Governor Pawlenty is fond of saying that “ Minnesota does not have a revenue problem—it has a spending problem.”
In fact, real per capita state spending in Minnesota has declined over the last six years.
Our budget deficit is due largely to the fact that revenues have fallen even more rapidly than expenditures.
From 2003 to 2009, real per capita state tax revenue is projected to fall by 13 percent, while total state own-source revenue is projected to fall by 9 percent.
We need to be very clear: Minnesota has a revenue problem.
So far, the state has dealt with its revenue problem by cutting the dollars that it shares with local governments and by increasing regressive taxes.
Since fiscal year 2003, real per pupil state aid to schools has fallen by 14 percent and real per capita state aid to counties and cities has fallen by over 30 percent.
This has not only caused cuts in public investments in education and infrastructure, but has also lead to increases in property taxes as local governments attempt to replace a portion of their state aid cuts.
Property taxes are regressive, meaning that a disproportionate share of the tax falls on those with the least ability to pay.
The state has also increased other regressive revenues, such as fees.
State fees in MN have risen 20 percent above the rate of inflation over the last six years.
We’ve socked it to students through higher tuition.
In his budget, the Governor is proposing to increase the net tax paid by Minnesota renters by cutting the renters refund.
All of these revenue raisers make Minnesota tax system less fair by dumping more public costs on to those with the least ability to pay.
Data from our Department of Revenue clearly shows that MN’s tax system is becoming more regressive over time.
So what does Minnesota have to show for the regressive budget balancing strategies that we’ve pursued since 2003?
Median household income has fallen relative to the national average
Our unemployment and poverty rates have increased relative to the national average
And in each of the last three years MN has ranked among the bottom ten states in the nation in terms of our rate of employment growth.
Conventional conservative wisdom is that you should not increase taxes during a recession.
However, as Nobel prize economist Joseph Stiglitz has noted, cuts in direct government spending are more harmful to a state’s economy than tax increases.
That’s because one dollar in tax cuts does not result in a dollar cut in consumption because a portion of each dollar that a taxpayer keeps is saved.
However, a $1 cut in direct government spending does lead to a full dollar reduction in consumption, thereby resulting in a greater loss in short-term economic stimulus.
Stiglitz also notes that tax increases on high income households do less short-term damage to the economy than tax increases on low income households because high income households save more and spend less.
So—based on this analysis its clear that increases in progressive taxes should definitely among the options the state policymakers pursue.
This approach will not only make Minnesota’s tax system more fair by reversing the drift toward regressivity, but it will balance the state’s budget in a way that does the least damage to the state’s economy.
Jeff Van Wychen is with Minnesota 2020
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