High tax rates ≠ high revenues
Lower tax rates incentivize economic activity and therefore expand the tax base. High tax rates do the opposite
This op ed appeared in the Pioneer Press on Wednesday, May 13th
In the Book of Genesis, Joseph tells Pharaoh to store grain during seven fat years to keep Egypt going during the seven lean years that will follow. That this ancient wisdom remains sound budgetary advice was demonstrated again this month. The surplus of $1.5 billion forecast in February for Minnesota’s state government budget in the 2020-2021 biennium has turned into a deficit of $2.4 billion.
Fortunately, this is only slightly more than the $2.359 billion the state has squirrelled away in its reserve fund. Joseph would be proud. As a result, if we dedicate the entirety of this fund to filling the budget deficit – and that is what it exists for – we will have a shortfall of only $33.5 million in each of 2020 and 2021. This shortfall could be covered entirely by spending cuts of 0.1 percent, or $6 per Minnesotan.
But Minnesota’s story isn’t entirely one of fiscal prudence. Between 2011 and 2019, Minnesota’s Gross Domestic Product (GDP) rose by 16 percent in real terms, but General Fund spending increased by 33 percent. The growth of government outpaced the growth of the economy. As a result, the share of the state’s income spent by the government rose from 5.5 percent to 6.3 percent.
Per-capita spending rose over that period too, by 26 percent, in real terms. Because of this, even after a cut of $6, per-capita state government spending would still be higher than at any time in history.
In the first quarter of 2020, real GDP decreased at an annual rate of 4.8 percent, according to the “advance” estimate released by the Bureau of Economic Analysis, bringing to an end the longest economic expansion in American history. This expansion offered an opportunity for both federal and state governments to get their finances on a sound footing, to fix the roof while the was shining.
The federal government failed conspicuously in this regard, running trillion-dollar deficits while the economy was growing. Balanced-budget amendments disguise this at the state level, as does the “off-balance-sheet” nature of government pension liabilities.
Even so, amid the deluge of spending, the state government wasted $100 million on a driver’s licensing system that didn’t actually produce driver’s licenses, fired the I.T. chief who knew about MNLARS defects before its rollouts then paid him $45,000 not to sue for wrongful dismissal, failed to send $30 million of bills to MinnesotaCare enrollees then refused to even try to collect the unpaid premiums, lost untold millions to day-care fraud, saw its Department of Human Services improperly pay $48 million to providers, paid an Iron Range Resources and Rehabilition Board official $166,000 in early retirement, then hired the official back a month later, paid the DHS Inspector General $42,000 to sit around at home for three months before an investigation began, and overpaid Native tribes to the tune of $29 million.
Now the lean years are upon us. We don’t know yet how lean they will be. There is much uncertainty around the budget estimate. If the economy reopens quickly we may see a quick rebound and a ‘V’ shaped recession. If it remains shut down, however, the economic damage will mount and we may see an ‘L’ shaped recession. In either case, the ever-upward march of government spending ought to be halted. We couldn’t afford in the fat years, and we can’t afford in the lean ones.
John Phelan of St. Paul is an economist at the Center of the American Experiment, a non-profit public policy organization based in Golden Valley that advocates for free enterprise, limited government, personal responsibility and government accountability.