The Long View

7 Things the legislature didn’t do, but should.

The 2017 Legislative Session turned out to be a productive one. From transportation to health care to education, Minnesota’s Legislature sent Governor Dayton a slate of bills that delivered on key priorities. The state’s roads and bridges received a much-needed boost in spending without a tax increase. First steps were taken to address the crisis in the individual health insurance market, providing immediate relief to people exposed to stunning premium increases. And important changes were made to empower school districts to hire and retain the best teachers.

Yet much remains to be done to make state policy work for all Minnesotans. In the Minnesota Policy Blueprint, published in 2014, Center of the American Experiment outlined a long-term policy vision for the state of Minnesota. State lawmakers passed several policies consistent with the Blueprint in 2017, but these policies are just a start. Here are seven key policies that demand more progress from the Legislature.

  1. Spend Less.

The single most disappointing aspect of this year’s legislative session is the fact that a Republican legislature passed $45.7 billion in general fund spending for the next biennium. This is an increase of more than 9% over the 2016-2017 period and more than $10 billion higher than Governor Dayton’s first biennium, 2012-2013. While much of this increase stems from the automatic growth baked into current programs, the legislature agreed to add yet another $1 billion in spending. Importantly, this bump in state spending has not been driven by any emergency or extraordinary need. Our legislature has simply been profligate, and Republican control of both chambers seemed to make little difference.

Some of that additional spending—e.g., $300 million allocated to roads and bridges and $160 million to courts and public safety—is welcome and overdue. But spending on education and health and human services (HHS) is out of control. The “automatic” spending increase for E-12 education was over $800 million, and the final budget agreement added another $483 million. This extra spending comes on the heels of a $607 million and a $526 million increase over and above the base in the last two budgets. The biggest budget problem, however, continues to be HHS spending, which grew by over $2 billion.

It would be one thing to increase spending if it delivered demonstrably better outcomes to taxpayers, but there is no evidence to suggest these added dollars will do anything to boost the performance of schools or public health care programs. What we do know is that more spending on education and HHS crowds out other priorities, such as transportation.

2. Cut Income Taxes.

The legislature’s lack of spending restraint also ruled out substantial tax cuts. The small tax cuts that were enacted (most notably, a reduction in business property taxes) were welcome, but, at just $450 million, they amounted to less than half of the extra spending.

Cutting taxes should rank among the highest policy priorities for the state. Most Americans know two things about Minnesota: it gets very cold in the winter, and taxes are really, really high. As a percent of personal income, WalletHub recently calculated Minnesota had the fifth highest state and local tax burden in the country. These high taxes damage Minnesota’s economy by discouraging work, educational investments, and entrepreneurship. They also discourage productive citizens from moving to Minnesota from other states.

People who support high taxes claim Minnesota boasts a strong economy due, in part, to the government programs that taxes fund. But, in Minnesota’s Economy: Mediocre Performance Threatens the State’s Future, the Center documented the fact that Minnesota’s economic performance has been average at best over the past 15 years, despite the state’s many natural advantages. Furthermore, the Center’s analysis of IRS migration data shows that every year, the state suffers a net outflow of residents to other states, with almost all of the net departures heading for lower-tax states. In 2014, Minnesota suffered a net outflow of $948 million in household income to other states.

Whether we like it or not, we are in competition with other states for the most desirable residents—entrepreneurs and others who contribute substantially to the states where they live. How likely would you be to choose Minnesota if two of the main qualities you attribute to the state are bad weather and high taxes?

Nibbling around the edges of Minnesota’s tax code isn’t enough. We need significant, across-the-board cuts in personal and corporate tax rates. Certainly Minnesota’s top personal income tax rate of nearly ten percent, the third highest in the nation, needs to go. But the other rates need to be cut, too. Minnesota’s lowest income tax rate, 5.6%, is higher than the highest rate in 23 states, seven of which have no personal income tax at all.

Improving Minnesota’s competitive position requires significant cuts in tax rates. Tax cuts, in turn, require spending discipline.

3. Eliminate the Estate Tax.

Lawmakers did take a couple of incremental steps toward reaching the tax reduction goals in the Blueprint. In particular, the tax bill raises the statutory exemption for the estate tax from the current $1.8 million to $3 million by 2020. But this is only a small step. The federal exemption is $5.49 million, meaning that many Minnesotans who are not subject to the federal estate tax will continue paying the state’s version of the tax.

Fully eliminating the estate tax should be a key priority because the tax is one of the most economically damaging, relative to the revenue it brings in, only $183 million in 2016. Because it is a very high tax on a very narrow base, the estate tax creates enormous incentives to avoid it, including an incentive to move to another state. The estate tax might be the largest factor driving out wealthy residents who are forced to choose between paying money to the State of Minnesota and leaving it to their children.

When residents move, the state loses any estate taxes they would have paid here. Worse, Minnesota also loses the income, sales and property taxes those people would have paid, had they remained in Minnesota. The Center is currently analyzing the fiscal implications of repealing the estate tax in its entirety, as more and more states are doing. Meanwhile, an educated guess is that doing away with the estate tax would cost the state’s government very little money, and possibly none.

The estate tax is largely a spite tax, imposed not so much for the modest revenue it raises, but to get even with the wealthy. Repealing it would send a powerful signal that Minnesota’s public policies are no longer driven by hostility to wealth creation, or wealth creators.

4. Enable meaningful school choice.

Education spending in Minnesota, as across the United States, has risen rapidly for decades. But we have learned that more spending does not equal better results. While spending soars, student achievement stalls.

This is particularly true for inner-city, at-risk students. Frequently, they attend public schools that are low-achieving, if not downright dangerous. Poorer families don’t have the money for private schools, and there are not enough scholarships to go around for the large number of disadvantaged youth in Minnesota’s public schools.

For these reasons, Center of the American Experiment has been promoting school choice for 25 years. To offer adequate alternatives to underprivileged children, school choice must include religious private schools— pretty much the only kind that exist in inner cities—and must cover tuition as well as incidental expenses.

Last year, and again this year, an excellent proposal for a tax credit to support Opportunity Scholarships for low-income students to attend private schools, nearly passed through the legislature but failed at the 11th hour. The proposal encountered determined resistance from Governor Dayton, who bitterly opposes school choice because it threatens to reduce the number of unionized teachers whose dues are funneled to support his party’s candidates. As Kim Crockett memorably put it, in 2017 Governor Dayton sacrificed Minnesota’s school children on the altar of government unions—again.

Next session, the legislature should do everything possible to get meaningful school choice, in the form of Opportunity Scholarships, across the goal line.

5. Promote mining in northern Minnesota.

Minnesota has some of the richest mineral deposits anywhere in the world. Northern Minnesota contains more than four billion tons of copper, nickel and precious metals. We have the second largest copper deposit in the U.S., and the third largest nickel deposit in the world. And in May, scientists announced that they have successfully converted an abundant Minnesota mineral, called ilmenite, into valuable titanium dioxide. This could create a whole new mining industry in northern Minnesota, which has both the largest and the most accessible reserves of ilmenite in North America.

Taken together, the mineral wealth of northern Minnesota is almost incalculable. And yet, apart from taconite, these resources have been almost entirely untapped. Companies invest many millions of dollars over a period of years and even decades, without getting a decision from the state’s regulatory agencies as to whether they will or will not be issued a permit.

Minnesota’s regulatory system, as it relates to mining, has broken down. The Center is working on a mining paper that will include specific legislative recommendations; for now, let’s just say that the legislature should act to reform the regulatory process to expedite processing of permit applications.

6. Adopt right-to-work. 

Minnesota is one of a shrinking group of states that force workers to join unions
as a condition of their employment. In the past five years, Indiana, Kentucky, Michigan, Missouri, West Virginia, and Wisconsin all adopted right-to-work laws that give workers the freedom to join, or not to join, a union.

These laws have passed because giving workers more freedom creates new job opportunities, makes states more competitive, and stimulates stronger economic growth. Stronger growth translates to higher wages. In 2012, the Center commissioned a study that found income per household would have been between $6,000 and $7,700 higher if the state had passed a right-to-work law in 1977.

Short of Minnesota passing right-to-work statewide, cities and counties may be able to pass their own right-to-work laws, depending on the outcome of a court case on appeal. Starting at the local government level is how Kentucky got momentum to pass right-to-work statewide.

Both Minneapolis and St. Paul have passed paid sick leave requirements. These laws have generated a legal challenge on whether towns and counties can adopt by ordinance labor regulations that are inconsistent with state standards. While the Center supports this legal challenge—one statewide labor policy is far better for business than a patchwork of regulations from city to city—if the courts ultimately go the other way, cities and counties will be able to pass their own right-to-work ordinances, just like a paid sick leave policy or a minimum wage.

7. Rein in the out-of-control Metropolitan Council. 

The Metropolitan Council was created in 1967, mostly to deal with sewage issues that crossed town boundaries. But it didn’t take long for Met Council members and staff to realize that the organization’s powers were potentially vast. In general, municipalities and counties are required to carry out actions that are in accordance with approved plans. Who approves the plans? The Met Council. Its central role in metropolitan area planning gives the Met Council the ability, never intended when the Council was established, to drive an ideological agenda. In recent years, that is exactly what the Met Council has done. It uses its planning powers to try to implement a vision for a radically different Twin Cities area.

Among regional planning agencies, the Met Council is unique. In a paper written for the Center in 2016, Kevin Terrell found that the Met Council has the largest budget of any of the nation’s 20 major regional authorities, while at the same time it is the least accountable—members never need to stand for election. Uniquely among such regional organizations, the Met Council has the power to levy taxes, a literal case of taxation without representation.

The Center’s new traffic congestion project highlights the manner in which the Met Council is trying to reorder the Twin Cities. The Council wants Twin Cities residents to ride trains, buses and bicycles rather than drive cars, and it is willing to make traffic more congested in order to realize that goal.

Multiple process reforms have been proposed for the Met Council, such as expanding the Council to include members who are elected county and city officials. Such process reforms would probably help, but a better course would be to abolish the Met Council as it currently exists. The legislature could then establish a new agency whose powers would be too modest to allow it to envision remaking the Twin Cities pursuant to an ideologically-driven vision.