After the recent resolution to the $5 billion budget deficit that ended Minnesota’s 21-day government shutdown, many are still upset that an all-cuts (i.e. no new taxes) solution was enacted. But in reality the resolution was far from what I would consider being comprised of all cuts. In fact, less than half was comprised of real cuts to the general fund, with the remainder comprised of more accounting shifts and borrowing from future tobacco revenues at rates that might turn out to make a pawnbroker blush. If there was any truth in political advertising, one could never call this an all-cuts resolution.
The truth be told, I was a strong proponent of an all-cuts resolution if legislators would have actually invested the time to closely examine all government spending; not just appropriations to the general fund. Sounds confusing? Well the truth is that government spends money in lots of ways. That is why every two years the Minnesota Department of Revenue is required present to the legislature a report called the Tax Expenditure Budget. What exactly is the tax expenditure budget? Well the simple answer is that when legislators pass a law to exempt certain products or groups of people from specific taxes that the rest of us have to pay, it is recorded as a tax expenditure. Some may consider it a special tax break. And when government revenues get tight just like those who argue that we can no longer afford certain programs or expenses, it seems reasonable that the same can be said for special tax breaks; i.e. maybe we just can’t afford them anymore.
Worse yet, 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, these tax expenditures are on “auto-pilot,” and most of them have been in place for decades without any legislative discussion or review.
So early in the 2011 session facing a $5 billion budget deficit, Senate Tax Committee Chair Julianne Ortman declared her intention to conduct a complete review of all of these tax expenditures, as the state just may not be able to afford some of these tax breaks anymore. But unfortunately such a review never happened, as some in leadership positions argue that because the repeal of a special tax break brings in added revenue it is the same as a tax increase; and new revenues were off the table. A good example was Rep. Runbeck’s bill to eliminate former Governor Pawlenty’s JOBZ initiative that provides income, corporate, property and sales tax breaks to selected businesses locating or expanding in selected rural areas. Whether you agree with this bill or not, the reality is that it was introduced on April 18 and then died a peaceful death as it never even received a hearing.
So how big is this hidden tax expenditure budget? Well according to a 2009 report by the Public Strategies Group, there are over 200 of these special tax breaks that add up to a projected $11.9 billion. Now please understand that many of these tax breaks, such as the exemption of groceries and prescription drugs from sales tax are exemptions that we all would never want to repeal; but over 200? Clearly there are others we could agree that may no longer be appropriate or that we no longer can afford; and repealing these special tax breaks would have helped close the budget deficit without the gimmicky budget shifts and borrowing. For example, we all heard that if we repealed the sales tax exemption on clothing it could increase state revenues by approximately $250 million per year. But did you realize that according to the Minnesota Department of Revenue, repealing the exemption on consumer and business services such as legal or accountancy services from sales tax could yield more than $2 billion per year? We actually shut down the government over a figure less than that! How about repealing the sales tax exemption on newspapers and magazines ($65 million); the exemption on telecommunications equipment ($26 million); or the exemption on farm machinery ($36 million)? In fact these tax expenditures that were written into Minnesota law are seldom discussed or reviewed during budget hearings, but are worth billions of dollars and are long overdue for a complete review.
The bottom line is that during times of budget deficit we all recognize that reduced spending is required and painful cuts must be made; but don’t confuse such cuts with real reform. Real reform is about changing the way our state government collects revenue, spends money and conducts its business. Unfortunately, unless the Minnesota economy gets revved up pretty soon, this most recent budget fix is projected to simply push another $2 billion structural deficit into the next biennium. Now is the right time for legislators from both parties to work towards real tax and expenditure reform. Just as we can no longer afford government spending to be placed on auto-pilot, we can no longer afford all these special tax breaks on auto-pilot either.
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