Grading the 2013 Minnesota Legislative Session: C+ for DFL but F on Reform and Bipartisanship

Students across Minnesota are finishing their exams and awaiting their final grades. The 2013 Minnesota legislative session is over and now it is time also  to assess the performance of one-party rule in Minnesota.  So how did the DFL do?  If the legislative session were to be graded, it earned an overall C+ but F grades when it came to working together and in making structural reform.
    Republican State Representative Steve Drazkowski, of Mazeppa, stated it well:  "We had an election back in November. And yes, Minnesota, elections have consequences."  Had Tom Emmer rather than Mark Dayton been elected governor in 2010 Minnesota might well be a state that looks different today with more restrictive laws on voting, abortion, taxes, and perhaps on same-sex marriage.  But Dayton did win and Republicans overreached with the marriage and elections amendments and in precipitating a government-shutdown.  They were ousted, yielding the first one-party rule in Minnesota in 20 years. 
    DFLers promised a lot.  They pledged a balanced budget with no gimmicks, a bonding bill, and a host of other pieces of legislation addressing economic development, bullying, guns, minimum wage, and unionization for day-care workers.  The governor also pledged to solve the funding formula for the Vikings stadium, raise income taxes on the wealthy, invest more in schools, give some property tax relief to homeowners, and transform the sales tax system to include clothing and more services.  All this the Governor and the DFL pledged to do in a bipartisan fashion.  Such a pledge was made out of fear of overreach if they were to purse issues such as legalization of same-sex marriage.
    No matter what post-mortem is written up, this will forever be the session as the one known for legalizing same-sex marriage.  It did so largely along partisan lines and it did so in part because of intense lobbying from supporters of same-sex marriage who unleashed a drove of lobbyists at the Capitol.  It also passed because of the perfect storm of shifts in national public opinion and state views that even if not supportive of same-sex marriage they were not opposed.  Passage of it should relieve Republicans of advocating a losing issue for them, but its legalization may also give DFLers little bonus point in the 2014 House elections.
    Democrats largely delivered on Dayton’s tax pledge for the  wealthy will pay more, but largely abandoned the reform of the sales tax system, opting instead for the safer option to go after smokers with $1.60 more per pack.  This tax will be used for general revenue and to help finance the Vikings stadium.  In do the latter, the governor and the legislature are essentially using tax dollars to finance the stadium, and there is no clear indication that these revenues will be enough to offset the miserable pull-tab revenues.  The State is addicted to addiction, counting on smokers to continue to smoke and not using the new revenue to offset smoking-related expenses.
    The budget was done on time barely, and DFLers displayed terrible time-managed skills and the ability to reach consensus among themselves, revealing what came close to single-party gridlock. But whether the budget was done gimmick-free and balanced is a matter of debate.  Originally pledging to pay back the K-12 shift, that was abandoned by the DFL.  Additionally, the  nearly $800 million borrowed off the tobacco bonds last session should have been paid back, and that too is not reflected in the balanced budget.  The State failed to make any real changes in any tax law to make it more stable–such as a change in property taxes to help in-state businesses, or adjust sales taxes.
    Single-party rule also produced a stripped-down bonding bill to pay for capitol renovations,  money for Rochester and the Mayo Clinic, tax credits for Mall of American expansion, more money for K-12, a freeze of public university higher education for two years, a daycare unionization law, and some property tax relief for home owners.  One should also not forget that the health care exchanges were created to allow state implementation of Obamacare.  All of these are significant accomplishments.  The DFL failed on enacting anti-bulling legislation, a new minimum wage bill,  and significant gun legislation.  For all of these changes the DFL deserves an overall C+ grade–it delivered on many of its promises.
    Yet the legislative session failed to produce much in terms of bipartisanship.  Too many of the votes followed party lines, revealing a state largely divided.  Both the Democrats and Republicans will go to the voters in 2014 telling their side of the story, leaving Minnesotans the final  verdict regarding whether the Democrats deserve to hold on to the governorship and House majority  control.
    Finally, where the DFL really failed was in terms of structure reform.  There was no comprehensive sales or property tax reform.  There was no major reform of the way government does business.  But more sadly, the biggest story the media has taken a pass on is how this is a legislative session that not only failed to take the chance to make structural reforms but actually moved in the wrong direction and caved into lobbyists and special interests on a range of issues.  The legislature passed campaign finance un-reform legislation that would increase contribution and spending limits dramatically, allow for lobbyists to give more gifts to legislators, and also increase the level of disclosure for contributions, thereby making it easier for many, including lobbyists, to give more money but with less disclosure and transparency. To a large extent, this is a dismantling of the remaining vestiges of the Marty reforms from the 1990s and a giant step back in government integrity.  Minnesota has already had shrunk and fallen from its heyday when it was national leader in political ethics, earning failing and near failing grades from the non-partisan Center for Public Integrity in these areas. The new changes do nothing to reverse that trend.  For these reasons, the session deserves an F when it comes to structural reform, doing little to change the way the State does business for good.

The Hype on Taxes: They Don’t Matter Much

Taxes impede economic growth. This is the belief among the Republican presidential contenders as they offer plans to cut taxes as a panacea to stimulate the economy. Herman Cain’s “9-9-9” assumes lower income tax rates for corporations and individuals will stimulate the economy. Newt Gingrich wants to cap top rates at 15% and Rick Perry has called for a national flat tax of 20%. Mitt Romney has a 59 point plan that includes tax cuts. Ron Paul wants a constitutional amendment to eliminate income and estate taxes. Michele Bachmann wants a return to the Reagan era tax cuts. All want to make the Bush era tax cuts permanent.

Yet do high taxes really hurt the economy as much as they believe, and will lowering them have much of an impact on stimulating it? The economic literature is clear — tax breaks to encourage economic relocation or investment decisions are inefficient and wasteful. Hundreds of studies reach this conclusion. When businesses are surveyed regarding factors important to their investment decisions, taxes often come in behind proximity to markets, suppliers, and the quality of the labor force. These other factors occupy a larger percentage of a business's budget than do taxes, and all of them are far more critical to long-term success than are taxes. Businesses occasionally admit this. Nearly 62 percent of those interviewed in a California study on hiring tax credits indicated that they had never or rarely affected their decision to employ individuals. Speaking at a recent chamber of commerce event, I asked business leaders whether the Obama tax cuts would encourage them to hire. Unanimously the response was no—they were unwilling to hire until such time that consumers were willing to buy their products and services.

Anecdotal stories and illustrations also confirm the tax fallacy. High tax states such as Minnesota have generally fared better in terms of economic growth, unemployment, median family incomes, and location of Fortune 500 companies, than low tax ones such as Mississippi and Alabama. In many situations high taxes, and with that, government expenditures on education, workforce training, and infrastructure, correlate positively with income, low unemployment, and business retention. One needs to look not just a one side of the equation—taxes—but the other side too—what taxes buy—to see what value businesses get out of them in terms of educated workforces and infrastructure investments. Most debates fail to do this.

Bureau of Economic Analysis statistics demonstrate how economic growth is related to tax rates. One can compare annual economic growth as measured by the percent change in the gross domestic product (GDP) percent based on current dollars to the highest federal individual tax rate and the top corporate tax rate since 1930. If taxes are a factor affecting economic growth, one should see an inverse relationship between growth of the U.S. economy and higher tax rates. The GDP should grow more quickly when top individual and corporate tax rates are lower. If taxes are a major factor deterring economic growth, lines on a graph should go in opposite directions: As tax rates go up the GDP should go down.

No such pattern emerges between high taxes and GDP growth over 80 years. During the Depression of the 1930s corporate and individual taxes rates increased, but in 1934 through 1937 the GDP grew by 17%, 11%, and 14% annually. Top corporate tax rates climbed to over 50% through the 1960s, again with no discernable pattern associated with decreased economic growth. The same is true with top tax rates on the richest which were 91% into the 1960s. Conversely, since the 1980s after Kemp-Roth and then after 2001 with the Bush era tax cuts, there is no evidence that the economy grew more rapidly than in eras with significantly higher tax rates on the wealthy and corporations. Looking at time periods when tax rates were at their highest, GDP often grew more robustly than when taxes were cut. Visually, the attached graph simply fails to demonstrate that tax rates negatively impact economic growth. (Click on the graph to get a better view of it).

Pictures are worth a thousand words, but statistics are priceless. Statistically, if a tax hurts economic growth, the correction with it is -1. If they positively facilitate growth the relationship is 1, and if they have no impact the relationship is 0. The correlation between GDP and top individual taxes is 0.29, between GDP and top corporate taxes is 0.32, and among the three it is 0.14. Statistically, there is a slight positive impact on either top individual or corporate taxes or economic growth, but overall almost no connection between tax rates on the wealthy and corporations and economic growth in the United States.

But what about taxes as job killers? Again running similar statistical tests, there is little connection. Using Bureau of Labor Statistics data on unemployment rates since 1940, the correlation among top individual and corporate taxes and the annual unemployment rate is -0.02—essentially no connection at all.

The simple claim of Perry, Cain, and others that high tax rates on the wealthy and corporations hurt economic growth and job production is false. The evidence is simply not there to support assertions that high taxes alone hurt the economy or that cutting them will have the stimulus effect asserted.