Let high-income tax cuts expire, redirect money to stimulate economy

September 2, 2010

The Center on Budget and Policy Priorities makes a strong case for letting $40 billion in Bush tax cuts for high-income households expire as scheduled at the end of this year. That $40 billion could instead be redirected to help stimulate the weak national economy.

According to the nonpartisan Congressional Budget Office (CBO), if this money were used for job-creation tax credits, continued federal aid to states and extended unemployment insurance benefits, it would create more jobs and generate more economic growth than simply extending the Bush tax cuts for the top income households in the nation (i.e., those with incomes over $250,000 a year). Why? Because higher income households are more likely to save this extended tax windfall than spend it. What the economy needs right now, however, is more consumer spending.

In fact, “CBO found extending the tax cuts for high-income households to be the worst of all options under consideration for preserving or creating jobs and boosting economic growth while the economic is weak,” the Center on Budget and Policy Priorities notes.

In the near term, the CBO found that some actions would create more economic growth and more jobs per dollar spent than extending the high-income tax cuts. For example:

  • A temporary jobs tax credit (a temporary payroll reduction on new hires).
  • Extending federal fiscal aid to states to help them avoid bigger and deeper spending cuts. (Congress in fact has recently taken this action, which may provide $430 million for health care and education in Minnesota.)
  • Extended unemployment insurance benefits for the unemployed. This provides the greatest “bang for the buck,” as benefits paid out to the unemployed would undoubtedly be injected right back into the local economy in spending by the unemployed to meet basic living needs.

When Congress returns from its summer recess in September, expect a fierce debate over the future of the expiring tax cuts (along with whether or not Congress will extend tax credits targeted to low- and moderate-income working families, such as the Child Tax Credit and the Earned Income Tax Credit). Extending the tax cuts for high-income households is the worst option for spurring economic growth, and would add $1 trillion to the national debt over the next ten years. Congress should allow the Bush tax cuts to expire. In the short-term, Congress should redirect that money toward initiatives that will truly stimulate the economy and help struggling working families. Once the nation’s economy is on more solid footing, the resources can be used to make a dent in the nation’s deficit.

-Steve Francisco

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Congress should reject hard caps on discretionary spending

July 26, 2010

Hard caps on nondefense domestic discretionary spending will not significantly reduce long-term deficits. That’s because the biggest factors contributing to long-term deficits are primarily the 2001 and 2003 Bush tax cuts and the costs associated with the wars in Iraq and Afghanistan – not domestic discretionary programs. According to the Center on Budget and Policy Priorities:

Just two policies dating from the Bush Administration — tax cuts and the wars in Iraq and Afghanistan — accounted for over $500 billion of the deficit in 2009 and will account for almost $7 trillion in deficits in 2009 through 2019, including associated debt-service costs. 

Domestic discretionary spending is the portion of federal spending included in annual appropriations bills to fund a broad range of national priorities, including education, environmental protection, law enforcement assistance, food safety, nutrition, medical research through the National Institutes of Health and more. Nondefense domestic discretionary spending makes up about 18 percent of all federal spending.   

Earlier this year, Senators Jeff Sessions and Claire McCaskill introduced an amendment to the Federal Aviation Administration bill that would have imposed hard caps on all nondefense domestic discretionary appropriations bills for the next three years. According to the Center on Budget and Policy Priorities, the Sessions-McCaskill amendment would have required cuts totaling nearly $30 billion in fiscal year 2011 or five percent below the President’s budget request. In fiscal year 2012, the Sessions-McCaskill amendment could have required cuts totaling almost $100 billion; a 15 percent cut below the President’s budget request.

In addition to these spending cuts, the Sessions-McCaskill amendment also required a two-thirds supermajority vote in the Senate to change the hard caps on discretionary spending, with no exceptions for any changes in the national economy or other factors that could make reconsideration of the caps necessary. If the Sessions-McCaskill amendment were adopted, a minority of only 34 out of 100 senators could prevent Congress from raising the spending caps to meet a future economic challenge or emergency.

Placing hard caps on domestic discretionary spending would also impede efforts to raise revenues to reduce long-term federal deficits. That’s because in past deficit reduction agreements, multi-year discretionary spending caps were linked to revenue and entitlement savings. The Session-McCaskill amendment would result in deep cuts to domestic discretionary spending without securing any savings from other parts of the budget, including revenue increases. Simply imposing new caps on discretionary spending places all of the burden for reducing the deficit on one part of the budget and ignores how much tax cuts have contributed to deficits. The Center on Budget and Policy Priorities notes that the Bush-era tax cuts from 2001 and 2003 account for $1.7 trillion more in deficits from 2001 to 2008, and $3.4 trillion more over the 2009-2019 period.

Fortunately, the Sessions-McCaskill amendment was not adopted. However, it is likely that there will be continuing attempts throughout the remainder of this year to attach this amendment to individual appropriations bills or to a continuing appropriations bill later this year. A balanced approach to deficit reduction is needed — one that looks at both fair and appropriate spending cuts as well as the elimination of selective tax cuts that are contributing to long-term deficits.

-Steve Francisco

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New analysis looks at revenue-raising options

May 3, 2010

The current economic crisis means that more Minnesotans are struggling at the same time that the state has fewer resources to help them. We’ve argued for a balanced approach to solving the state’s budget shortfall, including raising revenues, that will allow the state to maintain investments in education, health care, job training, services for the elderly and people with disabilities – the vital services that help Minnesotans weather these tough times. A balanced approach also best positions the state for when prosperity returns.

We’ve updated our widely-used analysis, Revenue-raising options to help close Minnesota’s budget deficit, which analyzes a number of recent proposals to raise revenues, measuring the fiscal impact of each. It also discusses how a revenue-raising package can be put together that helps solve our budget deficit and makes progress on reversing recent trends that have shifted more of the responsibility for funding government services on to low- and middle-income Minnesotans.

Revenue-raising options does not promote any particular policy proposal, but rather looks at a range of options that have been part of the recent policy debate. Those options are summarized in the table below.

Figure 1. Summary of Revenue-Raising Options: General Fund Revenue Raised

Proposal

FY 2011

FY 2012-13

Create new income tax bracket on high-income households

$170 million

$468 million

Enact a 10 percent income tax surcharge

$688 million

$1.6 billion

Return income tax rates to 1998 levels

$820 million

$1.8 billion

Return top income tax rate to 1998 level

$140 million

$383 million

Eliminate certain business tax preferences

$156 million

$283 million

Enact a corporate tax throwback rule

$15 million

$40 million

Eliminate sales tax exemption on clothing

$258 million

$604 million

Eliminate sales tax exemptions on many consumer services

$372 million

$868 million

Increase alcohol taxes

$121 million

$278 million

The legislature has not yet passed its final budget bills solving the current deficit, and another large budget deficit remains for the next biennium. The court challenge to the 2009 unallotments and uncertainty about additional federal Medicaid dollars for the state are two additional wildcards that could add to the budget shortfall.

While the end of the legislative session is two weeks away, the discussion about a balanced approach will continue, both at the halls of the capitol and in our communities.

-Nan Madden

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House and Senate agree to a supplemental budget bill

March 29, 2010

Over the weekend, the House and Senate wrapped up negotiations with each other and the Governor on a supplemental budget bill covering most areas of the state budget (not included are K-12 education and health and human services). They are debating these bills on the floor of the House and Senate today. In total, the bill would reduce the state’s $1 billion budget deficit by $312 million in FY 2010-11 and $419 million in FY 2012-13. The spreadsheets and bill language are available online. Here are some details about the agreement:

Higher Education – $47 million net reduction in FY 2010-11. The bill cuts funding for the University of Minnesota by $36 million, and the Minnesota State Colleges and Universities (MnSCU) system by more than $10 million in FY 2010-11. This reduces state funding for higher education institutions to 2006 levels. The bill also makes one-time reductions in funding for state work-study, library services and community college emergency grants. The bill reduces funding for Achieve scholarships in the FY 2012-13 biennium. To deal with a shortfall in the State Grant Program, the bill caps the Summer Transitions Grants program, eliminates the 9th semester of eligibility for financial aid, and asks students and families to contribute more to the cost of college.

Taxes and Aids to Local Governments – $111 million net reduction in FY 2010-11, $186 million reduction in FY 2012-13. The tax committee’s contribution to the supplemental budget bill comes in the form of cuts to state aids to local governments, which the state funds with two goals: so that all areas of the state have the resources to provide basic levels of service, and so that property taxes are lower than they otherwise would be. The conference committee made few changes from what was passed by the House and Senate. In FY 2011, aid to counties and cities are both cut by $52.5 million. This comes on top of the $200 million that local aids have already been unalloted in the 2010 calendar year, and together represent about a 31 percent cut in total county and city aids and credits. In the next biennium, counties are cut by $87.5 million, cities by $113 million and towns by $9 million.

In the 2010 calendar year, there will be no increases in property taxes as a result of these reductions – those levies have already been finalized. However, in the next biennium, it is assumed that these aid cuts will result in higher property taxes. The impact on the state budget in FY 2012-13 is a projected $8.9 million increase in state-paid property tax refunds to homeowners and a $9.2 million loss in revenues (from higher property tax deductions on the income tax). The aid cuts are significantly smaller than proposed by the Governor, and the legislature also rejected the Governor’s proposals for a $106 million cut to the Renters’ Credit and eliminating the Political Contribution Refund (part of the state’s public financing of elections) in the next biennium.

Public Safety – $35 million reduction in FY 2010-11. The largest single reduction in this budget area comes from a one-time transfer of $11 million from the Fire Safety Account to the general fund. The bill also appropriates $2 million from this account to pay for firefighter education and training.

The final agreement reduces funding for the Supreme Court, Civil Legal Services, the Court of Appeals and District Courts by a combined $10 million. These reductions are higher than the House proposed, but lower than the Senate and Governor’s proposals. There is a net $1.5 million reduction to the Department of Public Safety. That includes $1.6 million in new spending for Red River flood reduction and $1.3 million in reductions to Office of Justice programs. There is language minimizing reductions to services for battered women’s shelters and domestic violence programs, general crime victim programs, sexual assault victim programs, and youth intervention programs.

The bill also includes an $8.9 million cut to Department of Corrections, which is less than the level of cuts initially proposed by the Governor, House and Senate. The language specifically preserves about half the funding for community correction’s popular Sentencing to Service program.

State Government – $33 million reduction in FY 2010-11. The compromise bill reduces funding for a range of entities, including the legislature, constitutional officers and other administrative agencies and boards. In addition to direct cuts to agencies, the bill seeks to achieve another $3 million in savings through system-wide reforms or, if that isn’t possible, through additional reductions to state agencies. The single biggest budget impact in this area comes from increasing efforts to enforce tax compliance, which is expected to raise $20 million in the FY 2010-11 biennium. 

Energy (and Commerce) – $24 million reduction in FY 2010-11. This area essentially comprises the Department of Commerce and numerous special revenue funds. Of the $24 million in reductions in this area, 95 percent consists of transfers from these special revenue accounts. The two largest transfers include $14 million from the Assigned Risk Plan (which helps businesses purchase workers’ compensation coverage) and $3 million from the Petroleum Tank Release Clean-up Fund. Not included in the final bill is a securities registration fee proposed by both the House and Senate. This fee, which the Governor objected to, would have raised between $25 and $28 million in FY 2010-11.

Economic Development – $16 million reduction in FY 2010-11. More than half of the reductions in this budget area – $8.7 million – come from one-time money. The largest transfer is $5 million from the Petro Fund (which funds contamination clean-up grants). This transfer is significantly larger than the $734,000 transfer originally proposed by the House, Senate and Governor.

The bill also reduces funding for housing programs that preserve and improve rental housing by $4.9 million. State workforce development programs are cut by $1.3 million, including reductions to extended employment, Independent Living Services, Job Skills Partnership, Mentally Ill Supported Employment and State Services for the Blind. The Governor’s proposal to transfer $35 million from two funds dedicated to economic development in Northern Minnesota is not included in the bill. The final agreement does include small reductions to the State Arts Board and public broadcasting, but no reduction to the Minnesota Humanities Center (which was eliminated in the Governor’s budget proposal).

Environment – $24 million reduction in FY 2010-11. The final agreement includes across the board reductions to most agencies in this budget area. The Science Museum and the Minnesota Conservation Corps, however, are not cut. There are several large transfers from other funds, including $8 million from the Closed Landfill Investment Fund – a transfer that was not included in the original proposals from the House, Senate and Governor.

Agriculture and Veterans Affairs – $7.0 million net reduction in FY 2010-11. There is an eight percent overall reduction to the Department of Agriculture, including cuts to many grant programs. The largest single reduction is a provision to delay $4.4 million in subsidy payments to ethanol providers. There are no reductions to the Departments of Military Affairs and Veterans Affairs. Instead, the bill includes some new funding for veterans programs, including the military honor guard and services for homeless veterans.

Transportation – $15 million reduction in FY 2010-11. The conference committee cut to transportation is higher than the level of cuts proposed by the Governor, House and Senate in their original proposals. Almost all of the reductions are to transit, including a $1.7 million cut to Greater Minnesota transit and a $13 million cut to metro-area transit (through the Met Council). However, policymakers believe these reductions will be offset by higher than expected revenues from the Motor Vehicle Sales Tax (MVST).

-the Minnesota Budget Project staff

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Senator Bakk bill extends sales tax on clothes, lowers the sales tax rate and pays back school funding shift

March 4, 2010

At a press conference on Thursday, Senator Tom Bakk introduced a bill that would raise new revenues for the state by applying the sales tax to clothing and sewing materials. His proposal, which he said he has not yet discussed with the tax committee or with his caucus, would use the new sales tax revenue in the following ways:

  • In FY 2011, the sales tax on clothing would raise $258 million that would be used to address the state’s budget deficit.
  • Starting in FY 2012, $120 million per year of the revenues raised would be used to pay back the $1.2 billion school aid payment deferral that was implemented under allotment. The remainder ($166 million in FY 2012) would be used to reduce the general sales tax rate from 6.5 percent to 6.25 percent.
  • By FY 2021, the school payment shift would be fully paid back. At that point, the general sales tax rate would be reduced further. In other words, once the school payment shift is paid back, all of the proceeds raised from the sales tax on clothing would be used to reduce the sales tax rate.

There would also be rate reductions to the 0.375 percent sales tax collected under the Legacy amendment (dedicated to environment, arts and cultural heritage), the 0.25 percent metro transit improvement tax and the Hennepin County sales tax that pays for the Twins stadium. These dedicated taxes would still raise the same amount of revenue, but from a larger base and a lower rate. This is in keeping with the Legacy amendment, which states:

If the base of the sales and use tax is changed, the sales and use tax rate in this section may be proportionally adjusted by law to within one-thousandth of one percent in order to provide as close to the same amount of revenue as practicable for each fund as existed before the change to the sales and use tax.

One of the handouts from Thursday’s press conference showed that a sales tax on clothing is less regressive than the general sales tax. We have argued that tax changes are needed to make progress on addressing the rising regressivity of the tax system. Senator Bakk noted that while his preference would be to pursue a strategy of increasing the income tax, which would be more progressive, that is something that the Governor will not support so he’s taking a different direction this year.

In the press conference, Senator Bakk emphasized that he thought it was important for the state to have a conversation about the role of raising taxes as part of a balanced solution to the state’s budget problems. We agree, and appreciate his contribution to that conversation.

-Nan Madden

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2009 tax proposals would have rebalanced Minnesota’s tax system

October 28, 2009

We’ve just finished up our analysis of the major tax proposals made in the 2009 Legislative Session and what tax policies were passed by the legislature or implemented by the Governor through unallotment. And what really jumps out at me are the opportunities lost.

We entered the 2009 session facing a serious budget deficit. We also have a state and local tax system that is a smaller share of the economy than a decade ago. The average share of income that Minnesotans pay in state and local taxes dropped by 13 percent from 1996 to 2006. In addition, the tax system is becoming more regressive – meaning that low- and middle-income Minnesotans pay a larger share of their incomes in taxes than those with the highest incomes.

It’s been frequently said that you should never let a good crisis go to waste. So while it isn’t a good thing to have a terrible economy and a huge budget deficit, those circumstances did allow for a rigorous debate about the role of raising revenues as part of a balanced solution to the state’s budget shortfall, and about the value of rebalancing the tax code.

We saw some interesting and creative proposals to do those things in this legislative session. As we’ve described in our blog and also in our new analysis, the House tax committee under Representative Ann Lenczewski’s leadership passed a comprehensive reform of tax deductions and credits – a package intended to simplify the tax code and to ensure that, when the state does use the tax code to provide incentives for certain kinds of behavior, that those tax benefits are available more broadly.

By the end of the legislative session, each body of the legislature passed three tax bills that would have started to reverse the trend of greater regressivity in Minnesota’s tax code. These bills were part of a balanced approach that would have reduced the need for painful cuts to services. Each of these bills fell to the Governor’s veto pen.

But more tax debate surely lies ahead. The state continues to face severe budget deficits in the next biennium…and if the recent spate of bad news continues, a new deficit may well arise in the current budget cycle as well. Those interested in public policy may want to study up on the tax proposals that were debated in 2009 – we’re likely to hear about these and other tax reform ideas in the months to come.

-Nan Madden

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Legislature passes bill to balance budget with taxes, education shift

May 18, 2009

The tax conference committee wrapped up their work on Monday night, the last day of the legislative session. The bill includes elements similar to what was in HF 885, the legislature’s previous tax bill that was vetoed by the Governor:

  • A new fourth income tax bracket on taxable income over $250,000 for married couples, as in HF 885. This raises $516 million in FY 2010-11.
  • A surtax on income earned from charging interest over 15 percent, also as in HF 885. This raises $216 million.
  • $286 million raised from alcohol taxes, slightly more than in HF 885.
  • $14 million net raised from additional tax compliance.

The bill also includes two tax cuts:

  • $75 million in FY 2010-11 by allowing businesses to get a sales tax exemption at the time they make the purchase (currently they must pay the tax and then apply for the refund).
  • $5 million in FY 2012 for Angel Investor Credits for high tech businesses.

The bill also includes the K-12 education shift that the House proposed. The spreadsheet passed out in the tax conference committee indicates the net impact of all bill provisions would be to close the $2.7 billion gap remaining for the FY 2010-11 biennium.

The House and Senate passed the bill in the final hour of the legislative session and it is probably a safe assumption that the Governor will veto this bill, leaving the state’s budget unbalanced for the FY 2010-11 biennium. The Governor has indicated that he will balance the budget through his unallotment authority, although he does have the option to bring the legislature back into special session to try to reach a negotiated agreement. As we have previously reported, the Governor had indicated to the legislature that he primarily plans to cut aids to local governments, other tax credits (such as the Renters’ Credit and Political Contribution Refund), human services and higher education.

-Nan Madden


Session ends at midnight…where do things stand?

May 18, 2009

The 2009 Legislative Session ends at midnight tonight, but the state’s budget for FY 2010-11 is far from resolved. The Governor and legislators are still engaged in last minute negotiations, but time is short.

First, let’s review where we stand:

  • The state started the biennium with a $6.4 billion deficit projected for FY 2010-11.
  • Medicaid matching funds included in the federal stimulus package reduced that deficit by about $1.8 billion, bringing the problem down to $4.6 billion.
  • The legislature passed omnibus finance bills that make $1.5 billion in spending reductions ($786 million of those cuts are backfilled with federal fiscal stabilization dollars).
  • The Governor signed those omnibus bills, but made several line item vetoes to cut additional general fund spending, including $381 million in health and human services, $3 million in economic development and $2.6 million in higher education.
  • So, after incorporating the federal stimulus funds and the approved spending reductions, there still remains a $2.7 billion deficit for FY 2010-11.

Now, let’s look at what has been happening in the final days of session:

The Governor and legislature exchanged a few offers on Saturday and seem to agree on implementing a $1.8 billion shift in education spending. However, the House and Senate have been insisting that the shift be coupled with an increase in ongoing revenues to ensure the shift can be “bought back” in the future biennium.

If an education shift is implemented, that still leaves a $900 million deficit for FY 2010-11. Saturday, the Governor proposed closing that gap through spending cuts to the renters’ credit, health and human services, higher education, and aids to local governments. The legislative response proposed raising about $1 billion in revenue, reducing spending for aids to local governments and other budget areas, and undoing the Governor’s line item veto of General Assistance Medical Care.

There were no negotiations between the Governor and legislature on Sunday. Instead, the House attempted to override the Governor’s line item veto of General Assistance Medical Care and his veto of the tax bill that raised close to $1 billion in revenue. Both override attempts failed.

Today, legislative leadership emerged from a meeting with the Governor around 2 p.m. and said the tax and health and human services chairs will be taking a closer look at those areas of the budget to see if there are some partial solutions that can be agreed on. More discussions with the Governor are expected as the day continues.

If no deal is reached by midnight tonight, the Governor has said he will use his unallotment powers to balance the state budget.

-Christina Wessel


Last day of session: what’s left for taxes and local aids?

May 18, 2009

It’s the afternoon of the last day of the legislative session – a good time to take a quick inventory about what has been finished in terms of tax and local funding issues, and what is still unresolved.

  • The noncontroversial policy work of the tax conference committee was passed as HF 1298. This bill includes federal conformity items, provisions about changes to maintenance of effort requirements for local governments, clarification of nonprofit property tax exemptions, and a range of other public finance, local development and technical policy provisions.
  • Yesterday, the House was unable to override the Governor’s veto of HF 885, which included a new 4th income tax bracket, increases in alcohol taxes and a surtax on earnings from charging interest over 15 percent.

After moving the noncontroversial tax items into HF 1298, the tax conference committee did not close up shop. In a brief meeting this morning, it was announced that the committee was awaiting instructions from leadership. Issues that could come up include tax changes, but also aids to local governments and tax credits (including the Political Contribution Refund and the Renters’ Credit). By the end of the day, we should know whether the fate of aids to local government and certain tax credits will be determined by a tax conference committee report passed by the legislature, or by the Governor under the unallotment process.

-Nan Madden


A critical time in the session to keep the momentum going!

May 16, 2009

On Monday, over 500 people gathered in the Capitol rotunda to encourage policymakers to make revenue-raising part of a balanced solution to the state’s budget deficit. Organized by Invest in Minnesota, the rally brought together representatives from faith, labor and nonprofit organizations.

This week, the Governor has announced he will use his unallotment power to balance the state budget if legislators are unable to come up with a solution by the time the legislature adjourns on Monday. On Saturday, the Governor will release details about what an additional $1.2 billion in spending cuts would look like, and cuts are expected to especially touch health and human services, aids to local governments and delayed payments to schools.

Therefore, it is very important that policymakers continue to hear from constituents about the importance of raising revenues, and raising them fairly.

Invest in Minnesota has resources available to help people contact their policymakers, including a You Tube video you can forward to your elected officials. Take action soon!

-Leah Gardner