Hostage Taking by the GOP Over State Budget

05/12/2008

Paul Munnis


Hey -- what’s with Pawlenty’s insistence on a property tax budget cap as a condition of making a budget deal with the DFL?

We answer the question by asking “What and who is impacted by a property tax cap?”

The first thing to understand is Bonds and Bond Ratings. Bonding is something that most taxpayers do not understand very well. The pledge made for the issuance of all State Bonds is that they are backed by the full faith and taxing credit of the State of Minnesota and the principle amount of the Bond is “guaranteed to be repaid from State Property Taxes.” By placing a cap on the amount the State is willing to obtain from those property taxes then the Bond Ratings issued by the Bonding Appraisers are determined. In turn those ratings determine the actual interest rate of Bonds to be issued in the future. The State would like the Bond interest rates to be as low as possible.

Now a big part of the plan for 2008-2009 is to manage the capital improvements, the road maintenance, the light rail and commuter rail expansions, plus the capital costs of educational facilities, and the infrastructure improvements, all through Bond issuance. If you can’t get the Bonding Issues passed then you can’t invest in creating jobs for people in the State. We need jobs badly because we are shedding them. Our State businesses need to realize the sale of materials for the workers to use in these capital projects. That will cause businesses to retain workers rather than to lay them off. Laid off workers move to other states as they seek employment. We do not want to lose our workforce to other States.

So if you want to sell Bonds for capital budget improvement then property taxes must be pledged to back them.

Simply put -- by capping the amount of property taxes allocated to bond debt service then the amount of money that can be raised by bonding is also capped. Pawlenty does not want to invest in job creation in Minnesota, that is not his priority. When I look at who property owners are then I find it to be both Republicans and Democrats and I think that we have common ground on wanting the property tax reform that Democrats are proposing.

Anyway, that forces the DFL to pick and choose carefully what they want to throw out of the bonding package that they propose. Pawlenty has already made his choice: he threatened to oppose the Central Corridor light rail project and other DFL priorities without a deal.

Is this all that’s needed to resolve the conflict over how to resolve the State’s $985 million budget shortfall – just agree to a property tax cap?

No way. Pawlenty proposes fixing the budget deficit by grabbing off $785 million the funds set-aside for paying the health care bills for the poorest people in out State. That money is raised by a 2% medical provider tax on every ones health transaction done in our State.. The DFL opposes raiding that fund. The Mayo Clinic and others who want to be paid for medical services agree with the DFL on this. The DFL position is that the State has a structural deficit short-fall and it needs to be fixed by long-term tax reform in Minnesota. In that way the income will match the outgo and there will be no shortfall. Thus there will not be a need to raid health care funds to balance the budget. By way of a negotiation the Governor has proposed to only raid $175 million from healthcare funds. He will get the other money by cutting programs like nursing home assistance. Democrats are really not on the same page with him on that one. It's not as though Democrats won't let cuts happen in the budget. We have already included $155 million in cuts in the Democratic plan.

What the DFL wants to do with property taxes is to change the way that we are taxed. The DFL is trying to recognize several things in their effort. They recognize that home prices are falling and that the value of properties is falling for homeowners. They recognize this is a loss of equity for the homeowner. The DFL also recognize that corporations are underpaying their taxes on property to the State. So Democrats want to revise the tax tables so that homeowners pay less and corporations pay their fair share. Pawlenty wants to protect the corporations and raid the health care fund to pay for the deficit. Democrats want to fix the structural flaw so that there is no shortfall in the future. Democrats call this a property tax overhaul plan.

The wild card in all of this is the recession. The GOP argument is that you can’t raise taxes on the corporations when so many are going under. Also, you do not want to drive businesses out of our state.

Democrats counter that the worst of the recession is over with due to the stimulus package. It is expected that the recession will last only two quarters and then start to rise. When it does then corporations will still be living on easy street where taxes go and the State will still have a structural deficit. Since budgets are two year budgets the fix needs to be adopted now.

The DFL has set the timing of the new income from corporate property taxes to match the expected recession recovery and so corporations will be able to pay their taxes. As for driving business out of our State the Democrats note several things: there is a cost associated with relocation that is far higher than the corporate cost associated with paying the slightly higher property taxes. Also, the amount paid to the state in higher property taxes is a deduction on federal income taxes and thus much of it can be recovered. Also, what State is giving away free property taxes to corporations? Many have much higher tax rates than Minnesota does. Also, the States having lower corporate taxes are further away from the center of the nation and so will incur higher shipping costs for their products and goods if they are relocated to because nobody expects shipping costs to drop. Also, the DFL plan for restructuring taxes is revenue neutral now but will cover the structural gap in the future and so nobody gets a hit now but they will after recovery from the recession sets in. Finally, the DFL argues that if we don’t fix the structural deficit you will have to deal with it forever – it will never go away of its own volition.

So in the end it’s a classic Democrat vs Republican discussion. The GOP wants to protect businesses (they say) and the Democrats want businesses to pay their fair share of property taxes. The battleground is Bonding which Democrats need to balance the investment part of the budget and create jobs. By appealing to taxpayer’s short-term view of a property tax cap the GOP wants taxpayers give up their option of getting businesses to pay their fair share of property taxes in the future. Democrats believe that means higher and higher property taxes on homeowners and lower and lower taxes on corporations and so Democrats wants to avoid that.

In short – Pawlenty is holding quite a bit of the tools needed to balance the budget as a hostage in order to get more tax breaks for corporations. Democrats say “nuts to that idea.”

Some ask why is Pawlenty doing this? The answer is that he pledged “No New Taxes” and wants to uphold that pledge. By upholding the pledge it keeps him viable as a VP choice for the GOP that can run on a pledge of “No New Taxes.” That will attract a lot of corporate money to the GOP presidential campaign. The GOP is broke and needs money.

In this whole deal it’s not what you see but it’s what you don’t see unless you poke at the issue. Then when you see is Pawlenty playing hardball against you and your property taxes and that he is willing to sacrifice job creation in our State to his own future ambition. Pawlenty's position is just not in the interest of either you or me. We'd be crazy to support him in this matter.