Mark Haveman, Executive Director, Minnesota Taxpayers Association
The Civic Caucus
8301 Creekside Circle #920, Bloomington, MN 55437
June 22, 2012
Notes of the Discussion
Mark Haveman, Verne Johnson, Dan Loritz, Paul Gilje, David Broden, Audrey
Clay, Janis Clay, Sallie Kemper, Dana Schroeder, and Clarence Shallbetter
A. Summary--Mark Haveman
asserts that any tax reform efforts should focus on structuring the
revenue system to effectively deal with 21st century
demographic and economic realities. He contends that two major themes
currently surrounding tax reform - improving tax fairness and property tax
relief - are both significantly overstated problems and should not be the
focus of reform efforts. Rather, he believes that the combination of
broader bases and lower rates through tax expenditure reform is an
important strategy. He suggests that the thinking behind local aids and
credits needs to be revisited, as does the state's rationale for taxing
business. Any tax increase proposals should be conditioned, he asserts, on
significant government reform and redesign to lower the rate of government
cost increases and obtain greater return from the tax dollar.
B. Introduction of interviewee--
and Paul welcomed and introduced Mark Haveman, executive director,
Minnesota Taxpayers Association. Haveman joined Minnesota Taxpayers
Association (MTA) in 2002 as part of an effort to revitalize the Minnesota
Center for Public Finance Research, the research and education arm of MTA.
Haveman was vice president of a policy and technology consulting firm
specializing in environmental protection and resource conservation issues.
He has also served on policy and project advisory boards for the U.S.
Environmental Protection Agency, the National Institute for Standards and
Technology, as well as for several state agencies, academic institutions
and private foundations. He received his B.A. from Calvin College and an
MBA from the University of Michigan.
Haveman was invited
to discuss topics surrounding the tax reform debate expected in the 2013
legislative session. There has been considerable ongoing activity on this
debate. Currently, Minnesota Commissioner of Revenue Myron Frans is
holding events and town meetings around the state to develop reform
recommendations for Governor Mark Dayton. Separately, legislative study
groups on property taxes and state aids to local governments will be
offering recommendations. All of this is in addition to the recent work of
former Governor Pawlenty's 21st Century Tax Reform Commission
and a blue ribbon study on bringing tax expenditures into the budget
process, both of which took place in the last few years.
THE PROBLEM: Minnesota's revenue system faces
two primary challenges.
The first challenge:
structuring the state revenue system to deal
with 21st century demographics and economic realities.
Haveman noted that the aging of the baby boomers has potentially
significant implications for state revenue systems. According to the
Department of Revenue income tax collections fall by 40 to 50 percent when
people retire. Senior consumption patterns also shift with potential
implication for sales tax collections.
Haveman cited other realities that have an
impact on tax revenue: increasingly borderless commerce and the mobility
of capital. Businesses can locate anywhere and profits can be sourced
anywhere. Corporate income taxes, long derided as the most damaging form
of business taxation on economic grounds, are, he contends, increasingly
showing severe limitations as a practical part of a revenue system. Taxing
corporate income is, he said, "highly volatile and 'leaky,'" and efforts
to "fix" the tax immediately create new competitiveness problems and
concerns for businesses.
The second challenge:
continued use of the tax code to incentivize
behaviors at the expense of funding government in the most effective,
efficient and least distortive way possible.
There is, Haveman believes, a growing
recognition of the need to reexamine "tax expenditures" -- the variety of
exclusions, exemptions and credits embedded in the tax system to advance a
variety of economic and social agendas. Broader bases and lower rates are,
he contends, universally accepted as better tax policy. However, even with
the heightened awareness of the potential revenue impacts and distortions
they can create, legislators commonly propose new tax expenditures, and
existing ones are difficult to dislodge.
Two commonly expressed concerns about
Minnesota's tax system are overstated and should not be the focus for
future tax reform.
The first overstated concern is greater tax
. Haveman argued
Minnesota's tax system already strongly accommodates the principles of
progressivity and ability to pay.
The data used to support the existence of a
fairness problem lies in the Department of Revenue's tax incidence study,
Haveman said. Every two years, the Department calculates the incidence-the
final resting place-of taxes and examines effective tax rates by
population and income deciles in the state. He pointed out that in this
study the three primary taxes on individuals in Minnesota - income, sales,
and property - actually show increasing progressivity through the 9th
decile. The highest earning 10% of Minnesotans do pay a slightly lower
proportion of their income than the 9th decile, but he said
their burden relative to income is still equivalent to the middle class
and well above lower income Minnesotans.
The appearance of a fairness problem only begins
to emerge with the inclusion of other highly regressive and often
discretionary forms of individual taxation ("the rich clearly do not do
their fair share of smoking, drinking, and gambling" noted Haveman) and
In the incidence study, taxes paid by business
are passed along to households in the form of lower wages, higher prices,
and lower returns on investment based on the principle that that
"ultimately businesses don't pay taxes, people do." Business taxes are the
primary source of regressivity in the state tax system, he said, a fact
that gets practically no attention in tax fairness debates.
He noted Minnesota already does an excellent job
of respecting the tax principle of "ability to pay". Minnesota's state
income tax system is in the top five in the nation for structural
progressivity. Among other features, the state has one of the most
generous state-level earned-income tax-credit systems in the nation, and
one of the most generous and broadly accessible property-tax refunds in
Haveman suggested Minnesota can have a good
debate about revenue adequacy and whether or not the best way to raise new
revenues, if needed, is by taxing higher income households. But he
expressed concern about a tax adequacy argument masquerading as a fairness
crisis. Such a representation not only distorts perspective on Minnesota's
tax system but also "does a disservice and an injustice" to Minnesota's
significant and successful efforts to address ability to pay concerns and
build progressivity into the tax system, he said.
The second overstated problem is property
Haveman said there is little evidence to suggest
Minnesota is facing a property tax crisis. In the aggregate, state
property tax collections in Minnesota are below the national average on a
per capita and per $1000 income basis. Effective tax rates relative to
home value are in the middle of the pack nationally. Tax rates as a
percentage of homeowner income are, he said, modest across most of the
state. And for those situations where ability to pay problems are very
real, Minnesota has what he called "one of the best circuit breaker", or
property-tax refund programs in the nation "targeting relief to those who
need it," he added.
Structurally, property taxes are actually less
regressive than sales taxes which are the most commonly sought after
source of replacement income for local governments. This is true, he
asserts, even before the inclusion of the property tax refund program
designed to reduce the regressivity of the property tax.
In recent years, the "three legged stool" of the
revenue system (income, sales, and property taxes) has appeared unbalanced
with property taxation taking on a larger role. But, Haveman noted, in a
"Great Recession" when sales and income taxes decline, the much more
stable property tax will by its very nature pick up tax share, providing
sorely needed stability to the fiscal system. He said it's ironic that the
property tax is so frequently criticized for the very characteristic for
which tax policy experts find it so valuable and indispensible.
GOALS FOR THE FUTURE REVENUE SYSTEM:
In Haveman's view two goals are key: (1) get
the tax system in synch with 21st century realities, and (2)
balance Minnesota's long history of paying attention to ability to pay
with five other key and no less important principles: stability,
competitiveness, visibility, administrative efficiency and economic
Some specific reform issues and ideas are
Tax expenditures need greater scrutiny.
Haveman asserts that tax expenditures deserve much closer examination, but
cautions that care should be exercised since all tax expenditures aren't
necessarily by definition bad public policy. The Minnesota Department of
Revenue published a guide in early 2011 to introducing tax expenditure
reform into the budget process. (
It was, Haveman believes, a very careful and thoughtful piece of work done
by well-respected public finance experts. However, Haveman said, as far as
he knows, the report is gathering dust - in his mind, "a tragedy".
Re-examine priorities of business tax reform.
Haveman believes both state property tax and corporate income tax
probably deserve attention in the context of developing a much more
coherent rationale for taxing Minnesota businesses other than "getting
enough money." There are interesting approaches to consider - for example
examining what New Hampshire has done, taxing all business uniformly,
regardless of how the business is organized and basing business taxation
levels on benefits received.
Broaden sales tax base. Stronger reliance on
consumption-based taxes as opposed to taxes on income and capital is a
worldwide trend. Haveman contends that concerns about regressivity can be
addressed through income-based credits, an idea that can be traced back to
Minnesota tax commissions from the 1950s.
Examine potential to tax online sales.
Absent sorely needed federal action on this topic, state-by-state efforts
to address this significant equity problem will increase.
"Brick-and-mortar stores across the state are increasingly nothing more
than a showroom service for consumers."
Prioritize state aids to local governments.
Local government aid should prioritize capital needs essential to the
safety, health, and welfare of Minnesota citizens over current operations
expenses over which local officials can exercise more cost control.
Haveman proposes also that government repurpose some aids to provide
financial support to address the considerable costs often associated with
shared service agreements/collaborations and government consolidation.
Stop attempts to demagogue the property tax
"It's the bedrock of local government finance for a very good reason."
Fostering resentment for local property taxes is a dangerous thing to do,
Haveman contends. "Lawmakers should help citizens channel frustration in
more productive ways by improving transparency, citizen understanding, and
engagement in local levy-setting processes."
Reform/redesign will likely be essential for any
budget proposal in 2013 that includes tax increases. "If there's going
to be some grand budget bargain that includes tax increases, it's going to
have to be handcuffed to major government reform/redesign proposals to
demonstrate to those who are hit by higher taxes that government business
is being done fundamentally differently and that they are getting more
value for the dollar."
Will taxation of retirement income be a budget
issue? Haveman said that Minnesota follows federal conformity on
retirement taxation. However, a lot of other states are facing potentially
more serious revenue implications in the future having stronger exclusions
with respect to Social Security and/or pension or retirement income. "They
could take a big revenue hit as time goes on," he said.
Explore "value capture" to help finance
transportation. Haveman believes the concept of "value capture"
deserves further exploration although "we've worked enough with developers
to say there are many concerns and issues that merit caution in heading
down that path," he said. Differential taxation of land value and
improvement value (higher rate on land value, lower on improvement value)
would be one way to approach this.
Does state tax policy have a negative effect on
individuals and businesses locating in Minnesota? Business members of
the Minnesota Taxpayers Association firmly believe that the Legislature
underestimates the importance of the role of taxation, Haveman said.
The long-term budget picture is challenging,
Haveman agrees.Any new revenues are already oversubscribed, demographics
are pointing in the wrong direction and the general fund is going to be
under long-term stress, he said. Growth in health and human services
spending has placed stress on every other aspect of the general fund,
including education, and will likely continue to do so. "Minnesota has
historically spent 30 to 40% more per capita on health and human services
than any other state," Haveman said, "going back to the 1970s. We have
received many good returns from this spending but most other areas of
government spending are now below the national average to preserve this 30
to 40% premium in health and human services."
"We need to have a serious conversation in this
state about general fund priorities, where those dollars need to go and
how we can get more value from the dollar."
The chair thanked Haveman for the discussion.
The Civic Caucus
is a non-partisan,
tax-exempt educational organization. The Core participants
include persons of varying political persuasions, reflecting years of leadership in politics and
business. Click here
to see a short personal background of each.
Verne C. Johnson, chair; David Broden,
Paul Gilje, Jim Hetland, Marina Lyon,
Joe Mansky, John Mooty, Jim Olson,
and Wayne Popham