Gov. Tim Pawlenty wants to take $15,000 from Minnesota taxpayers and give it to me. That is darned nice of him, but the Legislature should think this through carefully before they OK it. The whole question of me getting any sort of benefit illustrates some practical pitfalls of trying to help a specific group of people with public funds.
Here is the deal: The governor has several proposals to benefit Minnesotans in military service. One is to exempt military pay and retirement benefits from Minnesota income tax.
I have enough active-duty and reserve service to get a pension from age 60 on. I am a major, and my pension will be what Bullwinkle J. Moose calls “antihistamine money — it ain’t nothin’ to sneeze at.”
Under current law, I’d pay Minnesota income tax on that retirement income. If the governor’s proposal is adopted, I won’t. That tax exclusion, assuming a normal life expectancy, equals a 2007 lump-sum value of $15,000.
I’m not poor, but if Minnesotans really want to give me that money, I’ll take it. My personal preference, however, would be that any benefits favor those currently bearing the brunt of operations in Iraq and Afghanistan.
In fairness to the governor, excluding military compensation from taxation is just one of his proposals. His education proposals focus on those of recent or current service.
Moreover, excluding military compensation from taxes would merely align Minnesota with a large and growing number of other states that already do that. And it is administratively simple. It would require changing tax forms and software, but not entail any new bureaucracy to administer a stand-alone military benefit program.
It would, however, have the drawback of all subsidies administered via income tax exclusions: They confer a greater benefit on high-income individuals than on those with lower incomes.
If I were a staff sergeant instead of a major, the benefit probably would be worth less than half as much. There are two reasons. First, pay for a staff sergeant is half that of a major. Second, most majors in the reserves have higher civilian incomes than do sergeants, and hence may fall in a higher marginal tax bracket.
Yes, those of us with higher rank like money as much as anyone else. But military service, particularly long activations of National Guard and Reserve members, imposes greater practical hardships on privates, specialists, and noncommissioned officers than it does on captains, majors and colonels.
One way to even out the benefit is to use a tax credit rather than a blanket exclusion of military pay. Most Minnesotans in service probably fall into the 7.05 percent tax bracket. Give all of them a credit of 7.05 percent of their military pay against their tax bill.
For most, the outcome will be the same as the proposed income exclusion. But lower-income military people, a group that includes many students and single parents, would get higher benefits. The few who fall into the higher 7.85 percent bracket would be a little worse off, but would not suffer privation.
Take it one step further: Make the credit a fundable one like the Earned Income Tax Credit. That is, make it a direct payment even for people who have no tax liability. That way, service people who have no taxable income, for whatever reasons, still would benefit.
One could take it even further: Construct a set of lump-sum credits for different categories of service. Take all Minnesotans on active duty and calculate their average pay. Compute what benefit someone receiving that average pay would get from a tax exclusion. Then give everybody in that group a lump-sum funded credit equal to that amount, regardless of their actual income.
Make the same calculations for all people serving in the reserves. Do it again for all active-duty retirees and again for reserve retirees like me.
Lower-rank enlisted persons with low income would be much better off. Higher ranking officers with high incomes would be worse off.
Granted, this approach would be more complicated than a flat exclusion of all military compensation. I think, however, that skewing the bulk of benefits toward lower-income service persons would be more significant than skewing it toward the rich end, as will happen with a flat exclusion.
There seems to be broad general support for doing something for our service people. The human cost of our military operations abroad certainly is not shared equally across our whole society. Those in uniform undergo peril and enormous disruption of their lives. The rest of us experience few, if any, effects.
The Legislature needs to ponder the specific aims of any program to benefit Minnesotans in the armed forces. It needs to ask how can we get the greatest help to those who need it for a given expenditure of public funds. That should include asking who gets how much.
© 2007 Edward Lotterman
Chanarambie Consulting, Inc.