|
|
Commentary: Governor's deficit cure irresponsible
By Wayne Nealis 8 February 2009
| MINNEAPOLIS - The $5 billion state budget shortfall for 2010-11 can be resolved responsibly and wisely if the Legislature were to enact a temporary, progressive surtax on income brackets that can afford to contribute more. |
Gov. Pawlenty's "no tax" proposal is a non-starter and an example of the irresponsible tax and budgetary policies of the Republican Party that voters rejected with the election of President Obama.
Responsible taxation and budgeting means funding the costs of operating state and local government functions in bad times as well as good times. Yet, GOP legislators, the Governor and misguided anti-government ideologues see the budget shortfall as an opportunity to pare down government, cut services and raise fees (a GOP tax by a different name). As we shall see, such remedies will hurt, not help the state's economy.
 |
|
Wayne Nealis
|
One rationale the anti-tax crowd claims for cutting government spending is that the public sector should respond to downturns in revenue just like the private sector. Yet government functions and employment are not comparable to private sector service or manufacturing firms. During economic downturns the demand for private companies' goods and services drop and fewer employees are required to manage the workload. On the other hand, the demand for most government services, like courts, health care, snow plowing or fire fighting remain constant or may even rise during a downturn.
It is understandable that a private sector employee who is laid off may think it is only fair that public employees are trimmed as well. Yet this same person, under the Governor's plan will pay more fees, receive a lower quality of street maintenance and wait in longer lines for building permits or other services that facilitate commerce and safety. They may also find that a family member or neighbor, who happens to be a public employee, will be out of a job. How do any of these consequences help the Minnesota economy?
The Governor's commitment not to raise taxes is also ideologically out of step with many Minnesotans. According to a recent KSTP-SurveyUSA Poll, 49 percent support a more balanced approach incorporating both tax increases and spending cuts, while fewer -- 41 percent -- support the Governor's "no tax" remedy.
I will grant that if the Minnesota state budget has structural deficits the Legislature has a responsibility to fix these with an eye on reducing the current deficit. Yet according to the state's economic forecasts, nearly one-half of the 2010-11 deficit will be new health care costs for people losing their employer-paid insurance when laid off and the remaining is due to declining tax receipts. Both are consequences of economic conditions—not overspending or inefficient government.
Governor Pawlenty's solution to raise fees will fall indiscriminately on middle and lower income wage earners. For example, the $40 increase in marriage license fees since 2003 doesn't have a noticeable effect on a person making $100,000 a year as it comes out of expendable income. But to someone making $25,000, a $40 hit comes out of their household budget. Now Pawlenty proposes to raise this fee and others even higher. Fees should have a rationale specific to the type and cost of the service, and not act as a tax to enhance general revenue and balance the overall budget. The Governor's solution is a poor financial and business model on which to operate.
Raising income taxes, on the other hand, is efficient and costs little to implement, save a little computer time. When the recession is over and revenues increase, tax rates would be returned to previous levels (although a more progressive tax structure would be desirable). A strict rule to curtail a surtax tax will be required to prevent legislators from counting on the “extra” tax revenue after recovery. Now for a more detailed look at the numbers.
The deficit of nearly $5 billion is no small matter. To gain a big picture perspective, it amounts to about $880 a year for each of the estimated 2.8 million Minnesotans currently employed--rich or working poor. Of course, increasing income taxes on low or average income workers would not be fair or affordable. Only upper income brackets have the discretionary income to pay more taxes.
My suggestion for the purposes of illustrating an alternative approach is to enact a progressive surtax on the top five income categories (deciles), beginning with a five percent charge for top earners (more than $700,000 in annual income), declining to one-half percent for individuals earning roughly $80,000 to $95,000. This change would cover nearly one-half of the deficit. This calculation is based on data in the 2007 Tax Incidence Study prepared by the Department of Revenue and is not based on actual taxpayer data.
The 2007 study is the latest available and uses 2004 income records. At the time, the fifth decile range was between $70,000 and $85,000. I estimate bracket inflation would raise the lower end to slightly more than $80,000 today. Under my scenario then a one-half percent increase would mean an individual making $80,000 would pay an additional $400 a year. A close look at actual data by legislators and state finance experts could yield quite a different tax plan to make up part or all of the deficit, along the ideas outlined here. Careful scrutiny by legislators would be required to ensure that those with families on the lower end would not be overly burden by a small tax increase.
Although some people advocate sticking wealthier taxpayers with the entire bill, I think even those on the lower income end (but not working poor) can forgo some discretionary spending, even if it is just $20 a year so that nearly all are called to be responsible for making some contribution.
The Governor, GOP legislators and some Democrats would argue that to raise taxes on wealthier individuals will reduce spending and cause further job losses. This is a red herring that we should not fall for. Common sense arithmetic tells us that if a progressive surtax is used to keep people employed around the state like our teachers, city and county employees or by direct government spending to employ local businesses on contracts, almost all the dollars will still be spent in Minnesota.
This is verified research conducted by Nobel Prize winning economist Joseph Stiglitz and former Brookings Institute Fellow Peter Orszag, now on President Obama's economic team. This 2001 study shows that it is much more likely (and this is common sense as well) that middle class and low-wage earners spend most of their income in state. Wealthier individuals will tend to spend more of their disposable income on products and services out of state, and on vacations abroad and so on.
So in the short run raising taxes on those who can afford to pay more, in order to ensure local and state employment levels and direct spending, is the best way to maintain in-state spending on goods and services and help local economies. The worst choice, according to the study, to deal with state budget deficits during a recession is to cut government employment or direct spending as the Governor proposes.
The conclusion of this research also argues against raising sales tax revenue as it will reduce the purchasing power of middle and low-income wage earners. Some Democratic legislators have suggested expanding the sales tax to include clothing might be included in the budget deficit solution. This would be the wrong direction to take.
State Democrats are likely worried about proposing an income surtax, even on the wealthy, as they calculate the effect on the Party's quest to win the Governor's race in 2010. Let's hope the leadership can rise above such political calculation and speak frankly with Minnesotans about the various remedies and the consequences of our choices.
No one likes paying higher taxes, but legislators might be surprised at Minnesotans' common sense attitudes toward the fiscal choices ahead. A clear indication of what we might call a post-GOP attitude toward taxes and government is that many wealthier Minnesotans, that my surtax scenario would affect, enthusiastically voted for Barack Obama. Who as a candidate, in no uncertain terms, told them he was going to raise their taxes significantly—and not just temporarily.
Wayne Nealis is a progressive activist and writer and a former member of two Twin Cities industrial union locals now affiliated with CWA. He lives in Minneapolis.
|
|
|
|
