Reports of Minnesota gubernatorial candidates’ pitches to a Chamber of Commerce-organized debate remind me of the old joke about the meek parson who frustrates his wife because he responds ‘yes, yes, you are right’ to any parishioner with a complaint. She confronts him about it, and he tells her, ‘yes, yes, you’re right.’
As an economist, I said “yes, yes, you are right” to specific things that each candidate asserted, despite the markedly different approaches that Tom Emmer, Mark Dayton and Tom Horner argued the state should follow. Yes, all did say things that were correct. And all were wrong on some issue or, at best, dodged it.
Unfortunately, although the specified topic was reviving the state’s economy, none of them noted the most important factor is how well the national economy performs. As long as the national and international economies remain in the doldrums, the effects of any changes in ongoing state taxes, spending and organization will have only marginal effects on economic growth and employment in any individual state.
Republican Emmer called, as he long has, for lower tax rates, smaller state government and less regulation, particularly of business activity. Economists in general would agree with his assertion that low tax rates and little regulation favor business growth and hence employment, with their usual “all other things being equal” caveat.
The problem is many “other things” beside tax rates influence economic performance. If low taxes were the only factor, Mississippi, Alabama, Arkansas and Wyoming would all be economic giants. They are not, for a variety of reasons. Nevada and Florida, ranked near the top in a Tax Foundation survey that puts Minnesota near the bottom, should be shining economic lights. They are not.
One important “other factor” is education. That, at least from 1950 through 1990, was Minnesota’s strong suit, both in terms of K-12 educational attainments and in the strength of state universities. All levels, together with an excellent set of private colleges, produced a well-trained work force. The University of Minnesota, a flagship research university, spawned a vibrant electronics and medical-technology industry that drove Twin Cities economic growth.
That is what DFLer Mark Dayton focuses on. We need to restore past state funding levels at local K-12 and state institutions, he argues. Money to do that and to close other state budget gaps should come from higher taxes for upper-income Minnesotans, starting with modest increases for individuals making more than $130,000 per year and couples making $150,000 per year, plus bigger hikes for those making $500,000 and $1 million per year. This idea is popular with many other Democrats, including President Barack Obama.
A handful of economists would favor this, largely because a remarkable proportion of the increase in total national income in the past 20 years has gone to the highest-income 10 percent of all households.
But many others would oppose it, especially at the state level, for a variety of reasons. First of all, competition between states in regard to tax burdens is real. High-income individuals tend to migrate to states where taxes are lower — again, all other things being equal. And personal and business tax levels are a factor when businesses plan new factories or offices. Regardless of one’s personal views on the just distribution of a tax burden, what other states do is important, and there are dangers in edging too far toward the high-tax end of the spectrum.
More generally, the idea that any tax increase should be concentrated on a small minority of households makes a mockery of the “shared sacrifice” that other Democrats called for, especially in the 2008 campaigns. The idea that only a few should be asked to give up any benefit or to pay higher taxes is at the root of our economic malaise.
As has often been true in Minnesota in recent decades, the independent candidate in the race has the soundest (or least unsound) economic ideas. Coming from years as a Republican, Independence Party candidate Horner has standing to note that although his former party has held the governor’s chair for 16 of the 20 years since the last DFL governor, it has done little to correct problems such as the excessive regulation complained about during election campaigns.
Horner wants to lower the state’s corporate income tax rates and not charge businesses sales tax on items purchased as part of major investments in new plants and equipment. He would make up lost revenue by extending the general sales tax to items currently exempted. These ideas are not original with Horner but he deserves credit for bringing them to the campaign and they merit consideration regardless of where the overall economy is.
And, as noted above, none of the three noted the obvious: Minnesota will not do well economically as long as the national and global economies are weak. Unwillingness to confront harsh realities is a problem at the national level, and it isn’t absent here, either.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.