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Home / News / ‘Tax reform’ easy to discuss, hard to do
Mark Haveman, executive director of the Minnesota Taxpayers Association, is just as puzzled as the next fiscal analyst when it comes to figuring out how the conservatives who control the state Legislature can devise a solution to the state's $6.2 billion deficit that Gov. Mark Dayton is willing to sign.

‘Tax reform’ easy to discuss, hard to do

reform is when you've got money to pay for reform. And we don't have money to pay for reform right now." – Mark Haveman, executive director, Minnesota Taxpayers Association “] “Obviously the best shot at [tax] reform is when you’ve got money to pay for reform. And we don’t have money to pay for reform right now.” —Mark Haveman, executive director, Minnesota Taxpayers Association Director of the MTA discusses the challenges in making taxes more fair while confronting a deficit

Mark Haveman, executive director of the Minnesota Taxpayers Association, is just as puzzled as the next fiscal analyst when it comes to figuring out how the conservatives who control the state Legislature can devise a solution to the state’s $6.2 billion deficit that Gov. Mark Dayton is willing to sign.

But in an interview with Capitol Report this week, Haveman shared his view of the politics-and-policy dynamics that are bound to play out before the session adjourns. Haveman also spoke at length about his critique of local government aid (LGA), which has already emerged as one of the numerous hot-button spending issues of the 2011 session.

Capitol Report: There are nearly 300 tax breaks that have passed over the decades and are in law today. Some are small. Others are enormous, worth hundreds of millions of dollars to the state in the form of tax expenditures. Is the state paying good money in the form of tax expenditures for bad tax policy?

Mark Haveman: Well, in some respects it’s in the eye of the beholder. These [tax breaks] were presumably created with some sort of public policy purpose in mind. The question I would really have to ask is, is it achieving that public purpose and are there alternate ways to achieve that public purpose without putting a dent in the revenue collection mechanisms of the state of Minnesota?

I think the answer is going to vary depending on what type of expenditure you’re looking at. There are some that have strong claims and there are others that need to go under the microscope. Generally speaking, you want to avoid using them. But sometimes, as in the case of the corporate income tax, these [breaks] serve a purpose because it’s an awful tax to begin with, and you have to do something to make it more palatable to businesses in the state of Minnesota.

CR: You were on the 21st Century Tax Reform Commission, and that commission did recommend eliminating the corporate income tax. At the very beginning of the session, the Republican leadership introduced some proposals that addressed business tax reductions. Do you expect corporate income tax reform to advance this session?

Haveman: It’s really tough, because obviously the best shot at reform is when you’ve got money to pay for reform. And we don’t have money to pay for reform right now. There’s a general recognition that something needs to be done in this area. I think the question that is still unresolved is whether that takes precedence over other needs. I’m cautiously optimistic that something can be done in this area, especially if they take a revenue-neutral approach where some things can shift to accommodate other things in tax reform. But that remains to be seen.

CR: Going back to tax expenditures for a second: While tax increases are certainly taboo at the Legislature, I’m wondering if you think reforms that raise revenue by changing tax expenditures can be a meaningful part of budget negotiations.

Haveman: Reforming tax expenditures can be seen by many as tax increases. One of the biggest tax expenditures in the state budget is the clothing exemption in the sales tax. That is a tax expenditure, but a lot of people would see [any change] as a tax increase. I think the tax expenditure budget is the first place to look. At first glance, it seems to me the most politically acceptable way of looking at these sorts of things. From a tax policy standpoint, it’s the first place to look as well.

CR: There’s a $6.2 billion deficit. You had four Republicans who did not vote for the Phase 1 budget bill on the House floor. How difficult will it be for Republican leaders to pass a budget that doesn’t have revenue of some kind?

Haveman: It’s going to be tremendously difficult. Right now they are going through a very large education process – just getting familiar with revenue systems 101, expenditure systems 101. I think the education process is probably opening some minds as to what $6.2 billion actually means.

CR: The GOP legislative caucuses have a lot of rural and suburban members. Do you observe a competing approach to financing local government there? Is there just a built-in tension between the rural and suburban areas based on LGA?

Haveman: There certainly is – because if you took, for example, the circuit-breaker approach, you basically let cities levy what they need to and see where the chips fall. Obviously you’re going to have people that will have big property tax bills in relation to their income as a result of that choice by local officials.

That’s where the state steps in and says, “How about a refund program?” What we know is that the circuit-breaker benefits fall primarily in the metropolitan area because that’s where some of the biggest ability-to-pay problems as a percentage of income reside. We’ve had years of experience in talking about this that have perpetuated the idea that a principle of good property tax relief is that everybody gets something, regardless of their ability to pay. That’s where the homestead credit falls disproportionately in outstate areas.

That’s the thinking we’re trying to impact. LGA is a great way to do it from the standpoint of local governments, because the money goes directly to them. But as we point out, any property tax relief that results from that, which may or may not happen, is going to go to everyone, and it’s going to go proportionally to those who own the most property. In some ways we think of it as a regressive approach to property tax relief.

CR: Democrats and Republicans argue over who’s responsible for rising local property taxes. Do you have a sense for who’s right?

Haveman: The challenge with property taxes is it’s intensely local, so the answer is going to be on a case-by-case basis. In some situations, aid cuts probably had something to do with it. In other cases, the spending pressures and cost structures of the local government had something to do with it. …

We looked at the state auditor’s report on city finances last year, and we think an important story within the story that wasn’t reported was that over the last 10 years, expenditures by cities are up significantly in real dollars. It doesn’t matter what measure of inflation you use to calculate that. Current expenditures are up, it’s the capital budgets that have gone down, which makes it look like city spending has declined in real terms over the past decade. But there’s a big difference between capital spending and current spending.

We look at this debate and we match it up with Voss database numbers – which, to us, suggest that in many areas of the state, property taxes are still very affordable regardless of the increases that have occurred over the last couple of years in the great recession. We know that commercial/industrial property value through the great recession has actually increased in 56 of Minnesota’s 87 counties, largely in outstate Minnesota. Tax capacity has increased in those areas as well. All of it suggests that we need to take a close look at these claims of lurking disaster in LGA cuts.

CR: What approach do you suggest lawmakers take when they sit down to debate local credits and aids in the tax committees this session?

Haveman: We’re suggesting three reform ideas. Focus more on taxpayers than institutions, which means more money for circuit-breaker purposes – tax refund programs rather than subsidizing the governments themselves. The second thing we encourage is to carve out a piece of this money to actually fund government cooperation and consolidation of services. The one thing going for us is that we’ve got potentially a pool of money that can go for shared-service design and consolidation of services. And we’ve got the demographics that suggest we have an opportunity to make that happen, because there are a lot of folks who will be leaving the work force in the very near future.

The third piece is, if you’re going to go down the equalization road of providing aids to local governments, focus on capital budgets rather than current expenditures. Current expenditures create spending obligations in the future. Subsidizing current expenditures also affects the cost structures of local government and how those cost structures impact you in the future.

If you focus on capital, you can get out of the business of trying to calculating city need, which we attempt to do but do very poorly in this state. And we can focus exclusively on tax capacity and these large-ticket items associated with water infrastructure, transportation infrastructure, things of that nature. [Those projects] and the debt expense associated with them are the things that can break the back of local tax capacity.

CR: What do you say to the rejoinder made by cities?

Haveman: It’s being argued that the goal of local government aid is to equalize the ability to raise revenue regardless of where you are in the state. We think that’s wrong. That confuses a goal and a tactic. The goal is to assure that all Minnesotans, wherever they live, have access to important city services at affordable tax prices. Equalizing tax bases can be a mechanism to achieve that goal. It should not be the public policy purpose.

CR: Last year there was a pension bill passed, and the stock market has also risen in the meantime. Has the improved fiscal situation gotten us out of the woods on pension underfunding?

Haveman: No. We’re not out of the woods yet. It’s terrific that we’ve had this rebound. But the most recent numbers suggest that we have $10 billion of unfunded liabilities for the three major funds. One problem is that we have an assumed rate of return that underpins all this actuarial analysis, and I think most people would regard as too high – it’s 8.5 percent – especially going forward.

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