The T Word: Which taxes to raise? Five ideas that are circulating at the Capitol

As I noted yesterday, few things are proving scarcer at the Capitol these days than Democrats willing to talk openly about the inevitability of tax increases as part of this year’s budget solution. And, to be fair, it’s still very early in the game to expect concrete proposals; GOP Gov. Tim Pawlenty had months, and extensive executive branch resources, to generate his budget, and DFLers by contrast are just starting to grapple with the particulars of the governor’s budget.

Still, the Democrats’ collective reticence on the subject seems remarkable. In the past week-plus, PIM has talked on background with a number of legislators–mostly DFLers, but some Republicans as well–about the tax revenues picture. And today we present a thumbnail sketch of the revenue ideas that seem to be eliciting the most buzz at this early stage in the session. We’ll be drilling down into a number of them in more detail in subsequent posts, and keeping track of new proposals as they emerge.

That said, here are the five issues we’ve heard the most about so far, in no particular order. Keep in mind that the estimates of the amounts of revenue involved are pegged to normal economic conditions, which is another way of saying the real yields would be lower for the foreseeable future.

Top-bracket income tax hikes: Back in 2007, the Minnesota Senate passed a bill that would have raised Minnesota’s top income tax rate to 9.7 percent. Some version of an upper-bracket increase is sure to surface this year, and some prominent DFLers are said to be studying the possibility of a measure adopted in California that establishes a top rate of 10.3 percent on incomes over $1 million a year. Upper-bracket increases would help to bring Minnesota’s top earners a little closer to the effective tax rates paid by Minnesota’s middle class–you can view the state’s effective tax rates sliced up by deciles of population in Minnesota’s most recent Tax Incidence Report (PDF), pp.57-59–but the revenues generated would only solve a portion of the deficit: about $640 million per biennium, according to the most lavish estimate we’ve heard.

Sales tax "extenders": That is, raise more money by extending the reach of the sales tax. So far as goods are concerned, the big prize that some are eyeing is an end to the sales tax exemption for purchases of clothing, which would bring in estimated revenues of nearly $400 million a year. That may be deemed too politically dangerous in the end, or it may be included in a "good news/bad news"package that simultaneously lowers the sales tax rate and broadens the base of taxable transactions. But the real action may lie in proposals to begin taxing services (as opposed to goods) more aggressively. A number of economists have made a case for this sort of shift in the tax system as a corollary to the rise in the size of the personal services sector as a portion of the total U.S. economy. Along the same lines, look for proposals to begin taxing certain business-to-business services as well. The Jesse Ventura administration made proposals along these lines that were praised for their innovation, but never got political traction at the Legislature.

A temporary across-the-board income tax surcharge: This has been done before. Back in the early 1980s, then-Gov. Al Quie, a Republican, imposed a 10 percent surcharge on all income brackets. I’ve been surprised to see how many Democrats like this idea–in some cases preferring it to more progressive upper-bracket hikes. It’s not clear why; maybe it’s because there’s no progressivity in the proposal, and Democrats have learned to fear any proposal that posits higher rates for the rich. In any case, the going estimate on additional revenues to be raised with a 10 percent surcharge is $1.5 billion for the biennium.

Fee increases: Of course, of course. You can bank on a steady stream of proposals for raising everything from speeding ticket fees to park permits, since even Pawlenty Republicans have learned to love "fees" provided that no one is rude enough to insist they’re really taxes too. But the downside is that fee enhancements don’t amount to real money for purposes of healing the state’s general fund budget.

Back out of the 2001 state funding of schools deal: You may remember that one of the Ventura administration’s more splashy initiatives involved a state takeover of school funding in Minnesota. This was done in the name of both fairness and local property tax relief. Now some DFLers are entertaining the possibility of undoing that deal. Technically, this is not actually a proposal to increase state taxes–but it would save the state an estimated $1 billion a year. Conversely, it would have the effect of forcing precipitous, and crippling, hikes to already high local property taxes.

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