MCFE Positions on State Tax Reform in 2013

 POSITION 1: Preserving fairness is important; improving fairness does not need to be a reform priority.

  • Minnesota's tax system already does an excellent job of respecting the principles of progressivity and ability to pay. Minnesota's state income tax system is ranked in the top five nationally for structural progressivity. Among other tax system progressivity features, the state has one of the most generous state-level earned-income tax-credit systems in the nation, and one of the most generous and broadly accessible property-tax refund programs in the nation.
  • The incidence of the three major forms of compulsory individual taxation -- property, sales, and individual income tax - actually show increasing progressivity through the ninth decile. The top decile tax rate is still above or proportional to middle class tax rates and well above lower income Minnesotans.
  • The appearance of a fairness problem only emerges with the inclusion of other highly regressive and often highly discretionary forms of individual taxation (such as cigarette, gambling, and alcohol taxes), health care taxes (whose benefits accrue primarily to lower income households) and business tax incidence. Business tax incidence is the primary source of regressivity in the Minnesota tax system.
  • The state should have a good debate about the adequacy of current tax revenues and whether or not the best way to raise new revenues, if needed, is by additional taxes on higher income households. But a tax adequacy argument should not be portrayed as a fairness problem. This distorts public perception on Minnesota's tax system and does a disservice and an injustice to Minnesota's significant and successful efforts to address ability to pay concerns and build progressivity into its tax system.

POSITION 2: Reducing local reliance on property taxation should not be a focus of tax reform efforts.

  • There is little evidence to suggest Minnesota is facing anything resembling a property tax crisis. State property tax collections in Minnesota are below the national average on a per capita and per $1000 income basis. Effective tax rates relative to home value are at national averages. Tax rates as a percentage of homeowner income are modest across most of the state. School property taxes are still less than they were in 2001 prior to the state takeover of the education levy. And when ability to pay problems do arise, Minnesota has one of the best and most accessible property-tax refund programs providing direct, targeted relief specifically to those who need it.
  • Structurally, property taxes are actually less regressive than sales taxes which are the most commonly sought after source of replacement income for local governments. This is true even before the inclusion of the property tax refund program designed to reduce the regressivity of the property tax.
  • The unbalanced nature of the "three legged stool" largely reflects the impact of the Great Recession with the more stable property tax taking tax share from declining sales and income tax revenues. The property tax provided sorely needed stability to the fiscal system and should not be criticized for the very characteristic for which public finance experts find it so valuable and indispensible.
  • Accurate property tax pricing of local government services is the best way to calibrate citizens expectations placed on local government with their willingness to pay. It is also the best way to prompt government reform and redesign initiatives when needed.
  • Reform of property taxation should focus on improving transparency and simplifying the system

POSITION 3: Tax reform energies should focus on system improvements to accommodate 21st century economic and demographic realities.

  • State tax reform should focus on creating a more stable, reliable, and competitive revenue system while continuing to retain Minnesota’s historical attention to progressivity concerns. Placing a stronger emphasis on taxing consumption and pursuing broader bases and lower rates through careful reviews of tax expenditures, such as recommended by the Department of Revenue, are two important avenues to pursue.

POSITION 4: Tax reform which also results in new tax revenues to the state should be conditioned on meaningful and lasting reforms which improve the cost structure, productivity, and outcomes of state level services or state supported public services.

  • Regardless of whether the state faces a shortfall or has a surplus, the redesign of state and local spending systems in ways that fund outcomes and provides greater taxpayer value is imperative
  • Spending and tax reforms are exceptionally difficult to enact independently. Strong private and institutional interests operating in government create intense pressure to resist reforms and retain the status quo. Likewise, an intent to increase tax collections as part of a reform effort can prevent the adoption of otherwise beneficial and important structural reforms and nullify competitiveness improvements.
  • The supply of future tax revenues represents a critical source of needed leverage for spending reform -- indeed it is likely the only leverage.
  • To make progress on state fiscal sustainability it is essential that a strong quid pro quo be established in which any revenue enhancements from tax reform are conditioned on meaningful, lasting, and substantive improvements in the value proposition to Minnesota taxpayers.