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Unprecedented levels of COVID-related spending and intrusion into private lives and public businesses have given liberals a taste for Big Government power that they’ll not readily relinquish. Minnesota’s policymakers must prepare for a tsunami of spending, regulations and social engineering in the next legislative session. Here are our thoughts on just a few issues they’ll face.
Higher Taxes are Not the Answer: by John Phelan
Back in February, economic forecasts showed that Minnesota’s state government had a projected budget surplus of $1.5 billion for the remainder of the budget cycle ending July 2021. In March, COVID-19 hit the state, and the economy was brought to a sudden halt. By May, that surplus had disappeared, and the state budget office projected a $2.4 billion deficit for the period ending next July. May also saw a prolonged period of rioting, which left devastation in some sections of the Twin Cities and a bill for the damage that was added to state spending. On July 31, the state budget office added a projection of an additional $4.7 billion shortfall for the biennium beginning in July 2021.
This poses a problem. Because Minnesota’s constitution requires a balanced budget each biennium, lawmakers in St. Paul must ask themselves a very hard question: How will we close this deficit? To answer, the state government has three options: higher tax rates, lower spending, or some combination of the two.
Minnesota already has some of the highest tax rates in the United States
Minnesota has the fifth highest top rate of state personal income tax in the United States—9.85 percent on income over $164,400 a year. Only Oregon, New Jersey, Hawaii, and California have higher top rates. But Minnesota doesn’t just tax “the rich” heavily. Our state’s lowest personal income tax rate—5.35 percent on the first taxable dollar earned—is higher than the highest rate in 25 states.
It is a similar story with state corporate income tax rates. At 9.80 percent on the first dollar of income, our state has the fourth highest state corporate income tax rate in the United States. Only Pennsylvania, New Jersey, and Iowa have higher rates.
Tax revenues do not appear to be driven by tax rates
Tax hikes as a solution to the deficit ought to be rejected because evidence suggests they wouldn’t succeed in bringing in the required revenues. When a state government raises a rate, it is attempting to appropriate a greater share of the income generated by that state’s residents for itself. So, we can judge the success of income tax rate increases, for example, by looking at whether they result in a greater share of the state’s Gross Domestic Product (GDP) being taken in income tax.
That does not seem to be the case in Minnesota. Figure 1 shows the state’s top rate of state income tax for a single filer and the share of the state’s GDP taken in income tax. What is striking is how stable the share of state GDP paid in income tax is—both the mean and the median average for the period 1974 to 2018 are 2.8 percent. This is in spite of state tax policy. In the 1970s and into the 1980s, Minnesota’s politicians tried to claim a large share of their citizens’ income with top rates of tax up to 17.0 percent. But Minnesotans did not respond to these rates by handing over a greater share of their money, as shown by the stability of the revenue line. Indeed, they handed over a larger share of their incomes to the government in the 1990s with top income tax rates of 8.50 percent than they did in the 1970s with rates of 17.0 percent.
The same is true of revenue more broadly. For total state tax revenue as a share of state GDP, the mean average is 6.6 percent since 1974 and the median is 6.7 percent. In other words, there is very little variation in these numbers.
There is an important policy lesson here. The dollar amount of tax revenue seems far more likely to be a function of the size of the state’s economy than of its tax rates. This means that if you want more money to fund government services, you are better off looking to increase the state’s GDP rather than its tax rates.
High tax rates restrain economic growth
With this in mind, a third reason for rejecting hikes in tax rates is that they depress economic growth.
The balance of empirical research on the effects of state tax rates on economic growth is clear. In a review of the literature measuring the impact of taxes on economic growth, the economist William McBride concluded:
…that there are not a lot of dissenting opinions coming from peer-reviewed academic journals. More and more, the consensus among experts is that taxes on corporate and personal income are particularly harmful to economic growth, with consumption and property taxes less so. This is because economic growth ultimately comes from production, innovation, and risk-taking.
Of the 26 papers reviewed by McBride, 23 (88 percent) find a negative impact of higher tax rates on economic growth. The other three papers find no effect. Not one finds a positive effect. Of the six studies looking at state tax rates specifically, every one found a negative impact.
More recent research corroborates this conclusion. Of 12 papers published since 2012 looking at the impact of taxes on economic growth, seven find negative effects, the other five find “mixed” effects, and none finds a positive effect.
Spending is already historically high
The fourth reason that increases in tax rates ought to be rejected is that Minnesota’s state government spending is already historically high.
Minnesota’s General Fund spending was higher in real, inflation adjusted terms in 2019 than in any previous year. The same is true in per capita terms. In total and per person, and in real terms, Minnesota’s state government has never spent more money than it is spending right now.
The two main components of this spending are education and welfare. Between 2010 and 2018, they have accounted for at least 70 percent of the state’s general expenditure.
In 2018, Minnesota spent $12,975 per pupil, just slightly above the national average, $12,611. But our state’s welfare spending is far higher. As Figure 3 shows, Minnesota spent $30,000 in public welfare for each person in poverty in 2018, the third highest amount in the country. Only Massachusetts and Alaska spent more. For the United States as a whole, the figure was just $17,000. For another comparison, the U.S. Department of Health and Human Services set 2017 poverty guidelines as household income below $24,600 a year for a family of four and below $12,060 for an individual.
Not only is Minnesota’s welfare spending high, it has grown rapidly in recent years. From 2010 to 2018, Minnesota’s total spending on welfare grew by 30.1 percent in real terms, from $12.3 billion to $16.1 billion. Indeed, welfare spending grew as a share of the state budget, from 33.8 percent of general funds in 2010 to 37.1 percent in 2018. As with total spending, we also see record high welfare spending in per person terms. Between 2010 and 2018, Minnesota’s public welfare spending per person in poverty grew by 46.4 percent.
Given that levels of state government spending are at record highs, there is ample opportunity to address the forecast budget deficit entirely through spending cuts without threatening key services. The budget for the current biennium, which runs from July 1, 2019 to June 30, 2021, is $48.3 billion with a $2.4 billion deficit forecast. If we took this amount out of the amount of projected spending for FY 2021—$24.4 billion—we would be returning spending in real, inflation adjusted per capita terms to the level of 2016-2017.
Getting a Bang for Minnesota’s Education Bucks: by Catrin Wigfall
The upcoming 2021 legislative session will undoubtedly begin with spending advocates calling for increased education spending. At 41.3 percent of the state’s budget, education consumes the largest share of General Fund dollars—more than transportation, public safety, and health and human services combined.
Education Minnesota (the state’s teachers’ union) has stated it will lobby for “significantly increasing the per-pupil funding formula and tying it to inflation” because “Minnesota’s share of funding for public school districts hasn’t kept pace with inflation.” This is not accurate. Even after adjusting for inflation, total revenue per student is up 25 percent just since 2003.
Arguments for increased education spending will likely focus on budget constraints that schools are facing due to COVID-19, especially given that many districts were already in the red before the coronavirus pandemic hit. But there is a solution to help school districts save thousands of dollars without asking for spending increases that the state can’t afford: K-12 emergency education savings accounts.
The government already sets aside tax dollars for every child’s education, but in an ESA, the money is able to follow the child. Given the numerous COVID-19 related concerns facing education, ESAs could be a solution to address a variety of these concerns while ensuring students can continue learning safely.
We know from the state’s past track record that despite consistently increasing the flow of dollars into Minnesota’s public schools, educational disparities persist, and achievement scores are stagnant or in decline. Until we pursue policy solutions that give us more bang for our education bucks, too many Minnesota students will continue to be left behind. Policymakers and state leaders should focus less on automatically increasing the education dollar amount and more on what can be done to leverage the diminishing returns the state is getting for that additional spending. If legislators are going to continue arguing for increased K-12 spending, they owe it to taxpayers and Minnesota families and students to make that argument in honest terms.
No spending increases for public pre-K
During the 2019 legislative session, legislators did not increase funding for public pre-K but extended the current funding until 2021. Calls for either increasing the funding or again extending current funding are expected. But the expansion of public pre-K is a huge burden on taxpayers, and it undermines existing preschool options by forcing them to compete with “free” public programs, which often force them out of business.
No reversal of teacher licensing changes
After years of effort, Minnesota’s teacher licensing system was overhauled with the adoption of a four-tiered licensure system in 2017. These reforms brought effective improvements to a badly broken and complex licensing system and streamlined the licensure process.
During the 2019 legislative session, DFL legislators proposed changes to the newly adopted licensing rules that would hinder a highly qualified teacher from becoming licensed and undermine the important gains made in helping qualified individuals become teachers in Minnesota. The proposed changes would also undermine efforts to address teacher shortages and attract teachers of color into classrooms. We need to give the newly adopted system an opportunity to work instead of rushing to rebuild licensing roadblocks.
While efforts to require pre-K teacher licensing were successfully defeated during the 2019 session, it is possible attempts to require this will be made in the upcoming session. Pre-K teacher licensing is unnecessary and creates barriers for teachers to enter the field. Minnesota already requires pre-K teachers to hold a bachelor’s degree from an approved program. The teachers’ union is pushing for pre-K teachers to be licensed because it would increase union dues revenue and expand the union’s power.
Reining in Energy’s War on Reality: by Isaac Orr
William F. Buckley, Jr. once said, “A liberal is someone who is determined to reach into your shower and adjust the water temperature for you.”
If liberals want to control the temperature of our showers, the progressive politicians to their left want to control everything else. These far-left lawmakers at both the state and federal level see energy and environmental policy as a weapon to radically change the lives of Minnesotans, especially when it comes to electricity generation and mining.
Liberal politicians are obsessed with the idea of forcing us to use wind and solar power to generate the electricity we rely upon every day. But we need look no further than California to see the disastrous future of Minnesota, and the United States, if we continue to elect politicians who prioritize a Green New Deal.
In August, more than two million California households and businesses lost their electricity during a record-setting heatwave. The reason? The sun went down, rendering the state’s solar panels as useful for electricity generation as a garden gnome.
For decades, California politicians have patted themselves on the back as they have forced the shutdown of coal, natural gas, and nuclear power plants— which can operate at night and when the wind isn’t blowing—while mandating ever-increasing quantities of solar and wind on the electric grid.
As a result, there were not enough reliable power plants left standing to generate electricity when it was needed most. California’s rolling “greenouts” come at a time when the state only gets about 30 percent of its electricity from wind and solar. Power outages will only become more common as the state mandates more wind and solar onto its power grid.
Imagine your elderly parent relying on a ventilator whose whirring noise fades along with the sunlight. Imagine your spouse relying on a sleep apnea machine that starts and stops at the whims of the wind.
What do Californians get for their dangerously unreliable electric grid? Some of the highest prices in America. The high cost of energy in California is one reason why the Census Bureau states California has the highest functional poverty rate—which adjusts for the cost of living—in the country.
In 2019, Minnesota liberals and Governor Walz wanted to mandate that 100 percent of Minnesota’s electricity come from carbon free energy sources by 2050. But the Walz administration refused to legalize new nuclear power plants, and it also refused to allow clean hydroelectric power from Canada to qualify as “carbon free,” even though it emits zero carbon dioxide.
Instead, the administration said it believes wind, solar, and battery power can power our society. California shows this belief is both wrong and dangerous. The only thing Minnesotans will get from emulating the Golden State is a dangerously unreliable electric grid and higher prices.
Despite the fact that liberal energy policies would require enormous amounts of copper, nickel, and cobalt to build the wind turbines, solar panels, and batteries they want to force upon us for electricity generation, liberal politicians have zero interest in allowing these metals to be mined in Minnesota.
The Iron Range produces 85 percent of the iron ore mined in the United States, and Minnesota has some of the largest undeveloped deposits of copper, nickel, platinum, cobalt, and titanium in the world.
Responsibly mining these resources could create up to 4,667 jobs in the mining industry, which pay an average of $80,000 per year. Another 4,912 people would have jobs in support industries, and 5,271 jobs would be created as miners and support staff spend their paychecks in the local economy. In total, there would be up to 14,851 new jobs on the Range generating $5.9 billion in annual economic output.
But these jobs are unlikely to come to fruition if liberal politicians are allowed to call the shots.
In January 2017, the Obama/Biden administration improperly cancelled the longstanding leases held by Twin Metals Minnesota in the final lame duck days of their reign. This not only includes Twin Metals Minnesota, but it also prevents other iron ore mines from being evaluated as well.
Rep. Betty McCollum staffers appear to believe that a Biden presidency would cancel the mineral leases for Twin Metals, just as President Obama had done, which would be an enormous setback for the Iron Range.
When a mine shuts down, it sends shockwaves through entire towns. Schools lose revenue as people leave to seek out new opportunities. Small shops, churches, and social groups suffer with less money flowing through the local economy.
The promise of a new mine offers the exact opposite. It offers high-paying jobs, good health insurance and retirement benefits, and new residents in towns that have been watching their young people leave to find work elsewhere. In short, it offers a brighter future.
Minnesotans can choose between brighter days or designed decay. We can choose to create thousands of high-paying, American jobs or we can be dependent upon imports of the metals we use every day from other countries. We can reject the energy policies that have plunged California into darkness, but only if people see the light.