» Nix exemptions, create a fourth bracket: House taxes chair Ann Lenczewski on fixing the deficit

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Nix exemptions, create a fourth bracket: House taxes chair Ann Lenczewski on fixing the deficit

by Steve Perry
Published: April 6,2009
Time posted: 1:00 am
Tags: Ann Lenczewski, Minnesota budget deficit, PIM interview, Taxes

[This item originally appeared in the 4/3 edition of the subscriber-only PIM Weekly Report.]

Last week PIM sat down with Rep. Ann Lenczewski (DFL-Bloomington) to talk about her tax overhaul proposal [story] [bill]–which, although revenue-neutral in its basic approach,is expected to provide the foundation for the $1.5 billion in new revenue the House has pledged to come up with–and about Minnesota’s structural budget deficit and the cost-shift bugaboo that she views as a necessary evil in the current economic downturn.

PIM: I wanted to ask you first about your tax overhaul bill, and whether you’re committed to making it the foundation for any revenue increases that your committee does end up pursuing.

Ann Lenczewski: Oh yeah. It’ll be in the omnibus tax bill. Absolutely it will be part of our proposal. Basically the concept is, in the tax expenditure part of the Minnesota tax code, we have all thishidden spending that people aren’t aware of. It doesn’t happen in appropriations or in the finance process, which people can see.It happens before all the revenues are collected for the chairs to spend money on.

And so it’s not transparent. It’s people getting benefits ahead of the crowd. The insidious part is that it’s disproprortionately going to the wealthiest Minnesotans. So I’m trying to dissemble that and say that the answer to the deficit isn’t just about raising taxes, It’s about shrinking government. These are cuts; it’s getting rid of a bunch of tax benefit programs that we have that allow people to get other people’s hard-earned tax dollars based on the fact they’ve got high incomes.Instead of cutting the poorest folks, or middle-income people, which is basically what all the fiscal chairs do when they cut–those people are sharing hugely in dealing with this deficit. They’re getting hammered with the cuts that are going to happen.

What I’m attempting to do is to say, for shared sacrifice, the lower-income and middle-class people are getting cuts, and wealthier Minnesotans should have to contribute, too. So we’re going to cut away some of the stuff they’re getting that is, relative to Minnesota tax incidence, very unfair. We really can’t afford to subsidize these tax expenditures anymore.

PIM: You’re talking about loopholes and exemptions that principally benefit upper-bracket people. Could you give me a couple of examples?

Lenczewski: There are like 25 things that I’m repealing, and they do different things. Some of them aren’t just helping wealthy folks. Some of them aren’t working at all, no matter who they’re intended to help–for example, the long-term health care credit. That’s intended to get people to buy long-term health care, and what it’s really doing is costing the state a ton of money. It’s a net loser, it’s completely not working. I heard a Harvard study at the National Tax Association showing that states doing this are just nuts, because they’re net losers.

So I’m repealing some things that don’t work, and then I’m repealing some things that are discretionary ways of saying, we’ll give you tax credits for certain activities but not for others. It’s sort of government playing king. .And then there’s a whole bunch of things for people who are high income-earners. We’re not getting rid of them entirely; we’re still going to keep them for people of limited means, but we’re going to turn them into a credit.

For example, on the mortgage deduction, the wealthier you are and the bigger your mortgage is, the more money you get. So if you have a million dollar mortage and you’re a multi-millionaire, you’re getting huge tax benefits from everybody else. If you’re a poorer person with a small mortgage, you’re not getting benfitting in the tax code at all. In fact, 46 percent ofall filers in Minnesota do not itemize, so they’re not getting any benefit at all. So right out of the chute, almost half of Minnesotans don’t get any benefit from this. You have to have a high income liability to start deducting some of these things off. If you’re not high-income, you can’t get it.

So it’s turning that tax relief upside down. We’re still going to keep some tax relief, but we’re going to give it to people who need it. We can no longer afford to give it to folks who are relatively better off. The Minnesota tax incident report shows us that the situation where the top income-earners in Minnesota pay proportionately less than everyone else hasn’t shrunk–it’s grown. We have this embedded unfairness in the tax code. And I know it’s difficult around here, but there’s no better time than a deficit to have the guts to do some reform. And for all those who would say, oh, that’s
confusing and it’s not simple and it’s hard to explain–to me, that’s just punting, and saying that because it’s not simple we can’t do it.

Well, we’re in a situation where we’re down $6.4 billion. Somebody’s got to get creative. What I’m saying is that rather than doing the thing Democrats are expected to do, which is just raise taxes on all these things–we’re going to need to raise some of that revenue, too, but can we first cut some things we don’t need anymore in the area of all these tax expenditures that are going to the pretty well-off? That way, you don’t have to raise as many general taxes on society. I think when people really figure this out, they go, yeah–so we’re helping people get tax relief for their million-dollar mortgages?

Yes, we are. And I know this whole area is complicated, but that doesn’t mean I’m not doing it.

PIM: And these tax expenditures that you’ve identified come to what, $200 million?

Lenczewski: I thought originally it was around $200 million, but when the revenue estimate actually came in, it looks like it’s about $300 million or more per biennium. Also, there’s this group of foundations–the Bush Foundation, the St. Paul Foundation, and some others; I think it’s the old Peter Hutchinson Public Strategies people–that just announced this big study about reforming government and what should be done differently. They actually cited this mortgage interest deduction and askedwhy this should be kept. They have a whole chapter in this study about it, and they also talk about tax expenditures as this hidden part of the state budget, which is $11 billion over a biennium.

Every time we have the debate–if you’re short $100 million, or you’re short$1 billion–people look atall the fiscally transparent stuff: What should we cut in K-12?Or higher ed? Or the environment? No one looks at thetax expenditures. What I’m trying to do is say, why shouldn’t that stuff be up for cuts too? Why are they held harmless? One thing I described at my press conference on this bill that helped people get it is, there’s this waterfall that is the revenue stream for Minnesota. It’s the sales tax and the income tax and the corporate tax, and it’s filling this lake that is the public good.

So here comes the revenue. And you can want a small lake or a big lake depending on your political philosophy, but that is the common lake that we’re all drinking from. And when we have a budget fight, whether Republicans or Democrats are the fiscal chairs, people will say, oh, we need more lake water for K-12, or for early childhood. We’re competing ina transparent way where people can say, we have this much revenue and what are we going to do with it?

What tax expenditures do is, up behind the waterfalls in the trees, where people can’t see what’s going on, there’s this other group of people who are first putting their cups and pitchers and taking care of themselves out of this waterfall before it reaches the common lake. They get that, and then they drink from the common lake too. And the public down by the lake doesn’t know that these people are making the revenue stream smaller. They’re down there saying, we only have this much water; what are we going to do? They don’t know that actually there’s all this water that’s already been removed. And we might want to keep what they took and say bring it down here to the whole public.

I think it’s unfair, and there’s also the problem that a disproportionate amount of the folks with pitchers and cups are wealthy people. And even if they weren’t, I think people should compete for what’s in the lake fairly. Tom Huntley and Linda Berglin don’t know that these people are making their jobs tougher. If we want to keep granting some of those benefits, fine, but let’s not do it in a hidden way. I think that Republicans mostly would not choose to give it to the wealthiest people, either, if the whole thing were more transparent.

PIM: So there’s perhaps $300 million out of $1.5 billion that you’re charged to come up with. You mentioned the tax incidence study, and one of the other things it identified is that the breakouts of the top 5 percent and the top 1 percent of earners show even lower effective tax rates than the top 10 percent. Does that mean a fourth bracket is a good place to go?

Lenczewski: Oh, yeah. I carried that proposal the last two years, and it was vetoed. But I’m not going to abandonthat just because the governor’s not for it. I think we have this political problem of, what do people of principle do? Dothey just say, I’ll capitulate because I know you’re going to veto it?Or do you say, we were elected too, and we have principles too?

Contrary to a lot of people’s impressions, Obama didn’t say, vote for me and I’ll raise your taxes. He said, vote for me and for 95 percent of you, I’ll cut your taxes. But for wealthy folks, sorry–you’re going to have to chip in more. I feel similarly. People shouldn’t be surprised that our caucus thinks we should raise more revenue from the wealthiest folks. Do I think we should raise it on everybody else? No. You can see in the tax incidence report that they are contributing. And they’re going to take cuts in the lake process. Who’s going to be losing resources? The people in those first and second brackets [at the bottom]. They’re going to get hammered in the cutting process, because we don’t give free college educations to millionaires–they’re going to low and middle-income people. You’re able to means-test spending and move it in a progressive direction to folks at the lower
end of the income spectrum. When you take it away, you are absolutely hurting those people.

So why not have the wealthiest people contribute more on the revenue end? Now, there are some people around here who say, why not just raise income taxes on everybody? Why not roll back the rates to 1998, or let’s have a surtax on everybody. That seems alluring at first. Shared sacrifice–why not? Well, you already have the first brackets doing that, because they’re going to lose a lot of their benefits in the cutting process. So why would we pile income tax increases on top of that? I’m trying to target the people who are doing best. And for people who say, well, that’s class warfare–no. The fiscal chairs are already hammering people at the middle and bottom. So everyone is going to share in making a solution. But when you say the poor and middle-income people should pay more income taxes, you’re actually saying those people should pay double.

So you have well-intentioned people–including some Democrats–saying, why not have everybody pay a surtax, or let’s just roll back
the rates. They’re not thinking through the fact that the net effect of that is a super-burden on the poor and middle class. I just reject the idea that the only thing that hurts people is tax increases. Losing your stuff hurts, too. They’re all kind of bad options.

I do want to have everyone on the income spectrum contributing. But when I look at the cuts in the governor’s budget, the House targets, the Senate targets–they’ve all got cuts. So everyone is going to contribute. I don’t want to exacerbate the problem by making those people contribute again [through across-the-board income tax hikes].

I’m trying to come up with the best ways I can find to make the system overall more progressive. Will there have to be regressive pieces in there? Yeah. We have to get to $1.5 billion. But overall, you want to make that Suits index more progressive, even if it’s by a teeny amount. It’s hard to do, and the more regressive taxes you bring in, the harder it is.

Add a fourth [income tax] tier, and it’s not going to get you to $1.5 billion. So it’s tough.

PIM: There are two very pressing facts this session–a longstanding structural deficit and the economic crisis of a lifetime. Can you solve the structural deficit this year, in view of the shape the economy’s in?

Lenczewski: I don’t think you can. I will say that where some of my colleagues like to blame the governor for all this, that’s not accurate. We had an ongoing structural problem of almost $1 billion. Now we’ve got a $6 billion problem. And $5 billion of that is not the Legislature’s problem or the governor’s problem. It’s the fallout of the national and international economy. All states are dealing with this.

It was hard enough to figure out how we were going to get the political will around here to deal with $1 billion. Now it’s so much worse. So no, I don’t think you can do it this year, but you do need to start heading in the right direction.

The one thing people are always trashing around here is the shifts. Oh, they’re terrible, and they’re political gimmicks. If they’re very gimmicky and you can’t justify them, I would agree. But there are some shifts in the short term, like the K-12 shift, that help to get you through a multi-year deficit problem, and here’s why: If you’re going down into a big [revenue] valley like this, and the only way to fill that in is to do permanent cuts or permanent revenue increases, you’ve got to do a lot of cuts or revenue increases. But if you can shift, you can maybe fill in the bottom of the trough with a shift until you come back out of the trough.

Do you want to over-rely on them permanently? No. But the K-12 shift is a one-time shift, and then we pay it back. Often, from a public policy standpoint, people will trash shifts. I think a lot of people believe I’m a purist on the academic aspect of tax policy–a wonk. At the conference committee last year, Sen. [Tom] Bakk gave me a 12-pack of Ivory Soap and dubbed me the purist who wouldn’t compromise. I’m a more merit-based thinker. I don’t care if a bill is by a Republican or a Democrat if it’s a good idea. So people are surprised that I’m more okay with shifts than a lot of people around here. I agree they’re bad–but the alternatives are worse, in my mind. To take disabled people and remove their health care, or give them limited benefits, on the one hand, or to raise people’s taxes when they’re scared and fighting for their jobs–Republicans are right. People are not salivating for tax increases.

Both those options are really bad. I think it’s legitimate to have some of the solution be shifts. Are the governor and the House and the Senate going to be using them to dodge a few bullets in the short term? Yeah. And I just don’t think that’s something to be ashamed of, because the alternatives are so bad.