Proponents of the omnibus tax bill vetoed today by Governor Dayton made the case that the tax cuts it contains – primarily a freeze on the statewide property tax paid by businesses and cabins and incentives for investors in certain businesses – would spur economic growth in Minnesota. We all want strong economic growth, but the bill (House File 2337) was unlikely to have had a strong bang for the buck.
In some cases, the state would have provided a tax benefit for behavior that would have occurred anyway. There was no requirement or guarantee that the tax cuts be spent on new hiring in Minnesota, or spur new investments that would have not occurred in the absence of the tax benefit. Businesses are more likely to create jobs when there is more demand for the goods or services they produce, not simply in response to a tax cut.
Another problem with the omnibus tax bill is that it didn’t specify how the tax cuts would be paid for in the future. The tax cuts cost $145 million in FY 2014-15, and the cost grows over time, reaching an estimated cumulative loss in revenue of $2.3 billion by 2026.
By phasing in the tax cuts, the omnibus tax bill separated the tax decisions made this year from the consequences of paying for them. And if the past is any guide, those consequences would threaten the building blocks of our future economic success.
For example, tax cuts could put at risk state support for our public colleges and universities, which play a critical role in preparing our workforce. State funding for higher education has already fallen below FY 2000-01 levels (and that’s in actual dollars, not inflation adjusted), even though our higher education institutions are serving tens of thousands of additional students. Those tax cuts could result in further cuts to state financial aid, which already falls short of the needs of the roughly 85,000 Minnesota students it helps afford college each year.
Or next year, we might expect policymakers to once again ask Minnesota renters to shoulder the cost of the tax cuts, as in this year’s House tax bill.
And adding $145 million to our FY 2014-15 shortfall would also put off the day when the state will fully reverse the school funding shift.
We’re not out of the woods yet
Some hoped that policymakers wouldn’t have to figure out how to pay for the tax cuts next year, thinking that the revenue gap could be filled in by stronger economic growth. It certainly is possible that the state’s economy could improve more than projected. But it would be unwise to pass tax cuts based on that assumption.
The April 2012 Economic Update from Minnesota Management and Budget reported that tax revenues for February and March came in $106 million above forecasts. But MMB identified a number of reasons, including timing issues, why the higher revenues in those two months may not indicate a trend.
The Governor’s veto of the tax bill avoids its most negative outcomes. If policymakers wish to pass a tax bill in the waning days of the legislative session, they should craft a bill that is paid for fairly, is realistic in its expected economic effects, and does not put our future prosperity at risk.