Minnesota’s “Must Do” Sits on a Department of Revenue Bookshelf

In a recent interview, Governor Walz declared every option needs to be on the table as legislators face the prospects of tackling two multi-billion dollar budget deficits simultaneously.  In addition to the usual “go-to” items of tax increases, budget cuts, and program reforms, there is another plan of action that deserves priority attention.  Best of all, we have an excellent blueprint already in hand on how to do it.  It’s bringing tax expenditures into the biennial budget process.

Tax expenditures are tax exclusions, deductions, and credits providing beneficial tax treatment to support favored activities or assist favored groups of taxpayers.  They exist on the Venn diagram of tax policy in the increasingly shrinking area where the Republican and Democrat circles actually overlap.  Republicans like them because, in spite of their commitment to lower taxes, their constituents still want government to do things.  Indirect “spending” through the tax code is the way to accomplish these legislative goals while appearing true to tax cutting principles.  Democrats like them because they can incentivize all sorts of societal outcomes and behaviors in a highly targeted, “non general fund threatening” way -- and sell them to Republicans as tax cuts. 

The evidence of their bipartisan appeal can be found in the number of new tax expenditure bills introduced every legislative session and their growing presence in our tax system.  Readers of our member publication Legislative Spotlight know that counting tax expenditure bill introductions and commenting on their increasing creativity and complexity has become a bit of a hobby of ours.  At least three dozen are practically guaranteed to be introduced every biennial budget session in all areas of state taxation.  Most of these don’t make it into law, but many do.  The 2017 tax bill alone enacted 10 new income tax expenditures and expanded two existing ones. 

Tax expenditures are not by definition bad policy.   They can support important public policy goals.  They also cause tax rates to be higher than they need to be, introduce significant amounts of administrative complexity and cost into the tax system, can create perverse incentives, and violate important tax principles like treating equals equally.   Contrary to popular belief they do not shrink the size of government.  Taxpayers who do not benefit pay higher rates for the same size of government.    If forgone revenue would have been used for a rate cut, the size of government has gone up not down.

The biggest problem is that once put in place they continue to exist without any review and evaluation process to examine outcomes and the merits of keeping them.   As legendary tax expert (and father of the term “tax expenditure”) Stanley Surrey said long ago, “Unless attention is paid to tax expenditures, a country [state] does not have its tax policy or its budget policy under full control.”

In 2010, the Department of Revenue brought together a distinguished group of economists and public policy experts from across the political spectrum to tackle this problem.  Their 2011 report, “Bringing Tax Expenditures into the Budget Process” is a careful and comprehensive examination of how to establish such a review infrastructure.  The report’s 25 recommendations cover evaluating whether tax expenditures meet their purpose, folding them into the budgeting process, improving the state’s acclaimed Tax Expenditure Budget Report, and making this information more accessible to the public.

The final report and its recommendations never really got any traction.   That’s not particularly surprising since a thoughtful approach to addressing a complicated problem is a lot less sexy than a “hit list” for immediate action.   The fact that creating such an evaluation infrastructure would require some resources certainly didn’t help matters either.   

Establishing such a process today may not be able to yield the instant gratification and immediate returns lawmakers will be looking for in grappling with the budget decisions they are facing.  But these are precisely the times when otherwise politically difficult subjects can be -- and need to be -- brought forward.  Putting this on the to-do list is a timely and critical investment in our state’s fiscal future.