The T Word: Lenczewski v. Bakk on exemptions, tax breaks for business, round 5

As the conference committee on taxes unfolds, it becomes clearer by the day that the tortuously slow going really comes down to the continuing disagreement between chairs Rep. Ann Lenczewski (DFL-Bloomington) and Sen. Tom Bakk (DFL-Cook) over tax breaks, loans and other kinds of special treatment for business granted in the name of spurring job creation or keeping local development projects afloat.

Bakk, who has represented the chronically troubled Iron Range for the past 15 years in the House and Senate, is perhaps the legislative Democrats’ greatest champion of such measures. In addition to having carried Gov. Tim Pawlenty’s JOBZ program in the Senate back in 2003, Bakk has put forward an omnibus bill containing numerous business-friendly provisions in the form of loans (most notably, $10 million for a wind-turbine blade manufacturer and $3 million for a company that customizes private jets) and tax breaks.

Lenczewski, meanwhile, is the legislative DFLer most unequivocally committed to ending those kinds of deals, on the grounds that they bleed away state revenues and that the projects and programs they underwrite rarely succeed.

Yesterday the committee met for two and a half hours without making substantive headway on a final bill or starting the discussion over the two bills’ major revenue-raising provisions. The topic of the day was the cost of the tax breaks for business written into the governor’s budget proposal and the House and Senate tax packages, which break out this way:

• House: $97 million in 2010-11 biennium; $43 million in 2012-13 biennium; plus a continuing commitment past the four-year budget window of $800,000.
• Senate: $434 million in ‘10-’11 biennium; $234 million in ‘12-’13; plus a continuing commitment of $287 mllion.
• Governor: $251 million in ‘10-’11 biennium; $424 million in ‘12-’13; plus a continuing commitment of $671 million.

The committee discussed at some length a proposal from Sen. Kathy Saltzman (DFL-Woodbury) that would grant about $164 million in tax breaks to insurance companies that use a portion of their investment portfolio to put money into Minnesota small businesses, but no action was taken.

In fact, the committee never really got past the positions staked out in the opening statement from Lenczewski and Bakk’s response. The entire impasse was summed up there, so I’ll close by quoting the transcript of that exchange.

LENCZEWSKI: [after reviewing House, Senate, and gubernatorial tax expenditure figures] I think members can guess where I’m going with this. If you look at the House, we’re at $97 [million] in the first biennium and the senate’s at $434 million. The House is just not interested in spending this kind of money in targeted tax incentives for businesses. Now, I know people will characterize this as job-creators, but people should know that it’s being paid for in the Senate tax bill by raising taxes on businesses. The tax increase on businesses, if we find that in the spreadsheet, is, I think, about $475 million. So in my estimation, it’s like you’re raising taxes on all businesses to give things to some businesses.

I just have not been a fan of these items. I don’t think they work, and there’s division in the House, on Democrats and Republicans. Some people love these things. But you can see on the House sheet–I’m phasing in single-sales, which is a one-time thing but it takes a couple of bienniums to get there. On Section 179 conformity, it takes a while to get there. The only real ongoing, forever thing I’m paying for is an R&D credit, versus the Senate at the $434 [million] number. Even six years out, there’s still a $287 million commitment for these tax programs…

The governor is spending in the first biennium $251 million for these programs–more than the House but less than the Senate. The governor’s spending $424 million–more than the House and more than the Senate–in the second biennium. These are spending. People like to call them tax cuts, but they’re spending. Outside the [budget] window, the governor’s committing the state to another $671 million in new tax preferential treatments for business. To me, that’s just growing the deficit in the out-window by another $670 million…. The fact of the matter is, to meet the governor’s number in the out years, you’re going to have to raise taxes another $671 million to pay for that. Or you’re going to have to cut another $671 million to pay for that….

Finally–and then we can just get into the fight over it–I want people to look at what is the ongoing commitment here to all these business tax reductions… If you look at the governor, he’s got the angel investment credit, the corporate franchise tax repeal…, capital equipment sales tax exemption, green JOBZ small business investment tax credit. The Senate’s proposing a qualified high-tech credit, a small business investment tax credit, a 10 percent income tax cut subtraction pass-through entity, a historic rehab tax credit, a film credit and upfront capital exemption. In ongoing money, the House is committing to R&D.

Now, I know we all have differences on this, but I just think when you look at the state budget trends, everything says our revenues are not going to keep up. Our expenditures are growing too fast, health care and other, and I think in a $6.4 billion deficit, we can’t be making ongoing commitments that we have no idea how we’re going to pay for. I think the people who are willing to raise taxes to pay for them are being more honest. They’re saying yes, we’ll raise a tax and we’ll pay for them in a permanent way. I think folks who are saying, we shouldn’t raise any taxes but we want all this stuff, too–that gets a little harder for me to stomach, quite honesty, especially when you look at the governor’s $671 million spending commitment without a way to pay for it…

I just think we all need to be honest. I think we should talk about if we think that what we need to be doing right now is creating jobs. I am not one who is convinced that handing out these spending programs creates jobs any quicker, any better, any more efficiently, or [for] a better return on the dollar than investing in things like K-12 or a good commerce system or a good health care system, or our workforce, or retraining, or the myriad other ways people think for the long term.

I know in the short term, people like these ideas because it gives a sense of hope. I remember Sen. Bakk talking about, hey, when JOBZ happened, you’d go to these communities and people were really hopeful. And you know, JOBZ doesn’t work. All the data shows it’s really not working. It’s working in a few places, but the Office of the Legislative Auditor report shows it’s really not been a good use of taxpayers’ money. The fact that things provide hope or make us feel good in the short term doesn’t mean they make good financial sense.

Job creation–unfortunately, to my mind, true job creation is [something about which] you have to think long term, you have to think down the road. These mechanisms that are in these bills, to me, are very risky ventures. They are putting the risk on the back of the taxpayer without a lot of information to show that anything works. And we just plain old can’t afford it….

BAKK: Madame chair, I think the issue is–I think you feel the economy has no problem. And I think the Senate feels that Minnesota’s economy is in a severe recession, and somebody needs to do something. I got an email today from former tax chair Sen. Doug Johnson… This is what it says: "Thanks for agreeing to help on the Cook Spectrum project. Spectrum was shocked to hear that Wells Fargo turned down the loan, as they received so much positive response…. Of about a $2 million project"–it’s an assisted-living building in a small town I represent–"25 percent was equity, 25 percent was SBA [Small Business Administration], and 50 percent was a loan from Wells Fargo. The individual who had been working with Spectrum Health Care had recommended the loan to the executive committee and it was turned down."

Madame chair, the problem is, we have financial markets that are absolutely froze up. I know this company. They’ve got a number of facilities. I know the CEO. This is a rock-solid project, and they’re looking for 50 percent of the money in a loan, and the bank won’t do it. So do we just throw up our hands and not do anything to try to jump-start some of these projects? And if the banks feel like somebody needs to take some of the risk out–I just think that that’s a reasonable place for the taxpayer to play a role when your economy is in a severe recession.

So we just fundamentally disagree. But I’ve met with developer after developer after developer, starting with a big Twin Cities developer who came in to see me the first week of the session and showed me a list of 16 projects that were ready to go, and not one could get financing. The owners wanted to go, they were ready to go, but no financing…

Madame chair, there’s a real problem out there. Owners have real projects that are ready to go, and they can’t get financing. And for the state to just say, well, there’s nothing we can do, I guess; we’ll just throw our hands up and let our citizens draw unemployment until their unemployment runs out and their health care runs out. And then they go over to Sen. Berglin’s committee and they qualify for Minnesota Care and more state services. And we just sit here on our hands and say, well, we can’t afford to help. We can’t afford to do anything to help bring the state out of the recession.

The Senate just doesn’t agree with that principle. The Senate thinks the state has some role, when you’re in a deep recession, to try to stimulate the economy… It’s just not acceptable that this session be only about balancing the state budget, and [then] we all go home.

You know, Madame chair, you and I have got a job, and we’ve got health insurance. But a whole lot of us have got constituents who don’t. They’ve got family members who are finishing up their college degrees and they’re moving home because there’s no jobs for them. I think they’re looking to people like us to try and do something. Clearly we have a problem–I don’t think anybody in this room thinks that we don’t have a problem in the financial markets. And to just do nothing other than balance the budget seems unacceptable to me.

So we just have a fundamental disagreement, Madame chair, and you may end up getting your way and we don’t do any of this stuff. I think Minnesota loses. But it takes both of us and it takes the governor to get anything signed into law. I just think somebody needs to do something on behalf of the constituents we represent. And Madame chair, I’m surprised that you don’t think doing the upfront exemption on capital equipment is a good idea. I thought we all thought that was worth doing. But I notice you didn’t put it in… In my time here, there’s probably never been a better time to try to do that. You’d reduce the cost of capital 6.5 percent upfront on July 1, and that just may make in building the bridge to some project being bankable.

Madame chair, I guess in the next 12-13 days, we’re probably going to talk about this quite a bit. But I just don’t think it’s acceptable to pretend there’s not a problem out there.