Minnesota’s Economic News – W/E 7/30/21
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Seven common-sense ideas that will transform Minnesota’s economy for generations.
Minnesota has many natural advantages, but currently, it is not faring will in comparison with most other states. Like it or not, states compete with one another. Minnesota is losing out in that competition because Minnesotans are over-taxed and over-regulated. Our state government spends too much and wastes too much.
John Phelan, American Experiment’s economist, has pointed out that Minnesota’s economy in the 21st century is average or worse in job creation, income growth, and GDP growth when compared with the nation as a whole. His report, “The State of Minnesota’s Economy, 2017: Performance continues to be lackluster,” shows the problem is statewide-the Twin Cities metro area has been below average in job growth and GDP growth compared with other metropolitan areas.
People move from one place to another for many reasons, but a common denominator is economic opportunity. If good-paying jobs are available, people will follow them. And, of course, lower taxes constitute a form of economic opportunity. Our 2016 report, “Minnesotans on the Move to Lower Tax States,” found that Minnesota consistently loses residents to lower-tax states. It’s not only “the rich” who flee Minnesota’s high taxes; Minnesota suffers a new outflow of residents to other states in every household income category above $25,000. Minnesota is a magnet for citizens of other states only in the $0 to $25,000 household income category. This is not a stable business model.
Minnesota’s economic doldrums are a problem, but they also present an opportunity-an opportunity for bold action. Minnesota will not make itself more competitive by nibbling around the edges. Significant changes will have to be made. And the present historical moment is an opportunity for changes that will not only make Minnesota more prosperous but a freer, more rewarding place to live.
Minnesota’s conservatives need to go big. We can’t realize Minnesota’s full potential with small-ball measures. What follows is a blueprint for a real renaissance that could make Minnesota America’s most prosperous and most progressive state.
I. Reform Minnesota’s Tax System and Restrain Spending
Minnesota can’t compete with high-growth states as long as we have one of the highest overall tax burdens in the United States. The Tax Foundation assesses Minnesotans as the 6th most highly taxed Americans. That needs to change, or anything else will do prove futile. So, how should we reform Minnesota’s tax system?
First, abolish the estate tax. Minnesota is one of only 15 states that still impose an estate tax, and of those states, our rate is second highest. Most people don’t worry about the estate tax, but those who do are generally mobile. They have to choose between leaving their money to their children or leaving it to the government. Most choose their children. And they vote with their feet by moving to another state. As a result, the state tax produces very little money-just 0.5 percent of Minnesota’s revenue in 2016. In the process, it drives away valuable citizens who If they stayed here would spend money and pay other taxes.
John Phelan reported earlier this year that ending the estate tax might actually produce more revenue for Minnesota because wealthy Minnesotans would stay here, rather than leaving. So, repealing the estate tax is an easy decision.
Next, repeal Minnesota’s corporate income tax. At 9.8 percent, our current corporate income tax is the third highest in the nation, the equivalent of telling entrepreneurs to start their businesses elsewhere. Just a few decades after Minnesota was regarded as a hotbed of venture capital, we now score far below the national average in venture capital investment per worker.
Repealing the corporate income tax would cost the state just $1.2 billion in 2017 and would signal to Minnesota businesses and entrepreneurs nationwide that we want the to do business here. Minnesota wants their innovation, their jobs, and their profits; and we want them and their employees to spend their money in Minnesota. Becoming the third state with no corporate income tax would send the message that Minnesota is once again for business.
Third, cut individual income tax rate. Minnesota’s notoriously high income tax rates define us as a “blue” state. Aggressive young people will see our 10 percent top income tax as a place to begin their careers or start a business. Minnesota needs a competitive income tax structure if it wants to compete seriously for 21st-century businesses, rather than accepting our current slow decline.
Minnesota’s tax problem is not limited to its top rate. All Minnesotans who pay income taxes are overtaxed. Minnesota’s lowest rate—the rate we all pay on our first dollar of taxable income—is 5.35 percent. That rate is higher than the highest rate—not the lowest rate—in 23 states. This must change.
Minnesota could cut taxes steeply and still not begin to approach states like Texas, Florida and South Dakota, which have no personal income tax at all—and whose economic growth vastly outpaces ours. Cutting every tax bracket by two points, so that the 9.85 percent bracket goes to 7.85 percent, 7.85 percent to 5.85 percent, 7.05 percent to 5.05 percent, and 5.35 percent to 3.35 percent, wouldn’t make Minnesota a low-tax state, by any means: we would still have the 10th highest top rate in the U.S. But it would show deep-blue Minnesota that we are serious about making our state competitive. And Minnesotans agree. The most recent Thinking Minnesota Poll shows they favor reducing income tax rates in all brackets by 65 percent to 31 percent.
Of course, Minnesota can’t replace lost tax revenues with borrowed money, as the federal government does. Significant tax cuts will reduce revenue—although by how much, is an important question—and must be balanced by reductions in spending.
The Minnesota Department of Revenue publishes a document that estimates revenue gain or loss for each one point change in the four current income brackets. Adopting the tax reforms suggested here would reduce state government revenue by $4.5 billion, or 19 percent, according to Department of Revenue estimates.
That might sound like a lot of money to legislators and bureaucrats in St. Paul who are horrified at the prospect of any spending cuts. But recall that the legislature increased spending by nearly 10 percent last session. This means we can achieve half of the needed reduction simply by rolling back that increase. Minnesotans should ask themselves: did you get a 10 percent raise last year? Most will answer no.
Reducing state spending by 19 percent would bring it to the level of 2012. (Or, in inflation-adjusted terms, 2011.) Whenever spending cuts are proposed, liberals object that widows and
orphans will be starving in the streets. I was here in 2012, and I didn’t notice any starving widows and orphans. Did you? There is no reason our state government can’t live on the revenue it had before the spending binge brought on by the Dayton administration.
Where should cuts be made? We can see waste everywhere. Probably some spending should be less hard hit—roads and highways, for example—but who takes seriously the idea that government spends our money so efficiently that cuts are impossible? No one. Recent publicity about massive and systematic fraud in Minnesota’s welfare system is one more reminder that cuts not only can be made, but need to be made.
Politicians who quail at the thought of a 19 percent cut in spend- ing should take heart from the just-conducted Thinking Minnesota Poll, which shows the average Minnesotan believes 20 percent or more of state spending is wasted. Minnesotans also believe—by 76 percent to 18 percent—that the state could achieve a savings of 10 to 20 percent by eliminating waste and fraud.
Which brings us to the fact that economists universally recognize the important difference between tax rates and tax revenues. Tax rate cuts don’t necessarily reduce tax revenues by an equal amount. A 10 percent cut in tax rates, if the cuts are pro-growth, may or may not reduce revenue at all.
Earlier rate reductions in Minnesota illustrate this point. Between 1984 and 1988, legislators cut our top income tax rate from 16 percent to 8 percent. (At the same time, the bottom rate increased from 1.6 percent to 6 percent, as the tax structure was flattened.) As a result, income tax collections rose from $2.32 billion in 1984 to $2.62 billion in 1988. More dramatically, if we compare the ten years up to 1984 with the ten years beginning
in 1988, income tax collections went from an average of $3.9 billion to $6.0 billion (because of the long time period involved, these numbers are expressed in constant 2017 dollars). In other words, tax collections rose dramatically after the top rate was cut in half.
Another round of tax cuts occurred between 1998 and 2000, when the top rate was reduced from 8.5 percent to 7.85 percent, while the bottom rate was also cut from 6.0 percent to 5.35 percent. Once again, instead of falling, income tax revenues rose from $4.7 billion in 1998 to $5.6 billion in 2000.
Thus, there is every reason to believe a 19 percent reduction in tax rates will not produce a 19 percent reduction in tax revenues. Experience shows that regardless of nominal rates, Minnesota’s total state tax collections have represented a remarkably stable percentage of the state’s GDP, during the period from 1974 to the present. Total tax collections have fluctuated in a range between 6.0 percent and 7.1 percent of state GDP, with little apparent relationship to nominal tax rates. This suggests that if we want to maximize state tax revenues—not exactly my goal as a conservative!—it makes more sense to focus on increasing Minnesota’s GDP rather than its nominal tax rates.
All of this means that once we see what revenue is actually collected following the tax cuts proposed here, there will be room for a second round of tax cuts. How steep these reduc- tions can be will depend on the empirical response to the first round of cuts, but experience tells us the second round can probably be substantial.
More than anything else, cutting Minnesota’s exorbitant tax rates while constraining state spending will move Minnesota out of the “blue” category and make the state’s economy competitive again.
II. Develop Minnesota’s Natural Resources for the Benefit of All Minnesotans
The Center’s just-published report, “Unearthing Prosperity,” describes Minnesota’s vast mineral reserves—perhaps the world’s richest untapped mineral resources—with a value of hundreds of billions of dollars. Development of even a small portion of Minnesota’s copper, nickel, platinum, titanium and cobalt would contribute, according to the IMPLAN software conventionally used by economists, $3.7 billion annually to Minnesota’s economy and
would create 8,500 jobs.
Developing Minnesota’s mineral resources would also provide a reliable domestic supply of metals that we all need, every day. For example, every smartphone and laptop contains cobalt, almost all of which must currently be imported. Minnesota contains 95 percent of America’s cobalt supply. None of it is now being mined; instead, we import cobalt from Africa, often after it has been mined by child labor.
The Thinking Minnesota Poll shows strong support for mining statewide. Where Minnesotans oppose mining, it is invariably on environmental grounds. Yet more than half of the Center’s mining report is devoted to describing the modern mining technologies and regulatory regime that make mines environmentally friendly. Not a single mine permitted since 1990 has suffered
an environmental incident causing it to be placed on the EPA’s National Priority List. Experience shows there is no reason why unfounded environmental fears should prevent development of such valuable resources. Indeed, all around us—in Wisconsin, Michigan, and above all in Canada—mineral resources nowhere near as valuable as those we have in Minnesota are being developed.
Finally, putting Minnesota’s mining potential to work would perhaps give the state the nation’s most diverse economy. Of course, along with economic growth will come new tax revenues. IMPLAN evaluates those revenues, at the state and local levels, at $200 million annually. These revenues can be used to further reduce taxes, but another possibility is to dedicate some of them to enhancing Minnesota’s fish and game resources.
If, for example, $40 million annually—20 percent of the incremental tax revenue from mining—was used for predator control programs, additional game- fish stocking programs, and so on, two consequences would follow. Minnesotans who hunt and fish would enjoy improved game and fish resources, and the state’s tourist industry would benefit, as well. Attracting more hunters and fishermen from other states would give Minnesota’s economy yet another boost.
III. Stop Imposing Unfair Costs on Minnesota’s Farmers
Minnesota law requires farmers to protect water quality by establishing “buffers” consisting of perennial vegetation rather than cash crops. Buffers of 50 feet are required for lakes, rivers and streams, and of 16.5 feet for ditches.
Everyone wants clean water. But legally-mandated buffers take valuable land out of production without compensation, thereby saddling farmers with the cost of protecting lakes, rivers and ditches. Some believe that in many areas (e.g., where there are berms) buffers are unnecessary, or the buffers required by law are excessive.
The Constitution’s Fifth Amendment prohibits government from taking property without fair compensation, but courts have often been permissive in allowing uncompensated regulatory takings. Therefore, a legislative solution is appropriate here.
Rather than imposing the cost of buffers solely on farmers, Minnesota’s legislature should require the state to compensate farmers annually, based on current rental values, for land that is taken out of production by regulation. This will have two benefits. First, the cost of clean water will not be borne exclusively by farmers. Second, state environmental authorities will have an incentive not to require buffers larger than are really necessary to protect water quality.
IV. Devote Minnesota’s Transportation Funding to Roads, Highways and Bridges
The Center’s 2017 report, “Twin Cities Traffic Congestion: It’s No Accident,” documents the fact that traffic congestion is far worse in the Twin Cities than in most metro areas comparable in size and geography. Congestion has quadrupled since 1982 and now costs Twin Cities drivers and businesses an estimated $4 billion annually.
Why? Because the Metropolitan Coun- cil has dictated transportation policies that emphasize trains and bicycle paths over roads and highways. The Department of Transportation is now going along with those policies. Both agencies have publicly stated that reducing congestion is no longer a priority. Instead, they focus on trains and bicycle paths that, as our report shows, actually make congestion worse.
Minnesota’s legislature should clearly articulate a transportation policy that prioritizes efficiency and convenience over left-wing ideology. Transportation dollars should be spent on relieving congestion and facilitat- ing vehicle traffic, which is how Twin Cities residents get where they are going more than 95 percent of the time. While perhaps not appropriate for statewide legislation, residents of cities like Minneapolis should protest against misguided local officials who take traffic lanes out of service and replace them with seldom-used bicycle paths.
Traffic congestion is more than an annoyance. It is an economic drag on the Twin Cities and a needless competitive disadvantage. The legislature should take decisive steps to reverse the Met Council’s ideologically-driven priorities. Voters will approve: the Thinking Minnesota Poll finds that by a 77 percent to 19 percent margin, Minnesotans want their transportation dollars spent on roads and highways, not trains and bicycle lanes.
V. Focus Energy Policy on Efficiency, Not Cronyism
Since 2007, when Minnesota enacted a 25 percent renewable energy mandate, the cost of electricity in Minnesota has risen 26 percent faster than the national average. Why? Because, as the Center’s report, “Energy Policy In Minnesota: The High Cost of Failure” documents, $15 billion has been spent on wind turbines and transmission lines in a futile attempt to turn Minnesota “green.”
Historically, Minnesota enjoyed electricity prices about 20 percent cheaper than the national average. Cheap electricity benefited consumers and gave Minnesota’s businesses a competitive edge. But in 2017, for the first time ever, Minnesota’s electricity prices were more expensive than the national average, and they are still rising.
Minnesota’s vast expenditure on wind turbines was not justified by a growing demand for electricity. On the contrary, electricity consumption has been flat, and is expected to remain flat. Instead, Minnesota has substituted unreliable wind energy for reliable coal, natural gas and nuclear energy. The problem is that wind energy, being intermittent and usually coming online when it is least needed, can’t actually replace traditional energy sources, because the state needs reliable power capacity sufficient to meet peak demand.
That means $15 billion has been spent on what is essentially an unneeded add-on to the state’s existing power plants. Not surprisingly, there has been no significant reduction in Minnesota’s CO2 emissions, which is the ostensible purpose of “green” energy.
Minnesota should get out of the business of subsidizing and mandating energy sources. The purpose of a utility company is to provide electricity reliably and at the lowest possible rate, for the benefit of consumers and businesses, not to pursue collateral, and in fact unobtainable, objectives. If wind or solar energy ever becomes price-competitive without subsidies or mandates (which are subsidies under another name, with rate-payers bearing the cost), fine. Meanwhile, the legislature should make it state policy that the Public Utilities Commission will only approve investments that are designed to produce power at the lowest cost to consumers. No favoritism, no special interest cronyism, no subsidies, no mandates.
To effectuate that policy, legislation requiring consideration of a fictitious “social cost of carbon” should be repealed, along with the state’s renewable energy mandate.
VI. Reclaim Minnesota’s Heritage as an Educational Innovator
Minnesota was once a national leader in educational innovation. Among other things, the state was a pioneer of the charter school movement. But those days are long gone. Now Minnesota, like many other states, spends more and more money to achieve stagnating, or worse, results. Our goal should be to get better results with less money. Here are some obvious ways to make that happen.
First, in urban areas, where public schools are generally the lowest-achieving, the best path to improvement is school choice. A student should no more be locked into a failing neighborhood school than into a low-grade grocery store, simply because it is the one closest to his home. Real school choice means 1) religious schools are included as options, and 2) tuition funding, as well as lesser expenses, follows the student. Experience around the country shows that real school choice improves student performance. That is as you would expect. Who cares more about a student’s future: the student and his parents, or the teachers’ union and school bureaucrats?
Second, our state government should take the lead in promoting alternatives to four-year college degrees. We have excellent technical schools in Minnesota, but policymakers have focused too much on increasing the rate of college graduation. The fact is that 70 percent of our young people do not obtain four-year degrees, and the vast majority of jobs in the state do not require such degrees. Many young people graduate (or worse, drop out) with massive debt and no clear career path.
For the minority who really want to pursue higher education, four-year colleges are the best choice. But for young Minneso- tans who don’t want to spend four years in classrooms study- ing books, there are great career alternatives, as outlined in the Center’s paper, “No Four-Year Degree Required.” The paper shows that young people who pursue careers as CNC program- mers, plumbers, electricians, and so on, can expect to out-earn the average college graduate over the course of a career.
Further, many Minnesota employers say their biggest problem is finding qualified workers. All states are in a race to solve a “skills gap” because our educational system is not producing young people with the training that employers need to run their business- es. It is generally agreed that states doing the best job of matching training to job needs will have a major competitive advantage. Currently, Minnesota is not seen as a leader in this regard, but the Center’s Great Jobs project is attempting to change that.
Minnesota’s legislature should prioritize technical education in its appropriations. Beyond that, there are many “soft” measures state government can take to re-orient our cultural fixation on four-year college degrees as the only path to success. To take just one example, our next governor should appoint a Commissioner of Education who understands the importance of technical education and puts the influence of the state behind training that will benefit not just Minnesota’s economy, but, even more important, the futures of young Minnesotans.
Third, the legislature should adopt a “bill of rights” for students in Minnesota’s public colleges and universities. Those institutions should be required to disclose basic data including four-year and six-year graduation rates, the percentage of students in each major who are employed within six months after graduation, and the percentage employed in a field related to their major, as well as median starting salaries. Such information will help high school students make informed decisions about their futures.
Finally, state government should take quick action against a pernicious trend that is devastating both inner-city and some suburban public schools: imposition of racial quotas in school discipline. When students who deserve to be suspended cannot be suspended because their race’s quota has been met, they often wander the halls, invading classrooms and sometimes assaulting teachers, as well as other students. This is an insane situation that cannot be allowed to continue. Minnesota’s legislature should pass legislation banning the use of race quotas in school discipline. Voters will approve: only 12 percent support use of racial quotas in school discipline, while 71 percent are opposed.
VII. Free Minnesota’s Public Employees
The Supreme Court’s recent Janus decision represents a declaration of independence for public employees. Minnesota should further effectuate that independence by adopting pay- check protection (i.e., making it illegal for the state or its subdivisions to withhold union dues from employee paychecks). Why should state government act as a collector for highly partisan organizations that, to make matters worse, are the largest donors to the state’s politicians? Public-sector unions should collect dues from their members in the same way that other organizations do, rather than benefiting from their special interest status.
A number of other reforms would help reduce public-sector unions’ undue influence. For example, Minnesota should not have “hereditary” unions, where employees never have an easy opportunity to vote on whether they want to be repre- sented by a union. Minnesota should require re-certification of bargaining units by election on a regular basis, every year or every other year, without employees having to file or request the certification.
This is not an exhaustive list of reforms that Minnesota should adopt. But the changes outlined here would go a long way toward restoring Minnesota’s rightful status as one of the nation’s freest, most prosperous and most progressive states.