Reform Project.
Anderson and others say the pension system encourages risk-averse employees who never leave. The longer they stay, the more seniority they acquire and the sweeter their pension becomes. That, she said, leaves little room for more entrepreneurial types.
“If we want to attract good people to government, who aren’t careerist, you need a system that works,” she said.
The article, called Public Pay, Benefits Set Off New ‘Civil War’ summarizes the conflict and issues well. We have a shrinking private sector and a growing public sector -and they have been on a collision course for years. It took a severe economic downturn to finally get enough people to look up and see the problem that we have been pointing to for years. What the public sector has failed to grasp is that folks in the private sector are maxed out and feeling insecure about the future. Public compensation packages have gone well beyond the old trade-offs. Private sector workers feel betrayed, taken advantage of. It has become very personal.
Some public employees feel “demonized” by this discussion. (Many that we know, by the way, are also critical of the system.) But the best thing they can do is ask themselves and their unions how they can be part of the solution-instead of repeating the same old class rhetoric. (Which includes references by the Strib to the fact that both Anderson and Governor Pawlenty are eligible for pensions; does eligibility for a pension mean one cannot be a critic of state pensions? One would think the Strib would either hold the snarky commentary or admire them for looking critically at their own benefits.)
As the article notes, the problem is no longer theoretical—and the bond markets are reacting to unfunded pension liabilities and other state debts. Rating agencies are taking a closer look at the issue. “Moody’s Investor Service, a premier credit-rating agency, issued a report this year that added pension obligations to its formula for determining a state’s fiscal health….Minnesota has one the best credit ratings in the nation, but adding its unfunded pension liability drops it to the middle of the pack.” Minnesotans like to pat themselves on the back for our fiscal prudence; these kinds of “reality checks” make it clear that our fiscal house is not in order. (New Jersey’s bond rating was just lowered due to its pension debt. )
The Federal Reserve devoted much of its fedgazette in January to Pensions in Minnesota and other parts of its district.
Pensions are just one part of the overall budget discussion taking place at kitchen tables and conference tables all over the state. We have also talked recently about “Reinventing the Workforce” in the public sector. We note here that the private sector is in a constant cycle of reinventing itself-it’s the great thing about free markets. You either figure out a better way to make that mousetrap, or you go out of business. The state may never be subject to quite the same competitive forces (sometimes called “destructive creativity”) of capitalism but why can’t we design state employment to be more competitive-or at least lined up with the sector that pays the bills? This recession has revealed many bad and expensive habits adopted during the “fat” years. Let’s let the “lean” years lead us to a state government designed to deliver core services in a way that encourages individuals and their families to take personal responsibility while maximizing individual liberty and free markets. It’s a tall order, but we are a tall people.
The Utter Folly of ‘Taxing the Rich’
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.