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Getting What You Pay For: A Case for Balance

May 17, 2011 By Lee Egerstrom, Economic Development Fellow

Step back three paces, take a deep breath, and look again at linkages between the economy and taxes, public services and employment, and the general well-being of Minnesotans and their counterparts in other states and nations.

The Minnesota Legislature is now inside what is supposed to be the final week of its current session. While a special session now appears highly likely, it would be constructive for legislative leaders to pause and consider the impact of their work on the economy and what messages, if sometimes mixed, they are hearing from their constituents.

First up, all lawmakers have to be aware at this point that the Star Tribune Minnesota Poll on Sunday showed Minnesotans strongly favor a balanced approach of program cuts and increased revenues to keep Minnesota afloat, as advocated by Governor Dayton. According to the Star Tribune article with the poll, 63 percent of Minnesotans favor a mix of higher taxes and service reductions, to 39 percent favoring a cuts-only approach to dealing with the state’s revenue problems.

Newly elected conservative lawmakers assume they received a mandate in the past election to rein in state spending. But they didn’t campaign on pledges to kick 100,000 fellow citizens off publicly-funded health care, squeeze quality out of education from kindergarten through graduate school, and raise regressive local and school district property taxes.

Where any mandate assumption falls on its face comes from Minnesota voters electing Dayton as governor in the same election. He didn’t conceal his beliefs that the state needs to raise revenue. Minnesotans recognize we have to pay for good schools, robust infrastructure and quality health care. For the most part, we’re willing pick up that tab. It’s a reality that is consistent with the 2008 election in which Minnesotans passed the Legacy Amendment that dedicates a tax increase to support the environment and arts.

Minnesotans seem to recognize that myths about taxes and economic performance don’t square with results when Minnesota is measured against the other 49 U.S. states, or when the U.S. is measured against the performance of other developed countries.

First, let’s look at Minnesota’s place in the political economy. Minnesota 2020 released a January report, “Minnesota’s Tax Fairness Retreat: A 50-State Study,” authored by former colleague Jeff Van Wychen. While Minnesota’s diverse economy is out-performing the national economy slightly, that report found Minnesota was slipping in its tax fairness relative to the nation.

Essentially, Minnesota is relying less on progressive revenue, such as income tax, which is based on salary, and more on property and sales taxes, which tend to fall harder on low-income and middle-class Minnesotans. It’s a trend that is expected to continue with legislative proposals that shove more community service costs on to local governments and property taxpayers.

Updated analysis of that report’s data further helps debunk the myth that lower taxes result in economic growth. In general terms, higher tax states, with less regressive tax systems, have generally higher median household incomes. In a real sense, we get what we pay for.

So how do these findings square with international comparisons of nations? There, the Organization for Economic Cooperation and Development (OECD) finds similar results, although differences among nations are even greater than domestic comparisons of U.S. states.

In a Feb. 17 report, (Tax Reform Trends in the OECD Countries) the Paris-based OECD research organization for the industrialized countries found that only Mexico and Chile raise less tax revenue as a percentage of Gross Domestic Product (GDP) than did the United States in 2009, the last year for which data are available.

In ascending order, the percentage of tax revenue to GDP starts with Mexico, at 17.5 percent, followed by Chile, 18.2 percent; the U.S., 24 percent; Turkey, 24.6 percent; Korea, 25.6 percent; Ireland, 27.8 percent; the Slovak Republic, 29.3 percent; and Greece, 29.4 percent.

In descending order from the other end of the scale are Denmark, 48.2 percent; Sweden, 46.4 percent; Italy, 43.6 percent; Finland, 43.1 percent; Belgium, 43.2 percent; Austria, 42.8 percent; France, 41.9 percent; and Norway, 41 percent.
Taxes vary greatly across the developed world in terms of progressive and regressive systems. But generally, most countries have more progressive taxes than do the loophole-ridden U.S. and state tax systems that have been manipulated by special interests and protected classes.

Going forward:

As we head into the session's final week, Minnesota legislators should seriously consider what kind of businesses a low tax, low-wage state would attract. What would our state look like were that to come true? Is that the quality of life Minnesotans really want?

Some communities, states and nations are looking ahead at what damage their lawmakers may be doing to protect the richest at the expense of the whole. Consider these examples:

  • By some measures, Minnesota’s current conservative budget proposal is expected to cause a loss of 5,000 jobs directly, with about 30,000 jobs lost due to the spillover impact.
  • In Oregon, business and community leaders are now worrying about public sector layoffs. Even though the American Recovery and Reinvestment Act helped Oregon retain about 4,900 jobs last year, there still were many state and local public job losses. The business community worries that severe cuts will undercut Oregon’s economic recovery, wrote Diane Dietz in Eugene’s Register-Guard newspaper. She quoted a Eugene banker as saying, “Government jobs are the wild card.”
  • And in western New York, a group of business, labor, government, higher education and charitable foundations have formed a group to assess the harm to the Town of Dickinson, near Binghamton, as it copes with losing 400 schoolteachers at area public schools. Areas of concern include loss of intellectual capital as people move away, the impact on the local tax base, quality of education in the area and the impact on culture and climate of schools.
  • Internationally, British austerity measures could wind up disproportionately impacting female workers.
  • In other places, there have been economic gains without major public service cuts. The Toronto Glove and Mail reported May 6 that Canadian enterprises created 58,300 jobs in April, cutting Canadian unemployment to 7.6 percent, back to pre-global recession levels.
  • France added 125,000 jobs last year, after 300,000 were “destroyed” in 2009, according to Dow Jones Newswires, and that 2011 will be stronger. France expects two percent GDP growth this year, according to French Economy Minister Christine Lagarde.

While private job growth is starting to improve, net job gains aren’t likely to continue as policymakers slash public payrolls. When seasonal adjustments are made, government employment is now down 416,000 jobs from January 2009.

Mark Zandi, chief economist for Moody’s Analytics Inc. and the former economics adviser for presidential candidate Sen. John McCain, warned in February (Bloomberg BusinessWeek, Feb. 4) that the ripple effect of public job losses and cuts in federal programs could lead to 600,000 job losses throughout the economy starting in July this year. This could have a devastating impact on local communities.

As we debate an all cuts budget or a balanced approach that includes revenue increases, policymakers should look at where Minnesota sits in comparison to similar U.S. states and world economies. The Star Tribune Minnesota Poll shows how Minnesotans want to move forward compared to others; our policymakers should take heed.

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