March 24, 2007
In tax debate, ask: How much? How fair?
Two strategic tax questions drive the proposals: How much? And how fair?
Looking first at fairness: The House leadership wants to reduce property taxes and pay for the reduction by raising individual income tax rates on a small sliver of the highest-earning Minnesotans: those with earnings after deductions of $400,000 for married couples or $226,000 for individuals without dependent children. Less than 1 percent of Minnesotans would be affected, and they are currently paying a smaller share of their income in total state and local taxes than middle-class Minnesotans pay.
So this would be a very positive step for fairness, which has suffered in recent years as local governments and school districts raised property taxes to compensate for reduced help from the state. Property taxes proportionally affect lower and middle earners more than they affect the wealthy.
But making the tax system fairer does not make it adequate to meet the expectations Minnesotans have for our state -- our widely shared commitment to a high quality of life, an economy that provides a decent standard of living to all working people, and a society that invests in our children so they can fulfill their potential.
To meet those expectations, we must also ask: How much public investment and government service are we willing to pay for?
Fortunately, we know how to measure how much state and local government we have. The "price of government" is all the revenue generated by state and local governments from taxes and fees, as a percentage of all Minnesotans' income. In the mid-'90s, that price of government number was about 17.5 percent. By 2003, after a lot of tax cutting, it had plummeted to 15.4 percent -- a decline of almost $4 billion a year. Last year, it was back up to 16.4 percent, thanks in large part to rising property taxes, fees, and public college tuition which disproportionately affect lower- and middle-income Minnesotans.
If we leave our tax and fee rates as they are -- what the conservatives are now calling "live within our means" because it sounds better than "no new taxes" -- then our price of government will decline over the next four years to 15.6 percent. That's about $2 billion a year less than today, and about $5 billion a year less than in the mid-1990s. That is not just "living within our means." It is diminishing our expectations to a level far below our means.
How much is enough? In theory, the question should be answered from the bottom up: Add up all the services and public investments people are willing to pay their government to provide. In practice, that's very hard, perhaps impossible, to do. But we do have a good guideline to how much government Minnesotans are willing to pay for. It turns out that even though most Minnesotans don't pay any attention to the measure called the price of government, they respond politically as if they were paying attention. When it reached 17.5 percent, pressure built to lower taxes. When it plummeted to 15.4 percent, pressure built to raise revenue.
Given the evidence that states that invest more in their people and places perform better economically, a good guideline would be 17 percent. A more modest guideline would be the average price of government since 1990, which is 16.6 percent.
Even that more modest 16.6 percent would require that we raise more than $600 million more revenue next year than our current system is projected to raise, and about $2.5 billion more in 2010 than we're now headed for.
Why is the price of government projected to decline? Because state revenues now are not projected to grow as fast as personal income -- i.e., the revenue system does not keep pace with economic growth.
The solution is simple. Adjust the revenue system so it does grow as fast as the economy. There are a number of ways to do this, but the most significant is to raise individual income taxes, because the income tax is the only major revenue source that grows faster than income. And raising the income tax more on high earners is even better, because high earners' incomes grow faster than average incomes.
If we use other revenue sources as well -- like a half-cent sales tax increase in the metro area to pay for transportation, or a statewide gas tax hike -- we should provide a fairness credit to low- and middle-income households based on their size, so that families struggling to make ends meet are not asked to pay more.
This solution has a triple-positive impact:
• It links our government size to our income, so that we "live within our means."
• It raises revenues needed to address many goals Minnesotans share, such as increasing opportunities for our children and reducing traffic congestion.
• And it makes the system fairer, by raising the share of taxes paid by the high earners, who currently pay less than their proportional share.
How much, and how fair? It's time to address both questions, head on.
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