Fiscal Policy Framework
Overall Fiscal Policy Statement
The Lourey Administration is committed to a state and local government financing system that offers all Minnesotans the opportunity for success in life by providing the essential public infrastructure and services necessary to achieve this goal. In order to attain the global competitiveness needed to bring prosperity to all, the State of Minnesota should focus on tax fairness at every level of income, narrowing the achievement gap in education, accomplishing affordable health care for all, securing public safety, addressing our long-term transportation needs by emphasizing energy alternatives, and accompanied by accountability measures to ensure the effectiveness of new investments. Minor fiscal changes and unrealistic tax collection expectations cannot move Minnesota forward to achieve needed, major policy goals.
This fiscal process framework is evolutionary in nature. Recent Minnesota history tells us that rapid and radical fiscal structure change brings about unanticipated negative consequences. The 2001 decision to suddenly eliminate the Minnesota general education levy quickly triggered yo-yo school financing that was far more dependent on swings in the state economy. The sudden change also created unexpected shortfalls for numerous Tax Increment Financing districts. Another significant jolt to the system came in 2003 when the cities’ local government aid (LGA) was reduced by 25%, triggering significant cuts in local public safety expenditures, spend down of reserve funds and rapidly escalating property taxes, especially for residential properties. The Lourey Fiscal Policy Framework outlines the achievable goals to be accomplished over several years, gradually transitioning to a more-stable and fairer structure based on forecast revenues available and changing expenditure needs at the state and local levels.
As such, this document will not detail exact year-by-year fiscal changes, but provides the framework for gradually changing Minnesota’s fiscal structure.
Actions taken by the Lourey administration will keep Minnesota’s Size of Government (SoG) ranking (total state and local government revenue as a percentage of personal income) competitive with surrounding states and the nation. Keep in mind, Minnesota’s SoG ranking is now in the bottom third of all states, and is lower than all surrounding states. Minnesota ranked in the top 10 nationally in the early 1990s, fell to the middle of the pack (18th) by FY2000, and most recently dropped 36th in FY2004 (latest data from U.S. Census Bureau and U.S. Bureau of Economic Analysis, based on total of all revenue sources including taxes, fees, tuition, service charges, intergovernmental transfers, and special assessments compared to personal income).
Key Fiscal Policy Goals
- A Fairer Tax Structure based on Ability to Pay
- Stability in K-12 Education Financing / Equal Opportunity for All
- Enhanced Public Safety in State and Local Partnership
- Encourage all Employers to provide quality Health Care coverage
- Enhance Transportation Infrastructure, encourage Alternative Energy use
- Maximizing State Revenue from Tax Evaders & Avoiders
- Accountability Measures for Major Spending Categories, New Initiatives
Specific Fiscal Policy Initiatives
More-Progressive Income Tax Rates
Over the past several years, state and federal tax changes have resulted in considerable tax relief for the wealthiest in society leading to a regressive tax structure that heavily shifts tax burdens from high incomes to middle and modest incomes. The top 1% in income (above $411,000 in yearly income) now pays a 26% lower effective tax rate than middle-income earners, based on 2007 estimated tax incidence by income decile (2005 Minnesota Department of Revenue study). Changes proposed in the highest income tax bracket by the Lourey administration will return Minnesota to an overall tax-neutral system so that the burden is shared fairly by all income levels. Specific rate changes will be determined after factoring in the November 2006 forecast and assessing FY 2007-08 state budget needs. The current three-tier rate structure will be retained, and it is anticipated that the top bracket rate will remain below 10%. In an effort to make the Minnesota Income Tax structure more progressive, the bottom bracket will not be increased.
Health Care Tax Credit
Becky Lourey earlier set a goal to reach affordable universal health care in her first term in office. A non-refundable employer health care tax credit applied against the corporate franchise tax (or individual income tax in instances of LLCs, partnerships or S-corps.) will be targeted toward smaller businesses that often struggle to offer quality health care coverage to their employees. Only certified, qualified health plans will be eligible for the Health Care Tax Credit. In an effort to maximize the impact of the incentive on smaller businesses most challenged to offer comprehensive health care, the Health Care Tax Credit will be capped. Taking effect in tax year 2007 (prorated in the first year), the tax credit amount and benefit cap will be determined after the November forecast based on anticipated revenues and overall expenditure needs.
Accountability standards will be applied to track the impact of the Health Care Tax Credit on expanding health care access, quality of benefits, and its direct impact on business expansion.
Education Stability Levy
Closely patterned after the Minnesota Miracle of the 1970s, the state must not continue down the cyclical road of adequately funding K-12 Education only in good economic times. Total elimination of the general education levy resulted in unstable financing for Minnesota schools and other unexpected negative consequences. A limited levy based on adjusted tax capacity will ensure fair funding for all school districts regardless of property wealth. Although the amount is yet to be determined, the new Education Stability Levy will start out considerably smaller than the general education levy prior to its elimination in 2001. The levy will be equalized by weighting school district poverty and property wealth factors. Savings to the state General Fund will allow for implementation of Public Safety Government Aid (see below).
Accountability standards will be applied to measure the impact of the Education Stability Levy on the year-to-year school district finances and measurable outcomes such as class size and curricular offerings.
Public Safety Government Aid – State and Local Partnership
The greatest share of state general fund savings from the Education Stability Levy will be utilized to create a new Public Safety Government Aid distribution to cities and counties in order to achieve a stronger and fairer state and local fiscal partnership, enhancing state investment in public safety. Major factors determining the Public Safety Government Aid distributions will include: crime rate, jail and prison census, traffic accidents, and various overburden factors.
Accountability standards will be applied to measure the impact of the Public Safety Government Aid, including the effect on crime rates and property taxes.
Invest in Transportation Infrastructure – raise Gas Tax & implement Carbon Tax
In her first budget, Becky Lourey will propose a staged gas tax increase ranging from 5 to 10 cents overall based on the input taken from business leaders, legislators, MnDOT and the public. As constitutionally directed, these new revenues will be directed to the trunk highway fund. In an effort to increase investment in transit, light rail and other alternative transportation needs, a new Carbon Tax will be statutorily dedicated. The Carbon Tax will be applied to all motor vehicles requiring state DMV registration, with rates calculated by vehicle model gas mileage per gallon. A major factor in determining the initial Carbon Tax will be based on the outcome of the November constitutional ballot question dedicating a portion of Motor Vehicle Sales Tax to meeting transit needs.
Maximizing State Revenue from Tax Evaders & Avoiders
Becky Lourey will continue efforts to ensure that all taxpayers - citizens and businesses alike - pay their fair share of tax obligations. While such efforts are not a meaningful reform of the tax system, they are needed to achieve full funding of essential state and local services, as well as instill respect and confidence in our system of governance. A majority of Minnesota businesses play by the rules but do not get a level playing field due to lax state laws encouraging some companies to employ various questionable accounting gimmicks. Minnesota should join the growing number of states that have closed off-shore foreign operating corporation (FOC) loopholes and other artificial tax avoidance devices.
As someone who operates a dynamic business, Becky Lourey understands that fiscal discipline is essential to the budget process. This is especially important when the public is asked to accept changes in budget priorities and the mechanisms to fund those changes. Employing accountability ensures fiscal discipline. The Lourey administration demands cost-effective use of new programs, and current investment especially by the largest budget categories – Education and Health Care. Accountability measures are intended to determine what works and fix or remove what doesn't.