Thursday, December 1, 2011

Minnesota tax reform: It's not all give and takes

Recently the Minnesota Commissioner of Revenue Myron Frans met with about 35 business people from the Mankato area for a "listening session" on tax reform.
His charge from Governor Mark Dayton was to take some time in the next year to develop proposals to be presented outside of an election cycle which may polarize positions rather than have a productive discussion.
But rather than an objective look at tax structure, it was clear from the presentation that a bulls-eye is still on higher income Minnesotans.
Frans presented slides entitled "While income is increasingly concentrated at the top ... the Top 10% now has 50% share of income" and "The tax burden is being shifted to those with the least ability to pay....The middle class is paying a larger share of Minnesota taxes."
Frans' conclusion: The top 10% of income earners are not "paying their fair share."
This has been a DFL refrain for several years now and it was unfortunate that he led the discussion to business people who may have a different interpretation of the data.
But, Frans did point out that over time, we have shifted a greater share of state revenue coming from property tax at the expense of sales tax. And for the individual income tax, the state has dramatically increased the number of adjustments and credits favoring special interests.
So the question posed by Frans and the state legislators in attendance to business people was "What are you willing to give up?"
The response, instead, was "Let's talk about spending first before we talk about shifting sources of revenue." In other words, have we had a serious discussion about the role of government, prioritizing those roles and determining how to fund those essential services. Afterwards, we can debate if we want other services funded and how.
Easier said then done and, frankly, not in the purview of the commissioner's mandate from the governor. So, let me go back to the charge of "what are we willing to give up?"
Here's a suggested list I gleaned from discussions with people in the community and from tax reform advocates on "what to change."
--Remove sales tax exemption on food, clothing and services. In exchange, lower the rate. Arguments against: "Increasing" taxes on food and clothing is regressive. Response: While it may be regressive, there are elements that suggest wealthier pay more overall for higher priced goods they buy...and of course, a sales tax is a "choice" tax. A T-bone steak will bring in more revenue than the same tax rate on a bag of Cheetos.
--To support reimbursement of health care costs for the needy, increase taxes on tobacco and alcohol. Arguments against: Again, it is a regressive tax. But also unreliable since people may cut their consumption and thereby we have less revenue. Response: Well then it improves the collective health of users who in turn may not need as much health care in the future.
--Phase out LGA but allow cities to impose their own local option taxes to fund services its constituents want. Regional centers, like Mankato-North Mankato, can increase their local option sales tax to help fund infrastructure being used by those people visiting the city. Arguments against: Small cities don't have enough traffic to garner large revenue support for infrastructure services and would be at a disadvantage. Response: Life is never a level playing field. Is it really the responsibility of the state to determine who are the haves and the have nots?
--Look at the estate tax and reduce the amount of taxation (as much as 40% on wealthy Minnesotans). Arguments against: The proportion of population being elderly will be substantial in the coming years and a great degree of revenue will be lost if we cut their taxes. Response: Those elderly may be leaving the state in order to avoid paying the estate tax. These are the least likely to use services (health subsidies, schools, etc.) but will still be here to help fund them.
--Cut the business incentives for new equipment and R&D that favor corporations or specific business activities. In turn, increase tax breaks for small businesses that are the true drivers of job growth. Arguments: This will put us at a disadvantage in attracting major employers. Response: The real concern now is with employers who already are in the state and trying to survive.
There are no easy answers to our budget problem. However, there was a winning formula in 1986 when President Ronald Reagan signed into law a sweep tax law reform. It was done with bipartisan help but it also was backed up with real economic analysis supporting the effect rather than partisan political positioning.
It was whittled away over time by special interest lobbying and legislators looking for their own perks. This is the normal course of how things evolve and we need to get on a path of constantly looking at regular periods of reform that has as its goals -- fairness, simplicity and business competitiveness.