The 5 Reforms Minnesota Should Do Right Now

In its next budgeting biennium, 2011-2012, Minnesota faces a projected $6-7 billion structural budget deficit. That problem can no longer be solved through the old...
by | October 19, 2009

In its next budgeting biennium, 2011-2012, Minnesota faces a projected $6-7 billion structural budget deficit. That problem can no longer be solved through the old paradigm of temporary accounting shifts and arbitrary spending cuts. Tax increases in an already a high-tax state are untenable. The new paradigm is reform based on economic principle and targeting economic growth rather that ad hoc, isolated short-term fixes. Specifically Minnesota should:

1. Reform the state tax system by reducing and eliminating taxes with high marginal rates imposed on a small tax base, like the corporate income tax, and replace the revenue with less distorting, low-rate taxes imposed on a broad tax base, for example reducing the rate and expanding the state sales tax to clothing and selected services. (Revenue neutral, but consumes fewer private sector resources.) Legislation introduced in 2009 that reduced the state corporate income tax was vetoed by the governor because it also created tax increases, which would have increased state revenue but at the expense of private sector jobs.

2. Cut state spending by significantly reducing with the intent to eliminate functions that are not constitutionally defined responsibilities of state government like corporate subsidies, incentives and credits and closing 16 Workforce Centers; ($233.4 million). Abolish ethanol grants ($30 million). Gov. Tim Pawlenty used unallotment to eliminate the extra-constitutional, $12 million Political Contribution Refund program; however, the program remains on the books and could be refunded.

3. Limit state regulatory activity to enforcing contracts, preventing force and fraud, increasing transparency of transactions between businesses and consumers and promoting public health and safety. Eliminate mandates telling businesses what products they must sell at what price to what people. Eliminate unnecessary licensing requirements that are barriers to entry for entrepreneurs in all industries. (Reduces $1.1 billion of annual economic growth lost to excessive occupational licensing.)

4. Reform tort law to clearly define actionable business responsibilities and liabilities and prevent lawsuit abuse. (Revenue neutral but drives a decrease in the $2.5 billion in direct annual tort costs to Minnesota companies.)

5. Reform the relationship of state and local government by weaning local government off state aid; limiting Local Government Aid (LGA) payments to "essential services" (In the current budget cycle, Gov. Pawlenty reduced LGA by $300 million through the unallotment process -- total two-year LGA budget is $1.069 billion); return regional planning commission (Metropolitan Council) to its original advisory role ($41.3 million).

Minnesota is a 4th quintile state ranking below average compared with other states on key measures of economic growth and degree of economic freedom. Because of the unallotment process, Minnesota actually has a smaller budget for 2009-2010 than in the previous biennium. These five reforms, however, provide a contextual approach to Minnesota's structural budget deficit -- the opportunity to balance the current budget and create a path to sustainable government revenues driven by economic growth. Rather than ad hoc spending cuts and tax increases, the Minnesota Free Market Institute proposes a shift to budget planning in the context of economic development supported by economic freedom.

Craig Westover is a Senior Policy Fellow at the Minnesota Free Market Institute and a contributing columnist to the Opinion page of the St. Paul Pioneer Press.

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Craig Westover  |  Minnesota Free Market Institute
bfc@hks.harvard.edu  | 

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