Minnesota’s legislature needs to balance the demands of COVID with improving the prospects of our economy.
The 2021 legislative session in St. Paul will open in the wake of one of the most tumultuous years in Minnesota’s history. In March 2020, Governor Walz shut down large chunks of the state’s economy in an effort to slow or stop the spread of COVID-19. In May, the Twin Cities were rocked by four nights of violence following the death of George Floyd in police custody.
As legislators convene, they should look at act on the lessons of COVID-19. But they should also not lose sight of the longer term problems facing the state in terms of a relatively sluggish economy. Indeed, the damage caused by the virus and the policy responses to it add an extra urgency to making Minnesota’s economic policies more conducive to growth and increased prosperity. The agenda below offers some practical proposals in response to COVID-19 and to improve the state’s economic prospects.
A legislative response to the COVID-19 pandemic:
The closing of Minnesota’s public schools has been a disaster for many Minnesota families. But this problem also presents an opportunity. For the first time, thousands of Minnesota parents have been forced to consider alternatives to the neighborhood public schools. Homeschooling has grown, charter school enrollment has risen sharply, and private schools are seeing increased demand, while public school enrollments have declined in many school districts. Our organization’s polling shows that for the first time, large numbers of parents of school-age children now have a negative view of the teachers’ union because they understand the union’s role in forcing school closures.
This situation offers a unique opportunity to diversify educational choices for families. Policy solutions include the following.
1) Establish Education Savings Accounts (ESAs)
ESAs are accounts that help pay for education-related products and services. In an ESA, government funding follows the child, not the school district. Different from private school vouchers and other scholarships, ESAs help families choose multiple learning options simultaneously, allowing parents to customize a child’s education to meet his or her needs.
2) Establish Special Education ESAs
Under Minnesota and federal law, students can have Individualized Education Plans that schools are required to uphold. But investigations have revealed that many of Minnesota’s most vulnerable children are not getting the help they need during the COVID epidemic. Minnesota could allocate a portion of CARES Act/ESSER funds to families in the form of Special Education ESAs. This would allow parents to access the tutors, specialized therapists, or other needs that a district committed to remote learning cannot provide.
3) Allow Virtual Charter Schools
Experience during the shutdowns has shown that online learning fails many students, while working for some. Authorizing virtual charter schools that specialize in online learning would introduce more flexibility and innovation into the state’s education system.
4) Permit Full School Choice
On more than one occasion, Minnesota has come close to adopting full school choice, including scholarships that help cover tuition at religious schools, which in urban areas can be the only practical alternative to traditional public schools. Widespread dissatisfaction with the public schools’ performance during the epidemic may open the door to finally bringing about full school choice.
The COVID epidemic disrupted health care in many ways, including the prolonged banning of “nonessential” medical services. As with education,
a serious problem has created opportunities to improve policies. In some cases, emergency measures taken during the epidemic can and should be made permanent.
1) Join the National Nurse Licensure Compact
In the past, Minnesota has excluded health care workers licensed in other states, but Governor Walz signed an emergency order allowing health care workers licensed in other states to work in Minnesota. This policy should be made permanent. Among other things, Minnesota should join the national Nurse Licensure Compact, something American Experiment has long argued for.
2) Lift the Moratorium on Hospital Construction
Minnesota law discourages construction of new hospital capacity by requiring the equivalent of a certificate of need. The state should restore competition to the hospital industry by repealing its moratorium on new hospital construction and all laws and regulations restricting development of such facilities.
1) Amend the Emergency Powers Statute
A 1951 statute allows Minnesota’s governor to declare emergencies that he can unilaterally renew, unless both houses of the legislature vote to end the emergency.
The governor’s powers under that law are virtually dictatorial. The law was intended to apply to floods, tornadoes and the like where quick executive action may be necessary, not to permit months- or years-long regimes of martial law. The needed policy reform is to amend the emergency powers statute, and the simplest way to do that is to provide that any emergency will automatically expire after 14 days unless it is affirmatively renewed by a two-thirds vote of both houses of the legislature.
Tax Reform for Economic Growth
Since 2020, Minnesota has slipped a place, to 46th, on the Tax Foundation’s 2021 State Business Tax Climate Index. This was largely driven by our state’s high corporate tax rates—where we rank 6th highest in the United States—and our individual taxes, where we rank 5th highest. To make serious progress in these rankings, we need to see these rates come down. But there are other things dragging Minnesota down on these rankings that would help us climb them if remedied.
1) Conform to the Federal Depletion Schedule
Minnesota is one of 13 states that doesn’t fully conform to the federal system for the deduction for depletion. This works like depreciation but applies to natural resources. By imposing its own schedule, Minnesota makes its tax system more complex than it needs to be. Conforming to the federal schedule would help this.
2) Eliminate Minnesota’s Alternative Minimum Tax for Corporations
Minnesota is one of only five states— down from eight as recently as 2017— that imposes an AMT for corporations. These corporate AMTs exist to prevent corporations from reducing their corporate income tax liability beyond a certain level. By requiring taxpayers to calculate their tax liability under two different systems, AMTs impose steep compliance costs on businesses, which in some cases proved larger than collections. According to the Minnesota Center for Fiscal Excellence, when the Department of Revenue last published a corporate income tax bul
letin (about a decade ago) the corporate AMT constituted about 1 percent of state corporate income tax collections.
3) Abolish Minnesota’s AMT for Individuals
Minnesota is one of just five states that imposes an individual AMT. These were created to ensure that all taxpayers paid some minimum level of taxes every year. As with corporate AMTs, they do so by creating a parallel tax system to the stan
dard individual income tax code. This requires individuals to calculate their
tax liability under two different systems, which imposes heavy costs relative to the revenues gained.
4) Eliminate the State’s Marriage Tax Penalty
Minnesota is one of 23 states and the District of Columbia that has a marriage penalty built into its tax codes. These penalities exist when a state’s standard deduction and tax brackets for married taxpayers filing jointly are not double those for single filers. As a result, two singles (if combined) can have a lower tax bill than a married couple filing jointly with the same income.
5) Abolish Minnesota’s Estate Tax
Minnesota is one of 12 states and the District of Columbia to impose estate taxes and is also one of six to impose inheritance taxes. These taxes are burdensome, disincentivizing business investment and driving high-net-worth individuals out of the state. In the Center’s 2018 report “The Cost of Minnesota’s Estate Tax,” we estimated that, by driving these people and their future payments of other taxes out of the state, Minnesota’s estate tax actually lost the state government revenue overall. A subsequent paper by economists Enrico Moretti and Daniel J. Wilson confirmed this. The Tax Foundation calculates that, taken together, these five policy remedies would raise Minnesota from 46th to 40th overall on its State Business Tax Climate Index. While we would like to be higher, this would be a definite improvement.
These are only initial proposals. In all likelihood, the pandemic will not be over when the legislature convenes. Neither are these all the fiscal measures that the state needs to really improve its economic prospects. But they do represent first steps, however small, in the right direction.