Time for a New Conversation on Taxes

Now that both the November elections and the November budget forecast is behind us, the political dynamics associated with the 2013 legislative session is much clearer.  The evaporation of GOP influence across all levels of state governance was admittedly a bit surprising.  However, what was not surprising was the rhetoric from both parties regarding their reaction to the November economic forecast projecting an upcoming biennial budget deficit of $1.1 billion.  While representatives of both parties were quick to agree that such a deficit was much more manageable than the $5+ billion deficit faced 2 years ago, their respective solutions were predictably routine.  Almost immediately after the forecast was released Republican voices were emphasizing that the current biennial balance of approximately $1 billion was a “surplus” and that there was no need for any tax increases.  Equally predictable was DFL Governor Dayton’s call for higher income tax rates on Minnesota’s top earners; a call he has made since his 2010 election. 

To say that we need a new conversation about taxes in this state is obvious.  How else can you explain such rhetoric?  First, suggesting that Minnesota has a budget surplus is like your brother-in-law telling you that he received a $500 raise and therefore has more money to spend, all the while ignoring the fact that he still owes $20,000 on his credit card.  Similarly, calling for higher income taxes on the rich (or anybody) simply exacerbates Minnesota’s already disproportionate dependence on the income tax.  So before both parties stake their ground on these all too-familiar positions, can’t we try to change the conversation?

One idea that has been around for quite a while, but seldom seriously addressed is the notion of broadening the sales tax base.  The arguments for changing the conversation in this direction are two-fold; and from my perspective compelling.  The first is that since the establishment of the sales tax in 1967, our Minnesota economy has fundamentally shifted from one that produces “goods” to one that delivers “services.”  However, the current sales tax is primarily imposed on the purchase of goods and not the delivery of services.  This means that each year as our economy continues to transform, the sales tax becomes less relevant and effective. 

Such deliberate policy decisions to exclude certain goods or services from the collection of sales tax is often called a “tax expenditure,” and Minnesota has plenty of them.  But the decision to exclude many consumer and business services is a big one.  According to a study by the Public Strategies Group in 2009, the inclusion of many consumer and business services currently exempt from the sales tax could yield up to $2 billion in additional revenue per year.  In light of the fact that the projected biennial budget deficit is $1.1 billion, isn’t such a change in conversation worthwhile?

The second reason for looking more closely at these tax expenditures is that while the appropriated general fund budget must be debated and approved line-by-line by legislators and signed by the Governor every biennium, once a tax expenditure is approved by the legislature it remains in place until the legislature intentionally modifies or repeals it.  In simple terms, this means that after being passed a tax expenditure go on “auto-pilot” and remains in place for decades without any legislative discussion or review.  Is this really the best way to legislate tax policy?

Of course the high profile “poster child” for such sales tax exemptions is the one on clothing; an exemption that many suggest is woven into the cultural fabric of Minnesotans. But the truth is that there are many sales tax exemptions that no one would ever want to change; such as the sales tax exemption on prescription drugs, groceries, and yes … clothing.  But just because we can agree on a variety of such exemptions is not a rationale for ignoring a thorough review of the more than 200 such tax expenditures currently in statute (yes … over 200!).  For example, do we really still need a sales tax exemption on newspapers and magazines ($65 million); an exemption on telecommunications equipment ($26 million); or an exemption on farm machinery ($36 million)?  

My point here is not to specifically pick on these exemptions, but rather to point out that collectively these special tax breaks add up to more than $11 billion in revenues not collected (Public Strategies Group, 2009).  And as noted above, once enacted these tax exemptions tend to go on auto-pilot.  Could a thorough review of all these tax expenditures by the Legislative Auditor lead to the elimination of at least one out of every ten of these exemptions?  Now that would totally change the conversation!

An Innovative Collaboration

I entered the Minneapolis Convention Center with a mixture of curiosity and excitement.  The occasion was the 2012 Tekne Awards; the Minnesota High Tech Association’s version of the Academy Awards for technology entrepreneurs and innovators.  And as I entered the Convention Center I was handed a badge and steered toward a reception area upstairs designated for the award finalists.  In the ballroom below were approximately 1,000 guests in a festive mood from all across Minnesota’s high tech industry.  I knew this was going to be a fun evening.

As I climbed the stairs to reach the reception area I noticed everyone shared the same badge as me with the word “Finalist” on it.  Slowly as my eyes focused I began to see friends and colleagues I have either known or have gotten to know over the past two years.  For you see, in 2010 the Blandin Foundation was awarded a multi-million dollar grant from the National Telecommunications Information Administration to coordinate a large, statewide initiative designed to promote broadband adoption all across rural Minnesota.  Known as the Minnesota Intelligent Rural Community (MIRC) project, this unique initiative brought together more than 20 different organizations, institutions, agencies and rural communities to focus their efforts on increasing broadband adoption among Minnesota’s rural residents, as well as rural businesses. And it was this initiative, spearheaded by the Blandin Foundation that was a finalist for the 2012 Tekne Award in the category of “Innovative Collaboration.”  As a broadband researcher for many years the Blandin Foundation tapped me back in 2010 to serve as the project’s evaluator over the next two years. In other words it was my job to document all the activity by this large group of partners all across the state and at the end of the 2-year effort to examine the impact and consequences of their work.

To state that the scope of the project was comprehensive is an understatement, as the project strategically targeted key groups of non-adopters.  For those low-income rural residents who couldn’t afford a computer, our partner PC’s of People secured, refurbished and distributed over 2,000 computers to needy rural families.  The average annual household income among those receiving these computers was $12,145, with over 35 percent having an unemployed head of household.  After all, for many Minnesota businesses today you can’t even apply for a job without being able to submit your application online. And if you are thinking, about the unmet computer literacy and training needs of many rural residents, our partners at DEED, U of M Extension, MnSCU and the Minnesota Renewable Energy Marketplace delivered more than 31,000 hours of training and technical assistance, both online and across rural Minnesota.

More than 2,000 rural businesses were provided training; over 6,000 rural businesses were reached; and direct technical assistance was provided to more than 60 small rural businesses by our partner at the U of M Extension.  Over the two years U of M Extension not only provided this important technical assistance, but with more than 60 percent of all major purchases beginning with a web-search today, they helped rural businesses understand the importance of managing their “digital tele-presence” in today’s economy. This was all bolstered by the efforts of the nine rural Regional Development Commissions providing outreach and media information all across their respective rural regions.  As I noted, this was a remarkable coordinated effort with a broad scope across an even broader geography we call Greater Minnesota.

And what was the consequence of all of this time and effort? Well beginning with over 4,000 baseline surveys conducted back in 2010, we have tracked the growth in broadband subscriptions from quarter-to-quarter, regularly reporting our progress to the National Telecommunications Information Administration.  With a goal of achieving 38,000 new broadband subscriptions across rural Minnesota within the 2-year period, the current count now stands at 40,496.

So it was with a good measure of accomplishment and excitement that we gathered at the Minneapolis Convention Center that evening.  For two years I had the opportunity to document an extraordinary effort of coordination and collaboration across multiple organizations, universities and state agencies.  And now with the project winding down at the end of 2012, here we were to celebrate our collective efforts.  So it was with great satisfaction as we watched former WCCO news anchor Don Shelby take to the podium and announce that the Blandin Foundation’s Minnesota Intelligent Rural Community project was the winner of the 2012 Tekne Award for Innovative Collaboration.  A great collaboration indeed.

Taking the Temperature of Rural Main Street

In today’s environment, any discussion of economic development inevitably includes the concept of entrepreneurship and small business development; and such discussions are particularly relevant when assessing rural communities.  The relative health of the businesses on Main Street has been a big concern in many rural communities for decades and trying to take the temperature of these businesses is not that easy.  Using somewhat crude measures it’s easy to count the number of empty storefronts or closed businesses; but such measures are really not very helpful.  However, tracking sales tax receipts is actually a more useful measure that is fairly accurate, easy to understand, and the data is collected for you by the Minnesota Department of Revenue.

So I was pleased to see a recent study published by Will Craig and Bruce Schwartau from the University of Minnesota that did just that.  If the names of Craig and Schwartau seem familiar it’s because I previously mentioned their work a few months ago.  In that earlier study they examined the sales tax revenues of the largest communities outside the Twin Cities metro (Rochester, Duluth, St. Cloud and Mankato) and highlighted the explosive growth and development of Mankato as a regional center.  However, in this new study they examine data released by the Minnesota Department of Revenue for much smaller communities; many as small as 1,000 in population.  Accordingly, data for communities of this size really can help us take the economic temperature of rural Main Street.

Another interesting fact relative to this new study is that it examines sales tax data from 2003-2009.  If you recall, this was not exactly the best years for the Minnesota economy.  In fact, state government experienced a significant contraction in 2003 and a subsequent partial government shutdown in 2005. This was then followed by two reasonable years of economic growth before both the financial and housing sectors crashed in late 2007, leading to the “Great Recession,” which presumably ended in 2009.  In fact according to Craig and Schwartau, between 2003 and 2009 sales tax receipts statewide were down 14 percent, after adjusting for inflation and the 2008 state sales tax increase.  With this in mind you can guess that my expectations for how our rural Main Streets might fare during this same period of time were quite subdued.

So you can imagine my surprise when the data indicated that many of our rural communities actually fared quite well and in fact some even thrived.  What is most interesting to note is that among the largest out-state communities (mean population 89,089) the average change in sales tax revenue was -15.7%, with only 25 percent of these communities recording an increase in sales tax collections.  However, among the smallest communities in the group (mean population 2,502) the average change was a loss half that size (-7.1%), but more importantly 54 percent of these small communities actually recorded an increase in sales tax revenue between 2003 and 2009.

How can one explain or make sense out of this data?  Well looking a bit more closely at this data reveals a very interesting correlation.  While the size of the community clearly is a factor in determining the amount of sales tax revenue collected, the geographic proximity of alternative shopping venues appears to be equally important.  Allow me to provide a simple example.  Aiken, Minnesota is a community of 2,165 residents that is situated approximately 31 miles northeast of Brainerd and 54 miles to the south of Grand Rapids.  Given the inconvenience to alternative shopping for their routine needs, businesses in Aitkin collected $2.54 million in sales tax revenue in 2009.  Now let’s look Janesville, MN; a community of similar size (population 2,256) but one that is conveniently located 17 miles on a four-lane highway east of Mankato, MN.  In 2009 with approximately 100 additional residents, Janesville’s businesses collected only $370,000 in sales tax receipts; approximately one-sixth of that collected in Aitkin.

So what do we make of this new analysis by Craig and Schwartau.  Well clearly the good news to be gleaned is that with 54 percent of these small rural communities recording an increase in sales tax revenues between 2003 and 2009, it suggests that many of these small towns are still both relevant and resilient even in difficult times.  Second, similar to the slogan used regarding the attributes of real estate, location and proximity to alternative shopping venues plays an important role in determining the overall health of our rural Main Streets.  Sometimes a bit of distance is a good thing.

Has Minnesota Lost Its Rural Voice?

Last month a policy colleague of mine from the Twin Cities contacted me and asked a question that took me back on my heels.  Specifically he asked if I could identify the creative voices and organizations developing new and innovative thinking to address the challenges and opportunities facing rural Minnesota.  He wanted to know who are the influential voices in the Minnesota legislature on rural policy issues.  And most importantly, if there were any organizations rising to the challenge of amplifying the “rural voice” as Minnesota becomes more and more urbanized.

While on the surface the question was rather simple and straightforward, my answer was anything but.  Rather the question reminded me that it was no more than a decade ago when there were many organizations that tried to fill that rural policy and advocacy void.  In fact, rural advocates were all around us.  Not that many years ago Minnesota hosted an annual “Rural Summit,” where rural residents, advocates and legislators would gather together to share ideas, discuss best-practices and develop ways to move our whole state forward.  And the legislature didn’t need any lectures from outsiders to help then better understand rural issues, as there was always a strong group of farmer-legislators from southern and western Minnesota and a strong contingent from northern Minnesota to keep their urban colleagues informed.  Unfortunately today the number of rural districts continues to dwindle and the last farmer left the legislator several years ago.

Today there are still rural organizations and advocates, but without question our collective rural voice is fragmented.  Concerns about rural health care are advocated by the Minnesota Rural Health Association; the concerns of rural towns and cities are addressed by the Coalition of Greater Minnesota Cities; and likewise, concerns of rural school districts are addressed by the Minnesota Rural Education Association.  But if it is true that the whole can be greater than the sum of its parts, then where are the organizations that facilitate these voices and help unify and amplify their message?  Equally important might be the question, are such organizations even needed?

Personally, I was always struck by the reality that with such a large and diverse rural land mass that Minnesota never had a state office or state agency that was dedicated to addressing rural development or rural policy issues.  For example in Illinois, the Governor’s Rural Affairs Council which is headed by Lt. Governor Sheila Simon recently completed a two-year effort to create a new rural development policy for the state.  Working with regional universities the Governor’s Rural Affairs Council is now in the process of implementing the recommendations from their recently completed study.

Similar examples can be found elsewhere.  For many years the Texas Office of Community and Rural Affairs served as a focal point for the development of rural policy and the distribution of federal funds through the Community Development Block Grant Program.  Today, the recently renamed Texas Department of Rural Affairs not only distributes the CDBG funds to rural communities, but also houses the State Office of Rural Health and the distribution of federal funds to rural hospitals as well.  Similar to its neighboring state of Illinois, the Indiana Office of Community and Rural Affairs is also headed by their Lt. Governor (Becky Skillman).  More importantly, one would be hard-pressed to find a state agency with a wider array of programs and initiatives designed to address the needs of its rural communities and businesses.  From its Young Entrepreneur Program to their Hometown Competitiveness Initiative, the Indiana Office of Community and Rural Affairs is a highly connected and networked organization dedicated to the betterment of its rural places.  And just like its colleagues in Texas and Illinois, the Indiana Office hosts an annual Rural Summit designed to bring rural advocates, legislators and residents together to strengthen the fabric of rural Indiana.

So you can see how my answers to this colleague’s questions seemed a bit weak and tepid.  The reality is that over the years the rural voice here in Minnesota has become simultaneously weakened and fragmented as various rural groups focused on specific sectors or industries with little coordination.  And while I am not suggesting that Minnesota should establish a new state agency, I do believe that a key missing piece in our advocacy for rural Minnesota is that unifying organization to help amplify the rural voice for all. For those of us who sang in our college or high school choir, you know what I mean.  Regardless how strong our individual voices may be, our collective voice is both amplified and strengthened when the director brings us all together.

Mobile Internet is an Equalizer

For a number of years now I have touted in this column the importance of the Internet and the digital tools it provides both Minnesota businesses and residents.  These tools not only allow businesses to increase their productivity and market share, but they allow 24/7/365 access to an increasing variety of public services; provides new access points to higher education; telemedicine and greater personal and community connectivity.  On a large scale the Internet has allowed businesses and communities to have a global digital visibility; and on a small scale it can provide new tools for a local church to maintain a connection with its congregation all week long and not just on Sundays.  It is truly a remarkable technology.  However, the reality is that the Internet is only a useful tool to those who connect with it; so it is not surprising that researchers and government agencies have continually monitored Internet adoption and diffusion across the country since the beginning of the 21^st century.

Today, according to a variety of reliable sources including the U.S. Bureau of the Census and the PEW Internet and American Life Project, we can say with a degree of confidence that approximately 80 percent of all American adults use the Internet, with the overwhelming percentage connecting through a broadband connection.  In fact, according to a recent study by Connect Minnesota, more than 95 percent of Minnesota households have access to a broadband connection and more than 70 percent of Minnesotans purchase a broadband connection.

At the same time studies have consistently found a number of sub-groups lagging substantially behind the Internet adoption curve.   These sub-groups include residents who are 65 and older; residents whose annual household income is less than $30,000; adults living with disabilities; and residents of color.  However, the Internet landscape has been changing substantially in the past few years and one has to wonder if these changes have been truly reflected in many of these statistics? 

For example, today we know that almost 90 percent of the adult population owns a cell phone and that an increasing percentage of those cell phones are Internet-enabled.  Yet for years researchers (including myself) conducted surveys with the opening questions being, “Do you have a working computer in your home?” and if so, “Is the computer connected to the Internet?”  For up until now the assumption has always been that the primary appliance that people use to connect to the Internet was the computer.  However we simply can’t make that assumption anymore.  In fact since the creation of the iPhone, the popular phrase “There’s an app for that” increasingly reflects the adoption of mobile devices worldwide and the change in the way people connect to the Internet.  However, for many government agencies this change has yet to fully sink in, as some still do not consider mobile broadband a true broadband connection. 

For some the issue is the connection speed, as they see mobile Internet connections as generally slower than most terrestrial-based connections such as Cable and DSL (which is true).  But for me the issue is the functionality of the connection; and if I can smoothly stream a Netflix™ video to my phone, how can you tell me that I don’t have a broadband connection?  Further, as the major mobile carriers (Verizon, AT&T and Sprint) begin to deploy wireless 4G technology with connection speeds of 12Mbps and faster, it will soon become self-evident that mobile broadband simply can’t be ignored.

But most important to this discussion is the impact of mobile broadband on some of those sub-groups that have traditionally lagged when measuring broadband adoption.  For example, a recent study from the PEW Internet and American Life Project reports that White, Black and Hispanic Americans all go online wirelessly at the same percentage.  And when looking specifically at Smartphone ownership, Black and Hispanic Americans actually report slightly higher rates of ownership than White Americans.  In fact, very similar results were recently reported by Connect Minnesota where they found no difference in the adoption of mobile Internet among White and Black Minnesotans and that Hispanic Minnesotans substantially surpassed the statewide adoption rate (48% vs. 39%). Similar findings were found among low-income Minnesota families with children.

The point is that the increasing adoption of mobile Internet appears to be an equalizer that needs to be better understood.  The recognition that the adoption of mobile Internet devices seem to be more widespread across a broader set of demographic and socio-economic groups than terrestrial-based Internet is a welcome finding as the Internet has the potential to “lift all boats.”  Accordingly, the sooner we recognize this reality the better.