Position Paper
A Position Paper Approved by the Board of Directors on 3/28/96
(Numbers updated 10/29/98)
The Minnesota Taxpayers Association believes that effective citizen control over governmental processes and finance is still the keystone of the arch upholding the democratic system of government. The Association also believes that to the degree that the majority of voting citizens is shielded from the cost of government spending, they have less incentive to be involved in exercising their responsibility for government oversight and control.
Minnesota’s state and local fiscal system, designed primarily to equalize revenue resources of local governments around the state, has the notable side effect of shielding, or protecting, the majority of voters from the cost of government programs. This protection of the majority of voting citizens takes three major forms:
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A heavy reliance on intergovernmental transfers to finance state and local
government.
Data from the State Auditor’s office show that in 1996, 30.4% of cities’ and 40.0% of counties’ revenues came from state and federal aid. In 1998, the percentage of school districts’ revenues coming from non-local sources for 1994 was nearly 70%. These numbers mean that when Minnesota city (or county) governments spend one dollar, they have to raise only 70 cents (60 cents for counties) from those able to vote them out of office. Less than one in three dollars spent by local school districts come from their own voters.
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A system of taxation that inoculates the majority of voters against the
burden of financing government spending.
The Minnesota Department of Revenue’s (DOR) 1997 Tax Incidence Study shows that in 1994, 74.8% of all state and local taxes in Minnesota were paid by the top 40% of income earners (those with over $32,108 of household income). The bottom 60% of income earners pay 25.2% of all taxes. Though their shares of total taxes are roughly proportional to their shares of income, these ratios make it frighteningly easy for 60% of potential voters to lobby for, or at least not resist, increases in government services for which they would pay only a quarter of the cost.
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A tendency to view taxes on business as morally superior to taxes on
individuals.
Economists agree that business taxes are always passed on to consumers, workers, or investors. Ultimately, all taxes are taxes on individuals. The only real difference between business taxes and individual taxes is their pattern of incidence on individuals or households. The DOR’s Tax Incidence Study shows that taxes on business are regressive, falling proportionately more heavily on low-income households than on high-income ones. What makes business taxes seemingly more attractive to some legislators is the fact that individuals vote and companies don’t, and that most individuals are not aware that they also bear the burden of business taxes.
According to the Revenue study, business pays 38.3% of the $12.5 billion in taxes studied in their report. That’s $4.8 billion in taxes that eventually show up in the form of higher product prices, lower wages, or lower returns on invested capital. In a sense business taxes are taxes on people that are hidden from citizens’ view.
We acknowledge that the wide use of federal and state aids has been of material assistance in solving many local financial problems. We also acknowledge that not every citizen is equally able to pay for all government services. Some recognition of the ability to pay taxes is required.
Nevertheless, there are liabilities and dangers of this type of state and local finance system that relies so heavily on intergovernmental transfers and hidden taxes that need to be held before the Legislature and the citizens of this state. Among these are:
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Loss of citizen control.
This is perhaps the most serious liability. The citizen who tries to fix the responsibility for the growing cost of government is confronted with a bewildering array of complexities that hinder the investigation and discourage further involvement. Only those who are paid to do so (both public and private lobbyists), become informed and confidant enough to engage public officials, but quite naturally they are confined to promoting their more narrow interests rather than those of the public at large.
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Incentives to spend.
Common sense dictates that the more heavily subsidized a local government unit is, the more that unit will likely spend. Many aids come with matching revenue requirements, which also tends to stimulate spending. What is true of governments is also true of individuals. The more the cost of government services is borne by others who are in the minority, the more likely the majority is to want additional services. For those who doubt that this is so, consider the voters’ reaction if the approximately $800 million subsidy to homeowners in this state were suddenly shifted on to them, or if the nearly $500 million paid in income taxes by the top two-tenths of the population that is above their share of household income were shifted to the other eight-tenths of the population.
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Loss of local self-government.
With an abundance of state and federal aid comes an abundance of rules and regulations on how that money is to be spent, with a consequent loss of discretion at the lowest levels of government.
Recommendations
In view of the dangers inherent in Minnesota’s current fiscal system explained above, and in consideration of the many proposals for its reform, the Minnesota Taxpayers Association makes the following recommendations as policy guidelines for that reform:
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Provide intergovernmental transfers to cities, counties, and school
districts based on a clear set of objectives.
The purposes of intergovernmental aid should be clearly articulated. In our view, transfers should be provided to (1) eliminate local fiscal disadvantages in providing "basic" services, and (2) to pay for state mandates on local government. All other local spending should be financed 100% locally. State aid to cities, counties, or schools should not be provided for the purpose of hiding the cost of local government from local taxpayers.
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Make no further changes that increase the overall progressivity
of Minnesota’s state and local tax system as it relates to taxes paid directly
by individuals.
DOR’s Tax Incidence Study shows that the combination of state taxes on individuals and property taxes on homeowners are already progressive, varying from 7.5% of income for taxpayers in the second population decile to 9.9% of income for taxpayers in the tenth population decile. (DOR states that the first population decile’s effective tax rate is overstated by an unknown but significant amount, and usually excludes it from summary descriptions.) It is only when the incidence of taxes on businesses are assigned to individuals and added to the overall tax burden that Minnesota’s revenue system becomes slightly regressive. We oppose changes in the direction of more progressivity on individuals and homeowners.
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Do not enact new taxes or expand existing taxes on businesses.
As stated previously, nearly two out of five tax dollars are paid by businesses, but borne ultimately by individuals. Individuals for the most part do not realize they are paying these taxes. DOR’s incidence study further shows that their incidence is regressive, ranging from 3.0% of the second population decile’s income down to 1.4% of the tenth decile’s income. Adding new business taxes or expanding existing ones merely hides the cost from voters and keeps them from making informed choices on the level of services they wish to pay for.
Because we believe that effective citizen control is so crucial to the continued enjoyment of the privileges and responsibilities of self-government, and that any changes in incentives should be toward encouraging citizen involvement and a consequent increase in accountability, the Association urges Legislators to consider the above recommendations regarding any future changes in the state and local finance system.