Governor’s deficit cure is irresponsible

The $5 billion state budget shortfall for 2010-11 can be resolved responsibly and wisely if the legislature enacts a temporary, progressive surtax on income brackets that can afford to contribute more. Gov. Pawlenty’s “no tax” proposal is a non-starter and an example of the irresponsible tax and budgetary policies of the Republican Party that Minnesotans rejected in electing President Obama.

Responsible taxation and budgeting means funding the costs of operating state and local government functions in bad times and good times. Yet, GOP legislators, the Governor and anti-government ideologues claim that like the private sector, government must also cut jobs and services during a recession.

However, government functions and employment are not comparable to private sector service or manufacturing firms. The demands for private companies’ goods and services fall during a recession and fewer employees are required to manage the workload. On the other hand, the demand for government services, like courts, health care, snow plowing or fire fighting remain constant or may even rise during a downturn.
Raising revenue via an income surtax would be efficient and cost little to implement, save a little computer time. And, when the recession is over and revenues rebound the surtax would end. Some ballpark calculations modeled on 2004 tax and income data show that a modest surtax plan would cover about 50 percent of the deficit.

A formula to achieve this, one of many possible, would be to levy a five percent surtax on the handful of individuals (7,339 in 2004) making over $700,000 whose combined income was $13.8 billion, or 10 percent of all income. [NOTE: It takes the income of 288,000 people making $50,000 to total $13.8 billion.] The surtax would drop in each of the next four brackets so that individuals in the last group, those making roughly $80,000 to $95,000 (in 2008), would incur a surtax of only one-half percent. This formula is designed to illustrate feasibility and could be more progressive and based on finer increments of income.

In 2004 these five groups, about 16 percent of the 2.8 million people employed, all together earned one-half of reported income. The remaining 2.4 million working Minnesotans split the rest. Who has the ability to pay more could not be clearer.

Although some might advocate sticking wealthier taxpayers with the entire bill, I think even middle income individuals (but not the working poor) can also forgo some discretionary spending, even if it is just $50 a year, so that nearly all Minnesotans are called to make a contribution. Public employees would also be subject to the surtax relative to their income.

The Governor, GOP legislators and some Democrats argue that to raise taxes on wealthier individuals will reduce spending and investment and cause further job losses. This is a red herring and false. Common sense math tells us that that if a surtax is used to keep people employed around the state like our teachers, city and county employees or through direct government spending contracting local businesses, almost all these dollars will be spent in Minnesota. It is more likely, on the other hand, that wealthier individuals will invest or spend the same dollars outside the state or put them in savings.

These conclusions are verified in research conducted by Nobel Prize winning economist Joseph Stiglitz and former Brookings Institute Fellow, Peter Orszag, who is now on President Obama’s economic team. Their 2001 study, published by the Center on Budget and Policy Priorities, concludes that given the choices states have in a recession “the least damaging approach in the short run involves tax increases concentrated on higher-income families” in order to maintain public employment levels, transfer payments and direct spending. The worst choice for the Minnesota economy, according to this logic, would be Governor Pawlenty’s.

Some Democratic legislators have suggested expanding the sales tax to include clothing to raise revenue. Such a solution, like Pawlenty’s proposal to raise fees (a GOP word for taxes) would reduce the discretionary income, thus the purchasing power, of the two million middle and lower income Minnesotans who are the engine of our local economies. Let’s hope the Democratic leadership can rise above the political calculations surrounding their hopes to win the 2010 governor’s race and speak frankly with Minnesotans about the various remedies and the consequences of our choices.

No one likes paying higher taxes, but legislators might be surprised at Minnesotans’ common sense attitudes toward the fiscal choices ahead. An indication of what we might call a post-GOP attitude toward taxes and government is that many wealthier Minnesotans supported Barack Obama. And as a candidate, he said in no uncertain terms, that he was going to raise their taxes significantly—not just temporarily.