director of the Minnesota Budget Project
An Interview with
The Civic Caucus
2104 Girard Avenue South,
Notes of the
Audrey Clay, Janis Clay, Pat Davies, Rick Dornfeld, Paul Gilje,
(coordinator), Verne Johnson (chair), Sallie Kemper, Nan Madden, Dana
Schroeder, Clarence Shallbetter.
Summary of Discussion:
Nan Madden argued that Minnesota is not sustainably and fairly funding
public investments that can make a big difference in the state's future.
She cited as examples cuts in investment in higher education and in early
childhood education. In addition, she argued that Minnesota's tax system
is outdated and does not share the responsibility for paying for those
public investments fairly. She proposed two strategies for improving
Minnesota's tax and budget system: (1) Reform and modernize the tax system
so that it can more adequately meet our needs as a state and share the
responsibility more fairly; and (2) Adopt common-sense budget system
reforms that encourage more responsible and sustainable budget choices.
Nan Madden has
been director of the Minnesota Budget Project since 1999. The Minnesota
Budget Project is an initiative of the Minnesota Council of Nonprofits
that provides independent research, analysis and advocacy on budget and
tax issues, emphasizing their impact on low- and moderate-income persons
and the organizations that serve them. She is an active voice for tax
fairness, a balanced approach to
budget and adequate funding of public services. She is the author of
numerous publications on fiscal issues, as well as economic
Madden serves on the
Steering Committee of the Affirmative Options Coalition, a statewide
coalition that promotes public policies that create opportunities for
low-income Minnesotans to achieve economic security. She has a master's
degree from the University of Denver and a bachelor's degree from
Macalester College. The Minneapolis-St. Paul Business Journal named her as
one of its 2006 "Forty Under 40" honorees.
Madden explained that the
Minnesota Council of Nonprofits is a statewide organization with 2,000
nonprofit members. It's one of the largest such state organizations in the
country. Its members are primarily charitable nonprofits. There is a
separate group, the Minnesota Council on Foundations, for foundations.
The Minnesota Council of
Nonprofits provides member services and training and does policy and tax
and budget work. Madden noted that nonprofits employ 10 percent of the
state's work force.
asserted that one thing we need to do for a stronger and more prosperous
Minnesota is to make sure we are sustainably and fairly funding our public
services in Minnesota. The state benefits from public investments:
infrastructure, education, safety, the way we care for each other to make
sure all people can live in dignity, and cultural and environmental
assets. She said we've gotten away from common-sense choices we've made in
the past to finance public investments that make a big difference for our
She gave two examples of how
we're not investing in our future:
1. Higher education. Minnesota
will need more workers with higher education degrees and credentials to
remain competitive in the economy, Madden said. But the state is paying
less for public colleges and universities than it did 10 years ago,
despite the fact that there are now 23,000 more students than a decade
Tuition has increased
substantially. That can prevent people from certain communities from
accessing education and gaining the skills Minnesota needs to compete. She
argued that we need everybody to reach his or her full potential if we're
going to continue to have a competitive economy.
2. Early childhood
education. More than7,000 families areon waiting lists to get help in
affording early childhood education that would help parents be successful
at work and their kids to start school ready to achieve. This is a missed
opportunity for the state, especially for high-risk kids, Madden said. It
has implications for costs down the road.
In addition, we have an
outdated tax system.
Minnesota's outdated tax system is not meeting our needs. All Minnesotans
benefit when we invest in our future prosperity, but we're not sharing the
responsibility for funding public investments as fairly as we could.
Madden reported that in
Minnesota, all state and local taxes put together amount to 9.7 percent of
income for people with incomes more than $429,000 a year and 12.1 percent
for middle-income households earning around $60,000. "This is something
many people don't see as fair," she said. "It can contribute to more
cynicism. We can narrow that gap."
These figures come from the
state's tax incidence study, which includes estimates of how business
taxes are passed on to people, whether as owners of capital, as consumers,
or as employees.
two broad goals for
Minnesota's tax and budget systems:
1. Reforming and
modernizing our tax system so it more adequately meets our needs as a
state and shares responsibility more fairly.
2. Making common-sense
budget-process reforms that encourage more responsible and sustainable
She predicted that tax
reform will be a prominent issue in 2013. The administration is gathering
input right now for a comprehensive tax reform package that the governor
is planning to put forward in 2013.
Madden recommended three
strategies for reaching those goals in Minnesota: using the income tax as
the most direct and focused way to raise revenues based on ability to pay,
updating the sales tax to reflect new economic realities and adopting
common-sense budget process reforms.
Raise additional revenue through the income tax. This could be by adding
additional brackets or raising rates. She pointed out that the income tax
is the only major revenue source based on income and ability to pay.
Modernize the sales tax to make a level playing field for all retailers
and to respond to new technologies.
For example, she said, music
fans have more choices today. They can buy a CD at a store or online or
download the album digitally. They would have to pay state sales tax on
the store CD purchase, might or might not have to pay sales tax for the
online CD purchase and would be exempt from paying sales tax for the
"It's not a level playing
field among retailers selling essentially equivalent products," Madden
said. The sales-tax base has been chipped away as people buy more products
online and buy more services and fewer physical goods. "It's time to get
into the 21st century with the sales tax," she said.
Adopt common-sense budget process reforms.
Include the impact of inflation in the
state's budget forecast. State law currently does not allow the impact
of inflation on spending to be taken into account in the state's
economic forecasts. It's important to distinguish the measurement tool
of the state's economic forecast from the actual budget choices. Madden
said she is not advocating automatic spending increases in every part of
budget. Instead, she argued, we need to acknowledge inflation when the
state is putting together the economic forecast. Inflation creates a
budgetary pressure, which is important to understand when we're making
budget commitments. Without acknowledging inflation, we can make choices
that aren't sustainable.
Build up more robust budget reserves.
The state's Council of Economic Advisers has long been recommending that
the target for the state's reserves should be five percent of the
state's biennial budget. The target in law currently is roughly half
that. Adequate reserves are important under challenging circumstances
and for managing risk and volatility.
Don't budget through the state
Constitution. Limiting taxes and expenditures to a formula in the
Constitution has not been successful in other states. Such initiatives
don't deliver on promises they make, have dangerous unintended
consequences and tend to encourage budget gimmicks, which lead to
looking for less transparent ways of raising revenue.
Madden noted that there were
three such proposals in the last legislative session, including requiring
a super majority vote by the Legislature for tax increases.
State faces a substantial
response to a question, Madden said the state puts out quarterly economic
updates, with the most recent an October update. That report showed that
in the short term, revenues are coming in higher than expected. If that
continues into November, $444 million will go to fix part of the past
school-funding shift, since surplus revenues are required to go to that
Madden predicted the update
will be less rosy for the next budget cycle, since national economic
forecasters are downgrading forecasts for economic growth
She said a November forecast
is due on Dec. 5 and that current projections forecast a $1.1 billion
budget shortfall for the upcoming 2013-2014 biennium. The forecasts are
done by taking into account economic projections and current law. One
difficulty in the coming projections is that the U.S. Supreme Court
decision on the Affordable Care Act turned some state requirements into
options. "There could be big changes based on that issue," she said.
Madden pointed out that the
$1.1 billion figure does not include inflation, which will cause the
shortfall to grow by roughly another $1 billion. And it will take another
$2.4 billion to completely pay back the past school-funding shift.
In response to a question
about how we deal with fluctuations in the business cycle, Madden said
some of the response is not on the tax side, but on the budgeting side,
with things like more robust reserves.
A questioner asked what
difference the state's sharper focus on outcomes in the next budget cycle
will make. Madden responded that the outcomes approach may help focus
thinking about the budget.
Minnesota's cost of
government is average.
An interviewer asked how Minnesota compares with other states. Madden
replied that the best way to compare states is to measure taxes and
spending as a percentage of income. On state and local taxes, Minnesota is
about 14th or 15th as a percentage of income. We're about 25th on a more
comprehensive measure similar to the state's Price of Government measure.
We used to be higher and now we're about average.
Don't exempt retirement
income for higher-income seniors.
An interviewer asked how income tax revenues will be affected by so many
people retiring in the next few years, thus pushing incomes down. Madden
responded that we should not worsen the problem by further chipping away
at the income-tax base through proposals to exempt certain retirement
income from the income tax.
It makes more sense, she
said, to look at people's incomes. If we need to help seniors with limited
means, we should look at how to help that group.
Exemptions, deductions and
broadening the tax base.
An interviewer asked whether the Minnesota Budget Project had a position
on broadening the base of the sales tax to include clothing and services.
Madden expects there to be a big discussion in 2013 about including
clothing in the sales tax and sales-tax base expansion. Her group would
not support that as a stand-alone proposal. "We think that further shifts
the responsibility more to low- and middle-income people," she said.
Sales-tax changes could have a place in an overall package, paired with
some income-tax changes, for example. And she argued that it would be a
big mistake to extend the sales tax to groceries.
In response to a question on
tax expenditures, Madden said a sales tax on services or clothing would be
an example of ending a tax expenditure. There is a lot of attention to tax
expenditures in general, but when people look at the specifics, finding
agreement becomes more difficult. One important tax expenditure, for
example, is tax incentives for charitable giving, which is of immense
importance to the Council's nonprofit members.
The big income-tax
expenditures at the federal level include the mortgage-interest deduction
and not paying income tax on employer-based health care benefits. In
response to a question on the mortgage interest deduction, Madden said
itemized deductions tend to miss the mark and be upside down. People for
whom the extra dollars might make a difference in their behavior tend not
to itemize. "Maybe we should think about a tax credit and possibly capping
the income level," she said. "We could spend less for incentives for home
ownership, but we might be more effective."
She argues that over the
last 10 to 15 years the state has gone too far on some budget cuts. For
example, she said, "Minnesota
has turned a corner where the ability of disabled people to live
independently is at risk."
Waiting lists for early
childhood education and rising college tuition are other examples showing
the effect of budget cuts, she said. Those things must be addressed, since
we need everyone to be at their full potential in the workforce.
Revenue sources for
questioner asked about revenue sources for nonprofits. According to 2010
information on the Council of Nonprofits' website (www.minnesotanonprofits.org),
revenue to nonprofits in the seven-county Twin Cities area, for example,
comes from the following sources:
85 percent from program services, which
includes government fees and contracts;
10 percent from charitable
Four percent from government grants;
Less than one percent from investments
and sales; and
One percent from other revenue sources.
Redesign and reform.
In response to a question about who is responsible for thinking about the
larger questions of redesign and reform, Madden said it is the job of
nongovernmental organizations-including public policy groups,
organizations that deliver services and people who receive services-and
members of the general public to be part of that discussion and raise
ideas for new ways of doing things. That's also a message the governor has
put out to state agencies: they should be rethinking what they're doing
and consider doing things differently in certain areas.
"Service delivery reform is
hard work," she said. "It takes time. It takes challenging thinking. Those
things probably work best when there is a combination of people from the
outside, who can question assumptions and ask if we can do things another
way, and people who work in the field who have the on-the-ground
experience. It's important to get a broad range of stakeholders, people
who receive services and their family members." But no one particular
group has the charge to promote innovation, she said.
A questioner asked where
most of the new reform ideas are generated. Madden said the Minnesota
Council of Nonprofits encourages nonprofit leaders and community leaders
to be part of that public-policy discussion. There is no one place that is
the center of gravity on reform. With nonprofits, the need for reform and
doing things in a different way is a pretty constant message.
Nonprofits have seen their
revenue from foundations and from charitable giving going down and cuts in
government funding sources. "They know it's a new world and that things
need to be done differently," she said. "They are asking those questions.
They want to be part of designing the new way."
An interviewer commented
that as people talk about redesign, they give the impression that it will
save money. He asked if anybody is looking at whether changing things will
save money or slow the growth of cost. Madden replied that there are many
discussions that reform will cut costs or that cutting spending will
induce reform. Sometimes that happens and sometimes it doesn't. Some
things are not a reform, but just a cut.
Lack of convergence on tax
asked about other organizations doing similar tax and budget work, Madden
mentioned the Minnesota Taxpayers Association. She said the nonpartisan
staff at the Legislature and the state Departments of Revenue and
Management and Budget also do high-quality work and provide good
A questioner asked whether
there is enough convergence of similar approaches to tax and budget reform
that a consensus could be presented to the Legislature. Madden replied
that on the tax side, there is not convergence, because there is not
agreement about whether we need to raise more revenue, the same revenue or
less revenue. The Minnesota Budget Project doesn't think it's worth
substantially changing the system just to raise the same amount of
An interviewer asked whether
there is more or less reason for optimism toward the possibility of
convergence. Madden replied that we're living in a very polarized time
where it's difficult to reach compromise, find middle ground and make
"That is the side of things
that makes me discouraged," she said. On the positive side, it's easier
for people to be involved, to keep up on issues and to express their
opinions than it was 15 years ago. There is more opportunity for people to
Based on her 15 or 16 years of budget work, Madden feels where we are now
is not sustainable. If we look only on the cutting side to solve budget
shortfalls, the public won't stand for it.
"We think reform is part of
that," she said, "but reform takes time. We think there does need to be
more revenue as part of this. We have cut too deeply, so we're not making
the investments that are important to our future. And we should take the
opportunity to close the gap between what low- and middle-income
Minnesotans are paying and what the highest-income people are paying."