There is good and bad in the GOP’s budget proposal

Yesterday, leaders of the Republican minority at the Minnesota Legislature rolled out their $13 billion “Give It Back” plan. This would dedicate most of the state’s $17.5 billion forecast budget surplus for one-time and permanent tax cuts.

Proposals include:

  • One-time rebate checks of $1,250 for individuals and $2,500 for joint filers regardless of their income. Cost: $5 billion.

This is little different from the “Walz checks” idea. It increases the amount of the check, up to a point, and extends the eligibility to higher earners. This was bad policy when Gov. Walz touted it — so bad, in fact, that even the House DFL wouldn’t go for it — and it is bad policy when the GOP is touting it.

  • Tax credits of $1,800 per child for the next two years. Cost: $4 billion.

Much of the devil lies in the detail of a scheme like this. The DFL’s current proposal will disincentivize people from working and marrying given how it is structured, and will likely leave the state’s economy smaller, overall. On balance, this is probably not a good policy.

  • 1 percentage point income tax rate reductions for the bottom two brackets — to 4.3% and 5.8%. Cost: $3 billion.

This is a very abbreviated version of one of the two proposals we set out last month. Nevertheless, it is better than nothing. This is good policy.

  • Full elimination of income taxes on Social Security. Cost: $1.26 billion.

I get more emails about Social Security taxation than any other issue. The essential argument is that the income has been ‘taxed’ already when it is taken in payroll taxes and is being taxed a second time when it comes back to you as Social Security and is hit with the income tax.

I don’t think this is quite correct. Social Security withholding is nominally a “tax” but it acts economically as an individual’s contribution to a “collective” form of a national defined benefit plan, like a contribution you might make to a 401k. As a result, Social Security income is effectively only taxed once as an earned benefit modeled on the taxation of pensions. The proposal, as it stands, would play havoc with horizontal equity in the tax system, even within and among senior households. Why should income from a 401k be taxed when income from Social Security isn’t? As loathed as I am to criticize a tax cut, I do not think this proposal is good policy.

  • Raising the state’s homestead value exclusions by 25%. Cost: $70 million.

This is good policy and is probably a better way to help hard-pressed seniors than elimination of Social Security taxation.