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Summary of Discussion with
Lawyer and former Commissioner of Revenue
8301 Creekside Circle #920, Bloomington, MN 55437
Verne Johnson (Chair); Marianne Curry, Paul Gilje, Jan Hively, Dan Loritz,
Joe Mansky, Tim McDonald, Wayne Popham (phone)
A. Welcome and
John James is a lawyer and public policy consultant with deep background
in taxation and a history of developing proposals for change in law.
A native of Iowa, James
came to Minneapolis in 1974 from Harvard Law School and has lived and
worked in the Twin Cities ever since. As James describes it, he got the
public policy bug in the early 1980’s when he got active in the Minnesota
State Bar Association Tax Section. He joined the Minnesota Department of
Revenue as Assistant Commissioner for Compliance under Commissioner Tom
Triplett in early 1986. A two-year commitment turned into five years when
he was named Commissioner of Revenue in late 1987 and stayed in state
government until 1991.
James co-founded the
Public Strategies Group with Peter Hutchinson and Babak Armajani. He ran
for Attorney General on Hutchinson’s Team Minnesota ticket for the
Independence Party in 2006.
James has produced
numerous governmental reform proposals, some of which have been enacted.
The most recent success came in 2009 with passage of a bill that ended a
gross unfairness in the Department of Revenue’s approach to officer
James chairs the board of
1000 Friends of Minnesota, and volunteers legal counsel to Karen
Organization of Minnesota.
C. Comments and
First, an editor’s note:
These notes reflect the conversation had around the table with some
additional details pulled from two important documents provided by James.
One is a proposal for reforms James has prepared for the Governor, and
certain state officials and legislators. The second include points taken
from a sort of diagnostics test that James ran on state services and
finances, in preparation for today’s meeting. He put those together in a
memo titled, “Minnesota’s Fiscal Situation.”
His thorough and detailed
recommendations are truncated here, for consideration of space and
accessibility of these notes.
You can read his
proposals, “Finding a Way Forward,” at:
See his memo to the Civic
Caucus, complete with detailed analysis of the budget and titled
“Minnesota’s Fiscal Situation: Problems and Solutions,” at:
During James’ visit with
the Civic Caucus, the following points were raised:
The future trends are
clear: there is a structural imbalance in the state budget
Revenues are projected to
grow at 3.9 percent compounded, through 2033, while expenditures are
projected to grow at 5.4 percent, over that same period.
Projections from the
state economist and state demographer are that the demands on state
services will grow. Baby boomer retirement and health care costs are
contributing to what former governor Carlson calls an ‘economic tsunami’ (http://minnesota.publicradio.org/display/web/2010/01/26/midday1/),
as their retirement and health care costs will grow while taxable income
and spending on consumer goods drop.
Meanwhile the 2010
legislative session is beginning from a deep hole, with the cost of the
status quo at 15-20 percent higher than currently projected revenues.
James ran out two
possible scenarios, to help illustrate. “Assume that revenue and health
care projections hold,” he said. “Then K-12 and all other areas of
spending are limited to .2 percent.” But “if K-12 gets a 2 percent
increase, then all other areas of spending outside of health care must
drop at 3.9 percent.
It is also clear that
taxing and cutting are not sufficient to resolve this imbalance
“Ted Kolderie has gotten
it right,” James said, referencing a talk Kolderie gave to the Minnesota
Taxpayers Association last September (http://pages.google.com/edit/thewrittenleague/KolderietoMTA9162009.pdf).
In it he said, “We’ve got four ways to handle this. We can tax more, we
can spend less, we can grow the economy, or we can redesign.” Doing things
differently is the only way to resolve the long-term imbalance.
A member observed that we
are seeing all sorts of activity to reduce costs by finding new ways to
accomplish tasks in the private sector. “There is too much focus in the
public side on revenue, and not on doing things differently.”
“The goal,” James put it,
“is to temper an increase in taxes while permanently cutting state
spending.” The goal here is not as simple as a focus on higher or lower
taxes, or larger or smaller government. Some people may want to grow
government; others shrink it. Those are separate questions. We need to
make sure that the government we do have is as much of a value as we can
make it. If we are not always looking for ways to better deliver services,
we are sliding.
Health care and
education are the two biggest cost drivers
expected to grow at 5.4 percent annually, compounded, in the coming two
decades. They break down to Health care at 8.5 percent, K-12 at 4.8
percent, and all other areas at 2.7 percent.
Together health and human
services, K-12, and higher education assume approximately 70 percent of
the state budget (http://www.mmb.state.mn.us/doc/budget/report-pie/all-nov09.pdf).
Something must be done
Redirect property aids
and credits to the individual, not to municipalities
“The Minnesota Miracle
has become the Minnesota Debacle,” James declared, referencing the 1971
effort that re-organized the fiscal policies of the state (http://www.mnhs.org/library/tips/history_topics/18public.html).
“What I’m doing is proposing a new Miracle,” he said, noting that “the
problem is around the property tax, and changes in conditions that have
resulted in a myriad of perverse incentives” and other side-effects not
intended or created by the original policy.
To James this is a
question of wise use of taxpayer money. “Part of this is getting better
value. We should be budgeting for effectiveness and results, but the local
assistance at $2 billion is a black hole for the state.”
The method for this is to
wipe clean our practice of sending money to the state, only to turn it
back around to municipalities. In its place James would allow decisions on
taxation to be made at the local level, protecting individuals through an
expansion of the ‘circuit breaker’: If property taxes rise above a
person’s income, they receive a credit to set the balance.
Resolve the partisan
deadlock by finding the win-wins that do exist
“Governor Pawlenty and
the legislature are at loggerheads, and so need to expand the scope of
negotiations,” James said.
“We have a high sales tax
rate and a narrow base—that doesn’t make sense. Broaden the base, and cut
the rate. This could drop rates to below 5 percent, …yet increase the
amount of revenue. And write into law that when the economy comes back,
drop rates further.”
Target reform at
health care provided to state and local employees
There are about 338,000
employees in state and local government in Minnesota, with a host of
different health care plans, James said. “If you add together all the
state and local employees, the amount we spend on their health care
premiums is the biggest investment of state and local government.” He
suggested the state could experience significant savings if it were to buy
health insurance for all state and local employees in one plan.
Reform the budget
“I’ve got legislation
already drafted on this,” James said. Recalling when he first came in to
state government, he told a story that “I was simply a lawyer; came in and
saw a $10.9 billion budget, and asked, ‘What happens if we have a
recession? If the economist blows the forecast?” Minnesota needs a
healthier reserve, as a matter of good governance.
In James’ view, budget
reserve reform, coupled with the switch of state effort from general
property tax relief to investment in human capital, with rate cuts enacted
now to take effect when the economy recovers in a few years, with
broadening of the sales tax base, and with positioning Minnesota to be a
leader in health care reform, could be a powerful legacy of sound fiscal
management for Governor Pawlenty to leave the state, and unleash a torrent
of creative effort to make Minnesota’s state and local governments more
purchasing of services
“Buy the services
together. There are too many little service buyers. This is a big redesign
area. It can be done already by the joint powers act. Armi Armajani (of
Public Strategies Group) likes to say that people all want to fix the
problem, but nobody wants to change anything. Don’t force consolidation,
but align incentives so that people see its value and elect to do it. The
problem here is not just the number of service buyers, but the transaction
Ted Kolderie cites the
joint powers act often, when illustrating the law’s capacity for service
sharing. Fire and police are commonly shared amongst municipalities. What
about other services?
Change the way we
“In Minnesota we need to
change our attitude toward businesses, by stopping the clobbering of
production in Minnesota,” James remarked.
It is possible, James
argues, to increase the amount of tax revenue from businesses while
decreasing the share paid by those located in the state, by targeting
companies located elsewhere that exploit the Minnesota market. “The
corporate income tax should be harmonized with the individual tax. The
corporate rate (now 9.8 percent) and the top individual rate (now 7.85
percent) should be the same,” he argues. Broadening the base in each area
of tax could both drop the rates and increase revenue.
He advocates creating
either a common state wide business property tax, or, better in his view,
repealing the existing state business property tax and enacting instead a
state wide tax based on business activity. James notes that taxing
businesses the same as homes at the local level would more fully engage
citizens in their local governments’ spending decisions, while also
automatically reducing the gap that now exists in business tax rates
around the state. Businesses would pay less tax to local governments and
more to the state. The business activities tax would be better for
Minnesota businesses than a bigger state wide property tax because it
would shift tax burden from businesses producing in Minnesota to
businesses exploiting the Minnesota market from out of state. The
existing state property tax on business would be repealed and sales taxes
on business capital spending eliminated. The clobbering of production in
Minnesota would be a thing of the past.
But if a new tax is too
scary to contemplate even though businesses producing in Minnesota would
collectively pay less than they do now, increasing the state business
property tax and reducing the local business property tax would still be a
big improvement over the current system for three reasons. First, it
would support the new Minnesota Miracle described above, in which the
state would invest more in human capital, local citizens and governments
would decide how much they wanted to spend on other services, and there
would be stronger incentives to operate more efficiently.
Second, the disparity in
taxes paid by businesses from one community to the next would be
significantly reduced. Now, for example, a business located in a property
rich community like Edina has a local property tax rate about 1/3 that of
a business located in a property poor community like Brown’s Valley. This
perverse feature of the current system makes it harder to get businesses
to invest where investment is most needed.
Third, because individual
businesses’ property tax burdens would be more related to how much
property they have and less to what community the property is in, the
business property tax would be better correlated with ability to pay.
James had some comments,
to close with. “We have got to find a place where ideas can be heard.
“That’s why you have the Civic Caucus,” he noted. More, though. Venues
close to government, among other non-profits, and by those interested in
That raises an
interesting question for the Civic Caucus: What is our role in this?
Communicating the ideas of speakers, as we do now, is one piece. What
about acting on ideas? Our capacity for the latter is limited, the members
agreed, but that does not mean the Caucus cannot make a significant
The group asked James,
who departs for his residence in Hawaii this month, how he plans to stay
involved. “If I got some encouragement I’d put in a lot more time.”
Indications seem to be
that the knowledge and creativity to solve the state’s problems are out
there. What is missing is the capability to capture and apply it.
Something to think about.
Thank you to Mr. James,
for a very important contribution to this ongoing topic.