Each year, the State of Minnesota loses billions of dollars of revenue through “tax expenditures.” According to the Minnesota Department of Revenue, “Tax expenditures are statutory provisions which reduce the amount of revenue that would otherwise be generated, including exemptions, deductions, credits, and lower tax rates.” In layman’s terms “tax expenditures” represent tax breaks enacted by the legislature.
Some tax expenditures make sense; for example, certain sales tax exemptions-most notably for food purchases-make basic necessities more affordable and reduce the regressivity, meaning the disproportionate impact on lower-income families, of the state’s tax system. Other tax expenditures-such as the income tax subtraction for K-12 education expenses-appear to have little impact in terms of promoting identifiable policy goals and actually make the tax system more regressive.
In recent years, Rep. Ann Lenczewski, chair of the House Tax Committee, has sought to eliminate some tax expenditures on the grounds that they do not have the desired effect. Lenczewski has observed that the elimination of selected tax expenditures could be used to (1) generate new revenue to help balance the state’s budget or (2) reduce tax rates so that the net impact would be “revenue neutral” (i.e., no net increase in state revenue).
Last week, the Minnesota House Tax Committee heard testimony regarding the 2010 Minnesota Tax Expenditure Budget (TEB). The TEB is prepared by the Revenue Department in even numbered years in order to estimate the fiscal impact of tax expenditures. During the course of the discussion in the House Tax Committee, Rep. Keith Downey proposed an amendment to state law that would change all references from “tax expenditures” to “tax freedoms.”
According to Rep. Downey, the term “tax expenditure” is inappropriate, since the various exemptions and credits represent a “freedom” from taxes, not an expenditure. In the 2010 TEB, the Revenue Department explains the use of the term “tax expenditure” because “they are similar to direct spending programs. Both tax expenditures and direct expenditures are used for public policy goals, such as funding or encouraging specified activities or providing financial assistance to persons, businesses, or groups in particular situations.”
The attempt to frame “tax expenditures” as “tax freedoms” is part of a broader right-wing agenda to portray any tax as an infringement on freedom. To wit, consider the “Tax Freedom Day” report from the conservative Tax Foundation; according to the logic of the “Tax Freedom Day” paradigm, we are not “free” until the calendar day we stop paying taxes.
A more mature perspective recognizes that taxes are part of the civil contract between citizens and their government. In order to pay for things like roads, schools, public safety and defense, citizens must remit a portion of their wealth to the government. Taxes are not an infringement on freedom, but a recognition of the fact that public goods cost money and that we have no right to expect something for nothing.
During the course of the Tax Committee discussion, Rep. Paul Marquart noted that when the taxes borne by some taxpayers are reduced through tax expenditures, the corresponding taxes paid by other taxpayers must be increased in order to generate the same amount of revenue. Thus, Marquart concluded that “tax expenditures” could more aptly be described as “tax shifts.”
In defense of Rep. Downey, it’s true that the typical Minnesotan might not think of the various income tax deductions and sales tax exemptions that they benefit from as an “expenditure.” In order to provide a more sensible and lucid alternative, Rep. Tina Liebling proposed a modification to Downey’s amendment; rather than calling a “tax expenditure” a “tax freedom,” Liebling sought to change the term to “tax preference.”
The change proposed by Liebling represented an ideal compromise assuming the goal is to make the vocabulary in state law more understandable to the typical citizen. “Tax preference” is a better description of the various exemptions, credits, and deductions described in the 2010 TEB than either “tax expenditure” or “tax freedom.” The Tax Committee adopted Liebling’s change to the Downey amendment.
In a perfect world, this would be were the story ended. However, rather than accept Liebling’s change, Rep. Downey withdrew the amendment. Apparently he was more interested in using an ideologically loaded term like “tax freedom”-which could then be used to portray any elimination of a tax preference as an assault on freedom-than he was in making the terminology of state government more explicable to the average Minnesotan.
Given Minnesota’s massive $7.8 billion budget deficit for the next biennium, all options should be on the table. State policymakers should not allow shrill ideologically-driven rhetoric to stand in the way of eliminating inefficient and regressive tax preferences.