Taxing Gatsby to invest in Ricardo makes sense
Dane Smith, MinnPost, May 30, 2013 – At the commencement ceremony recently for some 1,200 proud young scientists and engineers graduating from the University of Minnesota, several speakers reminded us that from these ranks in previous years came the job-producing creativity that helped create or nurture Medtronic, Cray Research, 3M and Cargill, as well as life-enhancing innovations of global importance in agriculture, medicine and technology.
This year’s graduations are coinciding with the completion of a landmark legislative session that provided more new education re-investment than any in recent memory, and the news media is cranking out predictable stories about angry opposition to impending state revenue increases that pay for that investment.
Allegations of persecution focused on the modest hikes in income taxes for those at the very top, who have benefitted the very most from corporate growth, which is largely dependent on a high-quality education system and public infrastructure. Usually left out of the debate is the fact that much of the coming tax increases will be paid by people who now have a greater share of total income and wealth than their ranks have had since “The Great Gatsby’’ was written.
These graduations should serve as a vivid reminder of the enormous foundational value of our tax dollars. Almost everything our taxes buy is of direct public benefit, in the form of long-term investment in human capital or business-building infrastructure, or shorter-term economic security, or public health and safety. But more of our state and local tax dollars go to education than any other purpose, and these dollars in particular do myriad things that create a smarter work force and stronger economy.
A good hard look at the bottom line shows that Minnesota’s overall tax obligations and public expenditures are lower than they used to be and are competitive with other states. And the new increases — which amount to less than half of 1 percent of total personal income — are prudent and necessary and good for business in the long run.
Outperforming low-tax states
And, perhaps most important, almost all recent indicators show that Minnesota is far outperforming most low-tax states and neighbors such as Wisconsin, where the political leadership has championed anti-government, anti-labor, tax-cutting policies as proof that it is “open for business.”
The Price of Government for Minnesota, the best bottom-line measure of total state and local government revenues as a percent of total income, is down almost 3 percentage points (from nearly 18 percent of income to around 15 percent) since reaching a high point in the very prosperous 1990s, and it will stay comparatively low under the proposed tax increases that will take effect later this year.
Some $250 million of the net increases for the next two budget years go to higher education systems and student aid that flows to private colleges and for-profit higher education institutions. The largest portion of the revenue increase is the $475 million that will provide enormously valuable new investments early childhood education, which business leaders strongly support, and to our indispensable and underrated K-12 system.
Interestingly, some Republican legislators have criticized the proposals for not doing enough to immediately restore the borrowing and accounting shifts from public school districts in recent years, or for actually cutting too much from human services.
Fears of southward migrations
But the main stink, as usual, is over fears that raising revenues will drive away business and capital to Florida or Texas or other states with somewhat lower taxes and much higher January temperatures. And this year’s opposition has been fueled by the new book, “How Money Walks,” which breathlessly reports that many people with considerable income and wealth have moved from states such as New York and Illinois and Massachusetts and Minnesota and New Jersey to states such as Texas, Florida and Arizona. The author asserts that this is mostly because Texas and Florida and Arizona have lower taxes or no income taxes, and … you get the drift.
We don’t need to foolishly assert that taxes make no difference whatsoever to find fault with this analysis. The endlessly chronicled migration to the Sun Belt began a half-century ago, driven in part by air-conditioning, freeways and greater mobility, cheaper labor, and by older folks in the early years of retirement, seeking relief from icy sidewalks, and — for some, no doubt — lower taxes.
If tax rates were everything, one would expect that the higher-tax northern states by now would be low-income wastelands, inhabited mostly by unemployed welfare recipients, “takers” victimizing a few remaining “makers.”
The opposite turns out to be the case. A quick look at “How Does Minnesota Compare” (a report using U.S. Census data and compiled by the nonpartisan Center for Fiscal Excellence), shows that in 2009, nearly all of the top 10 states in average per capita income were high-tax, progressive states. That perennial top 10 still includes Connecticut and New Jersey (which recently raised income taxes, and which have not seen significant new flight or disinvestment), as well as New York, California, Massachusetts and Maryland. Texas and Florida ranked far lower, near the mid-20s in income, and most of the other low-income states are southern or Mountain State enclaves where anti-tax, anti-government invective and policy holds sway. Minnesota ranked 13th in income, and 14th in taxes as a percent of income, up a bit on tax rankings from around 20th just a few years ago, but still 24th in general expenditures as a percent of income.
‘Enterprising States Dashboard’
And despite this constant refrain that Minnesota’s current taxes are too high, evidence continues to mount that Minnesota’s economy is once again outperforming most other states. The most recent U.S. Chamber of Commerce study of state competitiveness, using criteria that tend to punish states with progressive taxes, gives Minnesota a respectable 15th place in overall performance on its “Enterprising States Dashboard.” The report praises Minnesota for its “solid talent pipeline and workforce education system. The Land of 10,000 Lakes has the second most educated young workforce, and its higher education system is the fourth most productive in degrees per 18- to 24-year-old.”
Another very recent study by the nonpartisan Federal Funds Information for States ranked Minnesota sixth on its index of state economic momentum, with rankings of third in personal income growth and seventh in employment growth. Wisconsin ranked 33rd in economic momentum, and South Dakota, which continues to bill itself as a tax haven for beleaguered Minnesota business owners, ranked 47th.
Much business literature these days suggests that firms ought to refocus on what they do best, on their historic comparative advantage, and not try to be like everybody else. Minnesota’s distinctive route to prosperity was achieved through generous public investments and a basic premise that everybody in our state gets maximum opportunity. And it makes sense to double down on that, not to emulate poorer and more unequal states with cheaper labor and lower taxes.
Investing in youth
I must confess that I had a personal stake in that U of M graduation ceremony. A student from Mexico City, who became part of our household seven years ago as a high-school exchange student, was among the graduates in mechanical engineering, and his entire proud family came north to celebrate with us (shivering most of the time.)
We all laugh now at how horrified Ricardo was the first time he felt the fury of our ferocious winter. But he came back because our engineering programs at the U are among the best in the nation. Next month he starts at a very good salary with a Fortune 500 manufacturing company. His success so far has been subsidized with our state tax dollars, but I have no doubt that this will be repaid, with interest.
And that’s why we call it an investment.
Dane Smith is the president of Growth & Justice, a policy research organization that advocates for public investments that expand prosperity. A version of this article was published by the Legal Ledger/Capitol Report.