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Progressives Won’t Win Points from Right on Tax Cuts

April 28, 2014 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

As Minnesota's legislature debates another round of tax cuts, progressives must remember one key element: no matter how much they cut taxes, conservatives will never give them credit for it. No tax cut is big enough for the right.

That's not to say progressives should never cut taxes. There are many good reasons to cut taxes, such as reducing the share of public expenses borne by those least able to pay.  This was the thrust behind the new Homestead Credit Refund and increases in the renters' property tax refund enacted in 2013, which successfully targeted tax relief to low- and modest-income homeowners and renters.

One month ago, Governor Dayton signed into law the first tax act of the 2014 legislative session, which cut taxes by $443 million in the current biennium (FY 2014-15) and nearly a billion dollars in the next (FY 2016-17).

For the most part, the first 2014 tax act cut taxes in a way that will simplify and improve the efficiency of Minnesota’s tax system. These include federal tax conformity provisions that will provide middle class tax relief while simultaneously making it easier for Minnesotans to fill out their tax returns, elimination of three business-to-business sales taxes which failed the test of tax transparency, and an increase in the Working Family Credit which will reduce tax regressivity by putting dollars into the pockets of low-income working families who desperately need the additional resources. On the non-tax front, the act beefed up the state budget reserve by $150 million and dedicated a portion of future surpluses to the reserve—a move that will enhance state fiscal stability.

On the other hand, the first 2014 tax act also made a large cut to the Minnesota estate tax and eliminated the gift tax. This move will increase the regressivity of the state and local tax system while draining $43 million from the general fund in the current biennium, $144 million in the next, and approximately $200 million per biennium when the higher estate tax exemption is fully phased-in.

The state cut combined estate and gift tax revenue by approximately one-third (when fully phased-in) to avert the feared flight of high income residents to other states. However, a recent Minnesota Revenue Department estate tax study found that the majority of rigorous peer-reviewed tax migration studies failed to find any statistically significant tax flight resulting from estate taxes. This conclusion from non-partisan Revenue Department researchers is reinforced by the fact that Minnesota estate tax revenues increased by nearly 50 percent from 2007 to 2013—four times faster than the rate of growth in other state taxes and three times faster than the rate of inflation. If the estate tax is so easy to avoid by fleeing the state, it is hard to see how estate tax revenue could have increased so dramatically.

So—in response to a massive reduction in Minnesota’s most progressive tax—there was a wave of right wing jubilation, right? Actually, not so much. Conservative senators and representatives complained that the estate tax cut was not deep enough and proposed amendments to the tax bill that would completely eliminate the tax. A recent MinnPost article noted that “…millionaires and their financial advisors want more,” again raising the bugaboo of tax flight if they don’t get it.

The conservative objection to the newly enacted estate tax reduction is that it didn’t go far enough—an assertion supported by claims of dubious merit. An estate tax opponent cited by MinnPost argued that “if you’re in the $1 million-to-$2 million frame, you’ll get a fair amount of tax savings five years from now, but estates above that won’t see any significant savings.” In fact, a $4 million taxable estate will see a 14 percent reduction in estate tax liability, while a $3 million estate will see a 38 percent reduction. (Estates consisting mostly of farm and small business property of less than $5 million continue to be completely exempt.) Since when is a 38 percent tax cut not significant?

Equally challenged is the conservative contention that the estate tax is a middle-class tax. According to the Revenue Department estate tax report, the average annual income of households paying the estate tax (prior to the recently enacted cuts) is $295,000. (This number is based on data from 2002 to 2011; by now the average income of these households has probably risen above $300,000.) According to the Department’s most recent Minnesota Tax Incidence Study, the top one percent of Minnesota households by income paid 92 percent of estate taxes in 2010. It is only by the most tortured of definition of “middle” that the estate tax is a “middle class” tax.

Yet another estate tax proponent cited by MinnPost argued that failure to enact an even larger estate tax cut “just continues the conversation that Minnesota is going to find ways to keep raising revenues from the same core group of people [i.e., high income residents].” So—state policymakers enact a generous tax cut targeted primarily to wealthiest Minnesotans and even this gets spun as an attack on the rich.

The moral of this story is that when it comes to tax cutting, progressives just can’t win. No matter how much taxes are reduced, it will always be spun as paltry by the anti-tax conservatives, who will up the ante by proposing even more draconian cuts. Even a large tax cut that primarily benefits high income households will be framed in the context of “ways to keep raising revenues” from the rich.

From the perspective of progressive state policymakers, the lesson to be learned is that they should focus tax efforts—whether they be tax increases, tax decreases, or revenue neutral reforms—on maintaining and enhancing the state’s ability to fund important public investments, increasing tax efficiency and fairness, and maintaining Minnesota’s economic competitiveness; these are goals which they were, with few exceptions, successful in achieving in the 2013 and first 2014 tax acts. While progressives must be mindful of the level of taxation, attempts to out-cut conservatives will bring little fruit, from either a policy or a political perspective. Something to keep in mind during deliberations on the second tax bill of 2014.

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7 Comments:

  • test1 says:

    April 29, 2014 at 4:16 pm

    TEST1

  • Mike Downing says:

    May 5, 2014 at 12:32 pm

    How can anyone from the liberal progressive left call a $1.2 Billion tax increase followed by a $400 Million cut in the tax increase a tax cut? It must be from the “new math” in Common Core where this makes any sense. Any rational objective individual would simply call it a tax increase to support increased spending…

    • Jeff Van Wychen, MN 2020 says:

      May 5, 2014 at 1:02 pm

      Mike:
      I reference the tax cuts in the first 2014 tax act because that is precisely what they were: tax cuts.  I have always been clear that the 2013 tax act increased taxes and I never asserted or even implied that the 2014 tax cuts were sufficient to offset the 2013 tax increases.  The net revenue increase in the combined 2013 and 2014 tax acts were necessary to replace a small portion of the real per capita funding reductions over the preceding decade.  Your shock that I would refer to the outcome of the first 2014 tax act as a “tax cut” is hard to comprehend.

      • Mike Downing says:

        May 5, 2014 at 3:23 pm

        Jeff, to the contrary, I am not shocked that MN2020 and your intended audience would frame the 2014 Session as one of tax cuts. This is a political statement and not a statement based on the facts. Our state budgets and expenses are biannual so the 2013 & 2014 Sessions must simply be combined to yield increased spending of $700+ Million. To do otherwise is disingenuous at best.

        • Jeff Van Wychen says:

          May 6, 2014 at 3:12 pm

          Mike: So far during the 2014 session, taxes have been cut by $500 million, with more cuts to come in the second tax bill.  Thus, the 2014 session truly is one of tax cuts.  This is not a political statement, but one based on hard fact.  Your attempt to dismiss this reality is “political.”  If we combine the 2013 and 2014 sessions, there is a net tax increase.  I have never denied this fact; to the contrary, I am happy to defend the increase in education, infrastructure, and property tax relief and reform that the 2013 tax act made possible.  After all, the 2013 tax act did nothing but restore a portion of the real per capita revenue that was lost during the preceding decade.

  • A.Kornfuehrer says:

    May 5, 2014 at 5:13 pm

    About that estate tax change – How about middle class people who never came close to earning a 6-figure income in their life, but who frugally saved in IRAs and 401Ks.  Those IRA and 401K savings pushed quite a few people into estates valued at over $1 million, maybe not by much, but enough for them to become unintentional millionaires.  That means their heirs would have been hit hard by the previous Minnesota estate tax rates (recall, the rates started at 41%).  Even worse, those heirs would pay double taxes because first there is an estate tax on the face value of the IRAs and 401Ks, then there is an income tax when the heirs withdraw the money.  Had the middle class people been wealthy enough to have a stock portfolio instead of IRAs and 401Ks, yes, there would have been an estate tax to pay, but no double taxation because there is no income tax on the capital gains of inherited stocks!  In both situations, tax-deferred money is being passed on, yet they have quite different income tax consequences.  Bottom line—People who because of their frugality end up unintentional millionaires will no longer be punished now that the Minnesota estate tax exemption is going up to $2 million.  This change is a win for the non-wealthy.

    • Jeff Van Wychen says:

      May 6, 2014 at 5:40 pm

      A.:
      Thank you for your comment.  The one good thing about the estate tax reduction that was enacted about a month ago was that the relief was heavily concentrated at the lower end of the taxable range—that is to say, estates with total taxable value of less than $5 or $6 million.  Estates with taxable value above this level received little or no relief.

      I will also concede that the 41% rate upon estate value between $1,000,000 and $1,095,000 (referred to as the “rate bubble”) was a problem, but this could have been addressed in a way that did not reduce estate tax revenue by $100 million per year (the estimated cost of the new estate tax reduction when fully phased-in).  As I noted in another recent article (http://www.mn2020.org/issues-that-matter/fiscal-policy/new-estate-tax-break-comes-with-high-cost-in-revenue-fairness), House File (HF) 2108 would have eliminated the rate bubble and reduced estate taxes for estates at the lower end of the taxable range by extending the exemption from $1 million to $1.5 million with only a marginal cost to the state in terms of lost revenue.

      I would emphasize that under the old law, a full $1 million of estate value could be transferred without incurring any tax.  (The exemption was effectively $5 million for estates consisting primarily of farm and business value.)  Paying a reasonable tax on value above this amount (the beginning marginal rate under HF 2108 would have been 12%, which would not apply until taxable estate value exceeds $1.5 million) is not punitive to the middle class or anyone else.  Furthermore, the large estate tax cut recently enacted reduced the incentive for folks to make charitable gifts, which have always been exempt from the estate tax.  A modest tax rate applied to estates with a taxable value above either $1 million (old law) or $1.5 million (HF 2108) shouldn’t violate our sense of propriety.

      I would further note that unrealized gains (i.e., increases in stock value, etc.) go completely untaxed if not for the estate tax.  Taxing these unrealized gains upon transfer of estate value is entirely reasonable, especially if we completely exempt the first $1.0 or $1.5 million of this value.

      In general, I resist the argument that the estate tax is a middle class tax based on the statistics of who pays the tax.  There were ways of fixing the old estate tax to reduce taxes on the very few middle income households that paid it that did not involve draining $100 million per year out of the state general fund.

      My major gripe in the article, however, is that progressives received little or no acknowledgement from most conservatives regarding the large estate tax reduction that was enacted.  You, however, appear to at least acknowledge that the relief was significant—a point that I want to give your credit for.

      Thanks again for reading Hindsight and commenting.