December 3, 2008
A report published today by Citizens for Tax Justice, a nonpartisan research and advocacy group, gives us the latest figures from the IRS on how many deaths in Minnesota led to estate tax liability: In 2007, just 221 estates in Minnesota owed any estate tax. Doesn’t sound like too many? That’s because it’s not - it’s less than one percent of all estates in Minnesota (0.6%, to be exact).
But the fact that the estate tax only effects the highest of the high-income taxpayers isn’t why it’s a tax worth keeping. The estate tax makes good sense because it asks those people with great wealth to contribute their fair share. To quote the CTJ report:
“A society whose government provides the goods and services necessary for wealth-creation must decide how to pay for them, which means we must decide what to tax. We have decided to tax income from work through the federal income tax and payroll tax, which the vast majority of Americans are familiar with. If we tax earnings from work, it would seem only fair that we also tax transfers of large fortunes to those who do not need to work because of the enormous wealth of their families…If the families who pass huge fortunes down through successive generations are no longer asked to help pay for the goods and services that make such wealth possible, then surely Americans will question whether ours is truly a country where hard work counts more than a family name.”
As CTJ points out, this idea is not new - it goes back over a hundred years to Rockefeller and the President Theodore Roosevelt. The estate tax is worth keeping (for more information on the estate tax, read our issue brief on the subject).
-Katherine Blauvelt
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Taxes | Tagged: estate tax | 
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Posted by Katherine Blauvelt
December 1, 2008
The Minnesota Budget Project team was out at a conference during the week of November 17, and one thing I was very sorry to miss was the meeting of the Legislative Commission on Planning and Fiscal Policy on Friday, November 21.
Minnesota Public Radio and other news outlets have reported that information presented this meeting suggest that the state’s budget deficit may be around $4 billion for the next biennium. That seems consistent with the $4 to $6 billion going around the rumor mill. We will have more precise figures when the official forecast is released on this Thursday, December 4.
$4 billion is about 11% of the state’s general fund budget for FY 2010-11. Clearly big challenges are ahead. We recommend that policymakers keep the following principles in mind as they consider the deficit:
- A balanced approach is needed. With a deficit of this size, we cannot afford to take any of the primary budget-balancing tools - raising revenue, using reserves and other one-time measures, and cutting spending - off the table.
- The state needs to respond to the economic downturn and help build a stronger economy in the long run. Services that help people get and keep jobs, and that help families make ends meet must be allowed to work during these tough times. Budget-balancing choices should not make the impact of the recession worse for those least able to weather the economic downturn, including low-income families, laid-off workers and other vulnerable populations.
- We must understand the impact of state budget decisions on the economy. Joseph Stiglitz (a Nobel Prize-winning economist) and Peter Orszag (currently director of the Congressional Budget Office) have argued that spending cuts can be a bigger drag on a state’s economy than a targeted tax increase. As Christina has stated in a previous blog entry, cutting state spending takes dollars out of Minnesota’s economy. A targeted tax increase on high-income earners is likely to have less of a drag on the state’s economy, because those individuals are likely to maintain their levels of consumption, but compensate for the tax increase by saving less. That maximizes the amount of money moving in the state’s economy.
And if you missed it, the Star Tribune had an interesting story this week-end that looked behind the scenes at how the forecast is developed. It covers the art and science of forecasting, but also confirms that we are going to hear some very bad news on Thursday when the forecast is released.
-Nan Madden
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Budget Process, Economy, Taxes | Tagged: budget deficit, forecast, Taxes | 
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Posted by Nan Madden
November 26, 2008
Thanks to the economic downturn, states across the country are drowning in red ink - and now we have a not-very-well-publicized ruling from the IRS that could add to our fiscal woes.
Up until this point, tax law prevented companies from using a newly-purchased company’s tax losses to write off their own taxes. This was quite intentional - it prevented companies from buying other companies just so they could avoid paying taxes. But in late September, the IRS issued a ruling making an exception to this: a bank that acquires a failing bank with tax losses attributable to bad loans can use the losses from the deal to write off future taxable profits. The first case that this applies to: Wells Fargo’s pending acquisition of the uber-troubled Wachovia Corp.
This is a huge policy shift, done without Congressional approval, and the cost is considerable. As the SF Chronicle reported, some experts are saying that these new tax advantages will more than pay for the entire Wachovia deal. That’s worth repeating - the cost of buying Wachovia could essentially be - nothing. It’s a tax write-off worth more than $14.4 billion for Wells Fargo. And when the dust settles from all other acquisitions, the total tax revenue loss from this IRS ruling is estimated around $140 billion. This has understandably incited a reaction from members of the U.S. House and Senate, where legislation was recently introduced to reverse the IRS ruling.
Pending legislation notwithstanding, the practical question of the moment for Minnesota is whether this new ability of acquiring banks to minimize their corporate tax liabilities will trickle-down to states, resulting in less revenue for our already-in-deficit state of Minnesota. According to an analysis from Citizens for Tax Justice, a nonpartisan tax research and advocacy organization, at least 18 states - including Minnesota - could be hit. Wells Fargo certainly has a large presence in our state, so I’d expect some impact. According to their web site, Wells Fargo is ”the second largest private employer with 20,000 team members…it has the largest distribution of any financial organization in the state.”
Certainly an issue worthwhile for Minnesota to follow.
-Katherine Blauvelt
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Economy, Taxes | Tagged: banks, business taxes, IRS | 
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Posted by Katherine Blauvelt
November 20, 2008
A few weeks ago I attended the second-to-last meeting of the Minnesota Budget Trends Study Commission. To recap, this commission, established by the state legislature (not to be confused with the Governor’s 21st Century Tax Reform Commission), is made up of state budget experts and is tasked with recommending how we can minimize volatility in our state budget and tax system and prepare for the fiscal impact of demographic changes.
The commission discussed some of their draft findings (no draft report was handed out). We’ll get their final word in December. From what they discussed, here’s what you need to know:
- Inflation in the forecast matters. There was near unanimous agreement (with two or three notable exceptions) that the current practice of including inflation in the economic forecast for revenues and not expenditures creates a false picture of the budget.
- The need to limit growth in health care spending will be a major finding of the report. It’s not clear how the the commission will recommend we resolve this very sticky issue. I very much hope the commission recognizes that health care costs have been rising in both the public and private sectors. And in fact, private health care spending rose faster than public health care spending in 2005 (see this Minnesota Department of Health report). This is not a “big government” problem.
There are two meetings of this commission left. Next meeting is scheduled for Tuesday, November 25th at 9 am in the Centennial Office Building (could be changed since it’s close to Thanksgiving).
-Katherine Blauvelt
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Posted by Katherine Blauvelt
November 7, 2008
It isn’t the highest-profile outcome of the recent elections, but North Dakotans overwhelmingly rejected Measure 2, which would have cut their state personal income tax by 50% and cut the corporate income tax by 15%, with an estimated two-year cost of $420 million. The Bismarck Tribune reports that about 70% of North Dakotans voted against the measure.
In rejecting this measure, North Dakotans recognized that the oil boom that fueled their current budget surpluses was not going to last forever. They have retained the flexibility to enact better targeted changes to their tax laws and the ability to invest in the strong workforce and quality infrastructure that can build a healthy state economy into the future.
- Nan Madden
1 Comment | Budget Process, Taxes | Tagged: Measure 2, North Dakota, tax cuts | Permalink
Posted by Nan Madden
October 29, 2008
Today the Center on Budget and Policy Priorities released a report on how, in each of the 42 states that have a state income tax, the income tax impacts the very poor - those households with incomes near or below the poverty line. In 2007, the federal poverty line for a family of four was $21,203, and the line for a family of three was $16,530.
Why do we care about income taxes paid by low-income people? CBPP argues (and we would agree) that high taxes on very low-income families are counterproductive to efforts of those families to become self-sufficient and move out of poverty. The report states:
“Taxing the incomes of working-poor families runs counter to the efforts of policymakers across the political spectrum to help families work their way out of poverty. The federal government has exempted such families from the income tax since the mid-1980s, and a majority of states now do so as well. Eliminating state income taxes on working families with poverty-level incomes gives a boost in take-home pay that helps offset higher child care and transportation costs that families incur as they strive to become economically self-sufficient.”
Note: This is not about exempting very poor people from taxation - they still pay plenty of sales taxes, property taxes and other kinds of taxes.
Not surprisingly, states range the spectrum from levying substantial taxes on people with incomes below the poverty line to providing tax refunds. Families in severe poverty - with incomes significantly below the poverty line - must pay an income tax in 10 states, including Alabama, Ohio and Michigan.
Instead of making the hurdles higher for poor families, states can employ the tax system to help families move out of poverty. Fortunately, Minnesota is one of of those states. The report found that we are among 14 states that offers income tax credits to families with incomes at the poverty line as a strategy to help families become self-sufficient.
-Katherine Blauvelt
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Posted by Katherine Blauvelt
October 22, 2008
More on the Governor’s tax reform commission! Remember the commission asked for public comments on how to improve Minnesota’s business competitiveness? The Minnesota Budget Project, Growth & Justice, and others have had the opportunity to testify before the commission. Now the Institute on Taxation and Economic Policy (ITEP), a national nonprofit tax research group, has sent its own comments to the commission. A couple of quotes from the ITEP public comments:
- State and local taxes are a very small part of the cost of doing business. If you add up all state and local taxes paid by businesses, they account for only 0.8 percent of business costs.
- Reducing minor state and local taxes through rate cuts or more tax credits isn’t likely to impact a
corporation’s decision to locate in a state. For example, long-time business leader and New York
City Major Michael Bloomberg told the New York Times that “any company that makes a decision
as to where they are going to be based on the tax rate is a company that won’t be around very long. If you’re down to that incremental margin you don’t have a business.”
Coincidently, Art Rolnick, Senior Vice President and Director of Research for the Federal Reserve Bank of Minneapolis, recently testified to the commission that tax incentives for particular businesses should be avoided: “Even though tax incentives look good from a parochial point of view, having an economic bidding war – playing cities and states off against each other – that’s counterproductive.”
Finally, check out ITEP’s blog called Talking Taxes, which is a great way to learn about what’s going on in other states when it comes to state and local tax proposals.
-Katherine Blauvelt
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Posted by Katherine Blauvelt
October 16, 2008
In response to the economic crisis, Congress passed a $700 billion financial rescue plan aimed at buying the troubled assets of banks, stimulating the credit market and restoring confidence in the nation’s economy.
Regrettably, Senate leaders also attached a controversial tax extenders package to the financial rescue bill. Tax extenders are provisions that are generally set to expire each year unless they are renewed by Congress. The debate on tax extenders was already underway. By adding these provisions to the financial rescue plan, the Senate avoided a confrontation with the House about whether the tax extenders should follow PAYGO rules and be offset with either another source of revenue or a spending cut. The House’s version of the tax extenders bill did follow PAYGO.
The tax extenders attached to the financial rescue plan are not offset, so they will further increase the federal budget deficit. Among the items included in the tax extenders package was the one-year “patch” for the Alternative Minimum Tax (AMT) and an energy tax plan.
The financial rescue package also became the home for a one-year improvement in the Child Tax Credit, a credit of up to $1,000 to help families with some of the costs of raising a child. Under this provision, an additional 34,848 Minnesota children will qualify for the Child Tax Credit, and another 120,715 Minnesota children are expected to qualify for a larger credit.
Under current law, the Child Tax Credit is not properly indexed for inflation, and Congressional action is needed to ensure that low-income families do not become ineligible for the credit as their earnings are eroded by inflation. This improvement in the Child Tax Credit was achieved by lowering the earnings threshold for low-income families to qualify for the credit from $12,050 to $8,500 for this year.
Hopefully, this temporary provision will be extended beyond 2008 when the new Congress convenes next year. To learn more about the importance of the Child Tax Credit, read the Center on Budget and Policy Priorities issue brief.
-Steve Francisco
No Comments » | Federal Budget, Taxes | Tagged: AMT, child tax credit, paygo | Permalink
Posted by Nan Madden
October 1, 2008
The Center on Budget and Policy Priorities has recently issued an analysis of a measure before voters in North Dakota this fall called Measure 2. Despite the bland name, Measure 2 is a dramatic proposal: it would cut the personal income tax by 50% and cut the corporate income tax by 15%, with an estimated two-year cost of $420 million.
North Dakota is in a fiscal situation very different from ours. The state is projecting a surplus, in part because the North Dakota economy is benefiting from high oil prices and high crop prices.
Remember the late 1990s when Minnesota was enjoying surpluses? I do, and I encourage North Dakotans to learn from some things that Minnesota did right, and some things that have come back to haunt us.
First the good. When states have large surpluses, it may make sense to use some of the surplus to reduce taxes - and why not learn from Minnesota’s experience? Minnesota issued several sales tax rebates, and policymakers found ways to include as many Minnesotans as possible, recognizing that all Minnesotans pay taxes.
Now the bad. During that boom period, Minnesota made permanent tax cuts assuming that the good times would last. Those permanent tax cuts made the state revenue shortfalls that followed more severe than they otherwise would have been, resulting in painful spending cuts and our ongoing challenges in funding state services.
I urge our North Dakota neighbors to learn from our experience. If you want to use some of your surpluses to cut taxes, make those tax cuts as broad-based and fair as possible. But don’t make permanent tax cuts as if the good times will last forever. In contrast, Measure 2 is poorly targeted: it cuts North Dakota’s already low income taxes (they are the lowest among the 41 states that have personal income taxes) and provides no tax cut to the approximately 30% of North Dakotans who currently pay no income tax. If Measure 2 passes, it would make it nearly impossible for the state to make changes to the state’s sales and property taxes, which have a greater impact on most North Dakotans than the income tax does.
The Center on Budget and Policy Priorities adds this recommendation: use a portion of this surplus to make investments that will give North Dakota a stronger economy in the long run. High-quality schools, strong universities, improved infrastructure - these are the investments that will help North Dakota thrive after the current oil boom goes bust.
- Nan Madden
1 Comment | Budget Process, Taxes | Permalink
Posted by Nan Madden
September 29, 2008
As Christina mentioned on the blog last week, we testified at the Governor’s 21st Century Tax Reform Commission.
The Commission members will soon be developing their recommendations on “how Minnesota can improve and modernize the state’s tax code for businesses to encourage economic growth in a fast-changing, highly competitive and global economy.” This report will be released on December 1.
If we think about the state’s revenue system as a puzzle, the Commission to date has been taking one piece of that puzzle - business taxes - and examining it closely. We urged the Commission to now put that piece back into place and understand its role in a larger context.
I made the case that the public sector is a partner with individual Minnesotans, the for-profit sector and the nonprofit sector in creating a society with a high quality of life in which all people have the opportunity to succeed. The business community and our economy benefits from public investments that include:
- our physical infrastructure
- the human capital of our residents
- protecting the safety and well-being of both people and property, and enforcing our laws
- the way we care for each other and ensure that all people can live in dignity, and
- cultural and environmental amenities.
All these make Minnesota a great place to live, raise a family and do business.
However, recent tax and budget trends threaten our economic future. I urged the Commission to ensure that their final recommendations have two characteristics:
- That it at least be revenue-neutral; that is, it does not cut total tax revenues. Reducing revenues simply does not make sense when the state is facing a deficit of $2 billion in the next budget cycle, including the impact of inflation.
- It should pay attention to tax fairness, and not make the tax system more regressive. The state’s tax system has already become more regressive since 2002, and the Commission’s recommendations should not make that worse.
A set of recommendations that have these characteristics will better fit into our current fiscal environment.
- Nan Madden
No Comments » | Taxes | Tagged: business taxes, tax reform commission | Permalink
Posted by Nan Madden
