Sunday, April 17, 2005
Rethinking Minnesota Taxes
A Changing Share of the Pot
"The cost of government in Minnesota today is significantly lower than a decade ago, but the little guy is picking up a greater share of the tab," writes Mike Meyers, Star Tribune National Economics Correspondent.
"State and local revenue this year will represent 15.7 percent of total Minnesota personal income -- a drop from 17.7 percent in 1995, according to a projection by the state Department of Finance. Over that 10-year period, the tax burden has shifted gradually toward people of average and small means and away from the state's most prosperous residents.
"The trend is likely to continue.
"'The tax system is expected to become slightly more regressive from 2002 to 2007, because for higher deciles [the highest-earning groups of Minnesotans] income growth is expected to outpace growth in tax liability, while the reverse is true for middle to lower deciles,' the Department of Revenue said in a report released in March.
"Put simply, taxes -- in particular, property taxes -- are growing faster than the incomes of most people. But the incomes of Minnesota's most prosperous residents have climbed faster than the cost of state and local government. That's why, as a share of Minnesotans' total income, the tax burden is in decline."
These trends are among the reasons I first was intrigued by, and then decided to encourage, Joel Kramer's Growth & Justice initiative. I find Joel's ability to bring together diverse points of view to talk about taxes in Minnesota and the need to make our tax system more progressive very encouraging.
"After more than a year of research and public discussions involving 150 citizens, Growth & Justice is proposing that Minnesota make its tax system fairer for families and better for economic growth by agreeing to a swap: higher individual income taxes on high earners and lower taxes on business. And, we show several ways to do it." says Kramer.
Joel Kramer is the former publisher of the StarTribune and we are fortunate to have some one in the state with the time and passion to think clearly and in a new way about how we invest in the public interest. What he and his partners at Growth and Justice have learned from their research is that a number of the cherished beliefs of liberals and conservatives just don't hold up to close scrutiny. For example, Liberals believe that taxes on business are progressive while Conservatives counter with the argument that a progressive tax system hampers business growth.
It turns out that businesses shift their taxes on to consumers and the burden ends up falling disproportionately on lower income households. But contrary to what Conservatives believe it turns out that high income tax states do just as well economically as states with lower taxes. The pay off is that although taxes are higher the tax investments go toward things that enhance the quality of life, such as better schools, roads, and other public works. In fact, states with high income taxes had agreater increase in personal income in the time period between 1980 and 1998. At the very least, progressivity in the tax system does no economic harm.
So Kramer suggests a swap, that we raise the income tax at the top (fairer for families) and lower the business tax better for the business climate. He then adds one more suggestion broaden the sales tax to include clothing but lower the overall rate, which results in a less regressive sales tax. In raising the income tax he would concentrate on the top 5% of earners keeping the rate under 10% and reduce deductions and exclusions and if possible lower the tax rate on low earners to reverse the regressive trend taxation has been taking. These changes would contribute more total revenue and revenues will grow faster. This plan also has the benefit of making the tax system progressive without tying it to the ups and downs of the business cycle, which has been a problem in the past at the same time making it less dependent on the more regressive real estate tax. Property taxes are regressive because increases there impact those with lower and fixed incomes.
As WCCO 'Reality Check
"Minnesota's taxes were higher in the 1990s than they are now, and the state enjoyed its longest economic boom in history during that time. It was then Minnesota passed a series of tax cuts and rebates, totaling $3.7 billion.
"Today, Minnesotans are paying less of their income to state and federal taxes than they did 10 years ago. In 1995, Minnesotans paid 17.4 percent of their income. Today, it's 15.7 percent.
"Minnesotans are paying more in state fees, surcharges and co-pays. Those fees have increased $850 million."
"Who gets hit hardest by fees," Kramer explained, "are low and moderate income folks." The very people who need government's help to create opportunities and improve the chances their children will live better lives. We may be the first generation in our history who will not have fulfilled the promise to the next generation, that we will leave it better than we found it.
I made a special effort to invite Rep. Cox to the presentation and he did make it for the last half of the discussion. He took one comment that Joel Kramer made out of context and it needs to be commented on. Joel did say that although it is clear that more funding has a demonstrated benefit to early education and higher education, the benefit to k12 education of increased funding is less clear. He then added, which Rep. Cox apparently did not hear, that "the lack of clarity may not be due to things the schools can control."
To this I would like to add the notion that if schools have been under-funded since the 1980s it would be difficult to see positive results unless you know how much it really costs to adequately fund the schools. Several school leaders, including Northfield's Superintendent Chris Richardson, have been asking this question and demanding a study that would show what is the cost of educating a student in Minnesota, not what are we spending, but what is the cost. One other thought was expressed by a presenter at a recent conference I attended, who said that until we can say that we will truly fund schools to counter the effects of poverty, homelessness and the hardships of immigration and the migration of jobs away from our country, until we can promise every Minnesotan, every American a living wage, how can we expect that the schools can show improvement.
Recently John Kenneth Gailbraith was asked why he thought the age of prosperity he had predicted for our current times had not materialized for middle income folks the way it has for the top income earners. His response was that he had not anticipated the shift in the thinking of people more towards personal gain as opposed to continued investment in community and the public good that benefits everyone. We as Minnesotans, I believe, have a calling to reverse this trend, because with the advice of our leaders like Elmer Andersen, Rudy Perpich, Hubert Humphrey and Paul Wellstone we must hear this call to improve our society and leave it in good shape for those who will follow us. The test of a moral society, as Humphrey said, is the measure of how it provides for those at the beginning of life, those at the end of life, and those who must find their way in the shadows of life. We must not abandon this call.
Wednesday, April 13, 2005
I want to offer some clarification on comments that the district has budgeted increases for its employees at 4% and 5% and the suggestion that teachers have seen this level of salary increase in the past 4 to 6 years. It was also suggested that if the district did not follow through on giving this budgeted raise, there would be more than enough money to protect the jobs and programs being cut. The suggestion is that if the district budgeted less money for their employees, they could save teacher positions. First of all, this confuses the budget and negotiation process. The budget lays out a plan based on best assessments of what is going to happen. 'Negotiations' is a process protected by PELRA and the district must prepare by best guess for an uncertain outcome from that process. It does not commit the district to a settlement but allows for costs as they can best be predicted. So what the budget reflects and what is actually paid out are different.
I know from my experience as a union negotiator that the 4% and 5% increases in the past budgets are not teacher salary increases, but are the estimated combined costs to the district of aquite complicated agreement package of lane changes and contracted salary increases. These costs also include insurance increases that have frequently been double-digit percentage increases. In short, the term "increase" includes both salary cost and benefit cost that the district predicts it will spend.
Inflation has risen between 2.5 and 3.5% each of the past 4 years. Minnesota teacher salaries, ranked 14 nationally in 1990, have now fallen to 19th in the nation, $1,146 annually below the national average. In 1992, Minnesota ranked 9th in the nation in K-12 education spending per $1,000 of personal income; by 2002 our state had fallen to 27th place our costs shrinking in comparison to others. School employee health insurance this year is expected to cost $765 million.
In the last contract negotiation two years ago, the teachers' union and district agreed to a salary increase of 1% the first year and 3% increase the next. Most of the increase was eaten up by the insurance increase in the first year so that some teachers saw little if any net gain in their take home pay, at a time when Americans are experiencing 3%+ annual cost of living increases. This is where most of the "teacher increases" have been going the past 4-5 years. The "salary" increases just barely keep up with out of control insurance costs.
In decisions of this nature, everything has a context. I know that some people have lost their jobs, for many pay rates are stagnant, and many are not seeing wage increases as they see their local taxes and fees go up. This is why I argue for a hard look at how tax burdens are distributed, and arranged for a recent presentation by Growth & Justice on this point. Low and middle income workers are over burdened by taxes and upper income received tax adjustments, which lowered their over all tax rate. If we want to continue the competitive edge Minnesota has had, we need to invest in education and infrastructure, not cut as we are doing. The money must come from some where, and an educated population benefits all of us, so I don't think it's too much to ask those who benefit most from our society to contribute as well. We need a progressive tax system that asks everyone to contribute according to their ability to pay.
The School District must weigh costs of maintaining programs and the cost of maintaining a quality staff and decide to pay the cost or forgo programs and staff. This is not an easy analysis and presents painful "choices" under current conditions where schools are not adequately funded. Compromise is necessary to move forward in this environment, and that's what has happened in the teacher-district negotiations. This same mode of compromise must occur in other budgetary areas, and unfortunately, we in Northfield will be experiencing some dramatic changes in our schools because of the externally mandated cuts and a limited process to address the shortfalls. Adequate funding is necessary, and we don't have that the funding we need in Northfield or in Minnesota.
We urgently need vocal and active support in the legislature to maintain our schools. Track our elected officials' votes at www.minnesotavotes.org
and contact them to let them know your thoughts about funding education and that you remember their promises.
Wednesday, April 06, 2005
I joined Hilary Ziols, and Georgiana and Arthur Campbell for the Cannon River Watershed spring tour of land conservation efforts in the Cannon River Watershed on Saturday, April 2nd. We started at the Morristown Dam Park at 1 p.m., where we met Hugh Valiant, CRWP Board member and DNR Fisheries Area Manager. He lead the tour of shoreline protection projects in the Upper Cannon River Watershed. We saw Horseshoe Lake Aquatic Management Area, glimpsed examples of development pressures, and traveled to Caron Lake where a new acquisition promises to protect aquatic habitat forever.
We were joined by members of several sportsman groups, Deer hunters, Darkhouse spearfisherman, and waterfowl enthusiasts who presented Hugh with a check for his land acquisition projects. It was a beautiful day. Hilary distributed maps of the area we would visit, and Hugh talked about the plan.
At Horseshoe Lake we got a sense of what would be possible with shoreline protection and Hugh explained some of the aquatic and wildlife inhabitants that are given protection in this effort.
The sportsman wondered how deep the lake was and whether or not it was subject to much winterkill. Hugh explained it has been a problem in the past for this lake even though it does have a 23’ depth, however this winter was very mild and Winter kill was not a problem. Hugh also mentioned that if the carp could be controlled, it would be good for other species as well as the lake itself.
Farmer, Mike _______ at the Caron Lake site showed us a Native American ax head he found on his property
before we made the long trek to the shoreline. He explained that Native artifacts are very common in the immediate area. As we approached the lake, we startled geese and gulls that were basking on the sandy beach, and they continued to scold us from across the lake for disturbing them.
Hilary broke out some bottled water, cheese, sausage and crackers and the group continued to talk about the wildlife and the beauty of the Southern Rice County wilderness that Hugh predicts will all be lost unless we make great effort to preserve it.
If you have questions about future tours or other CRWP events, contact Hilary at the CRWP office:
Outreach and Development Coordinator
Cannon River Watershed Partnership
8997 Eaves Ave.
Northfield, MN 55057
Sunday, April 03, 2005
Rethinking Minnesota Taxes
"Rethinking Minnesota Taxes"
Discussion in Northfield, Minnesota
Can Minnesota's tax system be fairer for families and better for business growth?Growth & Justice says YES!
Join us for a presentation of the Growth & Justice tax proposal presented by
Joel Kramer, Growth & Justice
After more than a year of research and public discussions involving 150 citizens, Growth & Justice is proposing that Minnesota make its tax system fairer for families and better for economic growth by agreeing to a swap: higher individual income taxes on high earners and lower taxes on business. And, we show several ways to do it.
A changing share of the pot
Tuesday, April 5, 2005
Space in this discussion is limited.
Please RSVP to Emily Saunoi-Sandgren, 651-251-0725.
Location: Room SS106 in the
Northfield Community Resource Center
1651 Jefferson Pkwy
Northfield, MN 55057
Star Tribune National Economics Correspondent
Published April 3, 2005
The cost of government in Minnesota today is significantly lower than a decade ago, but the little guy is picking up a greater share of the tab.
State and local revenue this year will represent 15.7 percent of total Minnesota personal income -- a drop from 17.7 percent in 1995, according to a projection by the state Department of Finance. Over that 10-year period, the tax burden has shifted gradually toward people of average and small means and away from the state's most prosperous residents.
The trend is likely to continue.
"The tax system is expected to become slightly more regressive from 2002 to 2007, because for higher deciles [the highest-earning groups of Minnesotans] income growth is expected to outpace growth in tax liability, while the reverse is true for middle to lower deciles," the Department of Revenue said in a report released in March.
Put simply, taxes -- in particular, property taxes -- are growing faster than the incomes of most people. But the incomes of Minnesota's most prosperous residents have climbed faster than the cost of state and local government. That's why, as a share of Minnesotans' total income, the tax burden is in decline.
"Even as income goes up and up, even if you have a second home, eventually there's only so much property" that can be taxed, said Dick Gebhart, director of tax research at the state revenue agency. The same goes for purchases -- sales taxes claim a lesser share of incomes as incomes rise.
"If you're in the middle-income category, you're paying 21⁄2 times more than if you're at the top," said Wayne Cox, executive director of Minnesota Citizens for Tax Justice, a group financed mostly by labor unions.
After combining the state and local tax burden and factoring in the federal deduction of state income taxes, Cox concluded that people making $40,000 to $80,000 face a net effective tax rate of 11.3 percent in Minnesota. The elite group making $11.4 million or more faces a net effective tax rate of 4.7 percent.
A state analysis shows a similar pattern. It projects for 2007 effective Minnesota tax rates -- after federal taxes -- ranging from 6.8 percent for people with incomes of $323,340 or more to 18.1 percent for people with incomes of $8,344 to $14,056.
There are a number of reasons for the disparity, but the most obvious is the cuts in income tax rates passed in recent years. Those cuts spare far more in taxes for those with high incomes than they do for people at the other end of the scale.
For the lower-paid, "the biggest part of their tax bill -- sales taxes and property taxes -- is not what got lowered when the state lowered tax rates," said Nan Madden, director of the Minnesota Budget Project at the Minnesota Council of Nonprofits.
The Legislature's decision five years ago to lower property taxes for corporations also shifted more of the cost of local government toward homeowners.
Business property tax rates on $1,000 of assessed value were five times that of Minnesota households in the early 1990s. Today, the ratio of business to household property tax rates is closer to 31⁄2 to 1.
The effective state and local tax rate -- taking into account income, sales, property and other taxes -- came to 18.2 percent for those who made less than $8,344 in 2002, according to the Department of Revenue. Middle-income taxpayers, making $45,437 to $57,589, paid an effective rate of 12 percent. (The year 2002 is the most recent for which tax and income analysis is available.)
The top 5 percent, making $139,652 and up, faced an effective tax rate of 10.5 percent. After taking into account state income tax deductions on federal taxes, the effective state rate fell to 8.4 percent for the top 5 percent in 2002. In contrast, Minnesota's middle-income taxpayers saw their effective tax rate after federal taxes inch down a minuscule 0.7 percent to 11.3 percent from 12 percent.
The trend for those on the lower end of the pay scale would look even worse if the state factored in fees when assessing the distribution of the tax burden.
Fees, for everything from garbage pickup to auto license tabs, are raising hundreds of millions more today than in the past. Minnesotans this year will pay an estimated $881 million in fees, up from $482 million in 1997, according to the Department of Revenue.
Government fees have grown at more than double the rate of state and local tax revenue over the same period. In 1997, fees accounted for $1 of every $28 in state revenue. This year fees will make up $1 of every $22 in state revenue.
"A good illustration is tuition at university," said Joel Kramer, executive director of Growth & Justice, an economic policy think tank in Minnesota. "If you have a $5,000 tuition charge and your household makes $50,000, that's obviously much greater than for a $250,000 household. All fees work the same way." Kramer is a former publisher of the Star Tribune.
Lynn Reed, executive director of the Minnesota Taxpayers Association, argues that Minnesotans with high incomes still pay a large amount of state and local taxes.
Minnesotans who made more than $139,652 in 2002 -- the top 5 percent of all earners -- paid about $3.7 billion in state and local taxes that year, he noted.
"How much is enough?" he asked.
Examined another way, the top 5 percent made 28.1 percent of all Minnesota income in 2002 but paid 26 percent of their income in state and local taxes.
David Strom, president of the Taxpayers League of Minnesota, said he's not persuaded that ironing out imbalances in the tax burden should be the overriding goal of tax policy.
"You have to ask yourself how wedded are you to progressivity as a fairness tool when the price may be less economic activity," Strom said. "I would prefer more economic activity."
Strom and Reed both maintain that the state risks losing entrepreneurs and other high-income residents to other states if Minnesota were to attempt to shift more of its tax burden onto the wealthy.
However, Growth & Justice released a study last week based on IRS figures that found little evidence of high-tax states losing their most successful residents.
"We found no clear pattern of systematic flow [of high-income residents] from high-income tax states to low," Kramer said. "States that lost proportionately the most to migration are low-income-tax states."