Briefing

Background
Minnesota’s revenue system should be marked by two features: 1) sufficient revenue to meet agreed-upon levels of public service; 2) revenue raised fairly, that is based on ability to pay.

Minnesota’s budget crisis is due largely to an insufficiency of revenue. The most comprehensive measure of government size is Minnesota's Price of Government (POG) index, maintained by Minnesota Management and Budget. The POG shows that total state-local revenues as a percent of income stood at about 16 percent in 2008, one percent lower than the typical POG that prevailed for much of the last three decades and all through the 1990s. One percentage point difference amounts to more than $2 billion less per year, or about $4 billion of the projected shortfall of $5 to $6 billion over the next biennium. The lower POG was caused by large and permanent income tax cuts in the late 1990s, benefiting mostly top-end households, followed by a no-taxes approach to balancing budgets, such as we saw in 2003.

Every two years the Minnesota Department of Revenue publishes a Tax Incidence Report (this mandated report is the result of lobbying by JRLC in the 1990 session). This report shows the effective tax rates paid by households by income category. The report includes all state and local taxes, including business taxes. It answers the questions, Is Minnesota's tax system fair? Is the tax system based on ability to pay? Over a very broad range of incomes Minnesotans pay about 12.5% of their income in state and local taxes. There are two key exceptions: the very poor pay significantly more (19%) and the very wealthy, significantly less (10.8%).
             
Is Minnesota an uncompetitive, high-tax state? Minnesota now ranks 19th in state and local taxes as a percent of personal income and 32nd in total state and local revenue as a percent of personal income. Tax cuts and public disinvestment have been sold to Minnesotans as a jobs-producing strategy. Now Minnesota is average in taxes and our economy and unemployment is worse than national averages.

2009 Legislative Issue
Will the Legislature raise revenue to avoid painful budget cuts and raise revenue fairly?

JRLC Position
The state should raise sufficient revenue to fund social infrastructure, education, and basic human needs. Tax reforms are needed to make our state-local system progressive.

Bottom-line
• Raise revenue to avoid painful cuts to health care, early childhood, and human service programs.
• Restoration of income tax rates, an income tax surcharge, and expansion of sales tax base are options.