Links to a few random papers I have read recently, almost all irrelevant to SALT issues
NASCAR dumbed down students
This study found a 2007 change in NASCAR rules improved educational outcomes for children living near racetracks equal to “increasing school spending per pupil by $750; or 25% of the effect of avoiding an instructor with no previous teaching experience.” Econofact memo or full paper. (Irrelevant observation: kids living near IndyCar tracks had it better, thanks to the racecars burning various alcohol-based fuels since the series inception. Of course, those tracks likely hosted races by gasoline-fueled cars.) Another data point on why lead in the environment is such a big deal – think of the ubiquity of leaded gas and folks living next to busy streets and highways for many decades.
As an aside, Steven Johnson, The Brilliant Inventor Who Made Two of History’s Biggest Mistakes (NYTimes, paywall), recounts the history of the invention and industry’s adoption of leaded gasoline in an essay on unintended side effects of inventions. It turns out Big Corn, the ethanol lobby, appear a few decades too late to save us from a lot of lead poisoning.
Fixing social security’s finances
I had not heard of R. Douglas Arnold, a retired Princeton professor, but this excerpt (Milken Review) from his recent book, Fixing Social Security (Princeton U Press 2022), describes how Norquistian Republican tax aversion will makes fixing of social security’s finances extraordinarily difficult politically. (That will be so, even if Dems are in control and the filibuster disappears, I would observe.) Of course, predicting the political landscape in 2030s, when SS trust fund will be unable to pay full benefits, is a fraught exercise but extrapolating from the current situation, as Arnold does, presents a bleak picture on reasonable options. A looming disaster unless you’re one who believes unlimited deficit spending doesn’t matter (modern monetary theory anyone?). Meanwhile, Congress keeps pouring more tax expenditures (via Roth fiscal legerdemain and other fiscal tricks) into the private DC retirement system that principally benefits the more affluent.
Unexpected minimum wage effects
A Journal of Public Economics article, Fone, Sabia, & Cesur, The unintended effects of minimum wage increases on crime, finds that increasing the minimum wage also increases crime. Excerpt from abstract: “[W]e find that a 1 percent increase in the minimum wage is associated with a 0.2 to 0.3 percent increase in property crime arrests among 16-to-24-year-olds, an effect driven by an increase in larceny-related arrests. The magnitudes of our estimated elasticities suggest that a $15 Federal minimum wage, proposed as part of the Raise the Wage Act, could generate approximately 309,000 additional larcenies.” Thankfully, they found no impact on violent crime. The hope and common expectations were that an increase would reduce crime.
More minimum wage effects
Along similar lines but not as unexpected (at least to me), this paper from the Philly federal reserve bank, Agarwal, Ambrose, & Diop, Do Minimum Wage Increases Benefit Intended Households? Evidence from the Performance of Residential Leases (July 2019), suggests that landlords capture much of the benefit of minimum wage hikes. They found that landlords successfully capitalized minimum wage increases into higher rents, starting three months after the increases went into effect. For example, the authors estimated “the average of the 76 state-level minimum wage changes was $0.57/hour or 10% and ranged from 1.6% to 35% with the average increase in rents taking up 66.4% of the average income increase.” p. 12. This is consistent with similar research that shows employers capture a good share of the benefits of the earned income tax credits, as I have noted before. Trickle up economics.
Pricing the benefits of income tax simplification
I’ve long advocated simplifying the income tax, characterizing complexity as a hidden tax that yields the government no revenue but costs taxpayers a lot – some legislators probably considered me a nag for bringing it up in response to various of their ideas and proposals. This article, Choi & Kleiman, Subjective Costs of Tax Compliance (2/1/23), suggests that I may have been overvaluing the effects. Choi is a U law professor who I have neither met nor heard speak.
The article is based on an online discrete choice style survey (smallish with fewer than 250 responses used) that attempts to put a value, as the title indicates, on the “subjective” costs of compliance. Subjective refers to the value respondents placed on their time, rather than the traditionally used objective measures, like market prices for tax prep or estimates of respondents’ hourly wage rates. Put another way, subjective value is how the respondents value their leisure time that is consumed by tax compliance, rather than their out-of-pocket cost or foregone wages (if they could easily get paid for extra work hours). The authors found that subjective costs were lower than objective costs, traditionally used in cost-benefit analyses. I found some of the survey results interesting – e.g., respondents valued minimizing anxiety (e.g., about making a mistake) much more than aggravation. Some of the responses, of course, appear illogical at least on the surface.
The authors posit some interesting policy implications, but I would hesitate to recommend legislators make policy based on one survey, although some of them reflected common sense (focus efforts on lower income taxpayers and reducing mistakes rather than just time savings, etc.). The paper certainly is thought provoking and I hope stimulates more research, additional surveys or psychological lab experiments.
SEC rules, of course, require public disclosures by top executives who trade in the stocks of their own companies. The potential for insider trade (e.g., knowledge of private info about your own company) is obvious. Investment professionals scrutinize the SEC data for insights about companies – insiders buying and/or holding being a potential good sign and selling a potential bad sign for investing in a stock. No disclosure is require for trading in competitors’ stock, of course, even though sometimes one might have inside information, because of negotiations, contacts with suppliers, or similar.
Expanded 1099 information reporting on security sales allowed Pro Publica to look at executives who traded shares of their competitors. (As a shareholder, I would not like finding out that top executives have long positions in competitors’ share, FWIW.) They found suspicious examples:
“One executive, for example, sold more than $1 million worth of shares in a competitor’s stock the day before the company had its largest one-day price drop that year.”
“A Gulf of Mexico oil executive invested in one partner company the day before it announced good news about some of its wells.”
“A paper-industry executive made a 37% return in less than a week by buying shares of a competitor just before it was acquired by another company.”
None of that proves insider trading, of course; they are just interesting and suspicious anecdotes. Insider trading, as the article points out, is not easy to prove, especially for criminal convictions. Empirical measures of how common the suspicious practices are would be useful to judge how important a policy or enforcement problem this is.
An interesting question is whether Congress should allow IRS Form 1099 data on security sales to be shared with the SEC to enforce insider trader rules. Without researching the question, I’m quite sure that is not allowed now. I would guess it would provide good leads to the SEC and might deter illegal insider trading, just as information reporting improves tax compliance. Normally, tax administrators strongly oppose using tax data for unrelated purposes, mainly on the theory that it could undercut voluntary compliance. I don’t see that potential here, since the data is provided by third parties, securities brokers, not taxpayers. It seems like a potentially good idea.
GOP gerrymandering advantage gone
That appears to be true for congressional elections according to William Galston, The gerrymander myth(3/17/22) (Brookings). As his title suggests it is contrary to the typical narrative. His short blog post has the details, consistent with what I had casually observed. Republicans gained a huge gerrymandering advantage after the 2010 election and census. That has now evaporated. Two tables in Galston’s post compare the two eras and are convincing to me.
Thus, fixing gerrymandering will probably do little to help Dems politically to control the U.S. House during the rest of this decade.
Caveats. This analysis applies to congress nationally. Gerrymandering continues to distort congressional representation in individual states (for both parties, such as Ohio and Florida for R’s and Illinois for D’s) and in districting legislatures. Events in North Carolina, in which the GOP-controlled state supreme court appears likely to throw out the neutral plan used in 2022 for a GOP friendly plan, and elsewhere may change the equation slightly. (SCOTUS case is pending on the independent legislature theory but may be sent back to N.C. given the state court granted a rehearing likely mooting the controversial case.) Also, more blue states have commissions that yield neutral plans, so that is a long run disadvantage for Dems in the future unless something changes (and in politics, it always does).
Most importantly, gerrymandering is a problem that needs to be fixed, even if it does not systematically advantage one or the other party. Minnesota’s divided control over the last decades (other than Arne Carlson’s veto ineptitude) has allowed it largely to escape this problem. Adopting a constitutional amendment providing for a neutral commissioner would be a good insurance policy that that will continue and, as a bonus, would relieve the courts of a task that the folks who wrote the constitution never intended from them to carry out.
Advice for Dems on rural and white working-class voters
Anyone who has been paying attention recognizes the difficulties that Democrats are having winning in rural areas. As I have noted before, it’s almost as if they’re no longer competitive in rural Minnesota and with each election the effect appears more pronounced. In 2022 the Senate DFL caucus temporarily stopped the hemorrhaging, holding onto two or three rural seats by the slimmest of margins to win a one-vote majority. I would not bet on that continuing.
The Niskanen Center, a center Right outfit I associated with the GOP but not Trump which is officially nonpartisan as a 501(c)(3), published a report that documents that phenomenon, and the similar but lesser problem Dems are having with white working-class voters. Saldin & Munis, Faction is the (Only Viable) Future tor the Democratic Party (March 2023). The authors are two pol sci professors. It’s interesting reading for a political junky and seems a little unusual for conservatives to be serving political advice to Dems. The state of the newly populist Republican Party calls for desperate measures with no apparent home for principled, classic conservatives apparently.
This excerpt from an early paragraph in the report captures the problem the Democrats face, in the authors’ view:
Over the last couple decades, Democratic support in the countryside has cratered. As recently as 1996, President Bill Clinton won over 1,100 rural counties—roughly half the nation’s total. * * * [B]y 2020 Democrats barely had a pulse in rural American. Joe Biden only managed to win 194 rural counties, or about 17% of the party’s 1996 haul. And Democrats still might not have hit bottom. * * * Polling in the spring of 2022 showed the GOP with a whopping 34-point advantage in rural areas on the generic congressional ballot. These polls proved prescient, as preliminary analyses of election returns suggest that Democratic congressional candidates performed worse in rural areas in 2022 than in any year in the modern era, garnering less than 30% of the rural vote.
Faction is the (Only Viable) Future tor the Democratic Party, p. 3
They observe that (based on polling) that the problem is both a policy problem – on social and cultural issues and immigration – but more importantly a perception problem (“pervasive belief” in their words). As they put it:
In other words, the Democratic label/brand is associated with a 35-point handicap in rural areas, which cannot fully (or even largely) be attributed to policy disagreement.
The explanation for this gap is what scholars refer to as “rural resentment.” This concept is defined as a pervasive belief among rural Americans that they have been left behind, ignored, and looked down on by urbanites and the government and media elites who cater to them. Rural resentment has been shown to be strongly linked to voting for Republicans, even after accounting for partisanship, racial attitudes, ideology, gender, age, educational attainment, and other relevant factors.
The key takeaway of this research is that Democrats can’t fully fix their problems in rural areas by moderating on cultural issues (though this will surely help). They also need to be creative in building back the trust of rural communities who see them as elitists who view rural communities with contempt.
Faction is the (Only Viable) Future tor the Democratic Party, p. 6 [emphasis in original]
You need to read the whole first half of the piece to understand their view of how dire the situation is for the Democrats, especially in rural America but also among the white-working class. It seems convincing but I’m not a good judge as apolitical type.
Their solution is for Democrats to change their tactics, emulating the likes of Senator Jon Tester (D-Mont.) and to develop a separate faction in the party with a more conservative orientation. One of the authors is a professor in Montana; hence, the Tester example. They correctly point out that both major parties have often had distinctive factions that deviate somewhat from the national mode (Progressive Era Republicans or Southern Democrats in the post-FDR era as two examples) and allow them to better compete for votes in distinctive geographic areas and with different populations.
This is difficult to do (changing engrained perceptions constantly reenforced by social contacts and Fox News and the like) and is not something that a national party can order up but happens organically I would guess. I think there may be a sort of snowball effect. Once an area becomes solidly dominated by one party, social dynamics take over and make it very hard for the other party to compete. Think about the futility experienced by the Republican Party in the South for the century after the Civil War (admittedly, an extreme example). If there is any truth to that, it suggests the Dems need to act quickly or they may be in the rural wilderness for a very long time.
I’m highly skeptical about the author’s advice as a realistic game plan. But the piece is interesting and thoughtful.
This is another in my series of bad high school book reports on nonfiction books that I have read recently. I write them to memorialize my thoughts in the vain hope that I will remember a bit more of what I read.
Reading this book was part of my quest to understand the migration of the Republican Party away from conservatism. This is one of about a dozen books I have read in that effort. I have not written book reports for most of them, assuming they had a short shelf life as many focused on Trump-related matters, which were constantly being overtaken by events. I may write reports on a couple more but hope to take a long break from the topic.
The Right is a historical account of American conservativism both as a political movement (i.e., what activists, the Republican party, and elected officials were doing) and as a set of ideas (i.e., what its deeper thinkers – I would hesitate to describe most as political philosophers – were saying). It covers the last 100 years, essentially from Harding to Trump in presidential terms.
The 100-year frame Continetti chose is apt. Before 1920, it was not clear that the Republican Party was the conservative party. During and before the Civil War, it clearly was the party of change. During the Progressive Era (roughly 1900 to 1920), a case could be made that the party of TR, LaFollette, and other reformers was a party of change, rather than conservativism. That ended in the 1920s when its conservative character was set – certainly by the 1930s when opposition to the New Deal defined it.
Continetti is a conservative journalist who has worked for a variety of organizations and is an amateur historian (he doesn’t have academic history training although he teaches college history courses). Although he does not like Trump, I don’t think of him as a diehard Never Trumper, unlike his father-in-law, Bill Kristol. So, the book is a portrait drawn by someone sympathetic to conservatism, at least of the more classic variety.
What I found interesting
I found the historical frame provided useful context for recent developments. It paints a picture of the interrelationship between the activists and the thinkers and the policy concerns and values that motivate them on domestic and foreign policy. Events, such as the Great Depression, WWII, the Cold War and its end, Vietnam, and 9/11, and the need to win elections shaped both political positions and ideas. The complexity of the shifting sands of events, composition of coalitions (addition of Southern and many socially conservative labor Democrats, e.g.), and more defies capturing the book’s essence in a short summary (he says after reading his 9 single-spaced pages of notes). For someone interested in the evolution of conservative politics and thinking, this book is a must read, in my opinion.
He describes how far out strains (John Birch Society, southern populism, etc.) have been persistently present in the movement and how the elected officials and thinkers successfully kept them bottled up without completely alienating their proponents or losing most of their votes. Of course, in our two-party system they had nowhere to go after FDR and LBJ remade the Democratic Party. Throwing your vote away on Lyndon LaRoche was less attractive for righties than on Ralph Nader for lefties, I’d guess. Of course, George Wallace accelerated the movement that both made the GOP’s political success possible and now bedevils them demographically as the nation becomes browner.
Continetti reminds one of past craziness that is easy to forget – Eisenhower as a communist plant, fluoridation of water as communist plot, and similar nonsense that foreshadows purported rings of elite Dems who are pedophiles, Jewish space lasers, and Italian software controlling voting machines. (The left, of course, has its own susceptibility to various nonsensical conspiracy theories.)
As one who only rarely read the American conservative catechism, I learned a lot about tensions in the movement’s ideas, such as between the libertarians and more conventional conservatives to pick just one of many.
Bill Buckley and National Review figure strongly in Continetti’s narrative, not surprisingly since Buckley was often in the conservative cockpit, both politically and philosophically. The magazine and his PBS show gave him his intellect and personality big platforms. Talk radio, Limbaugh and others, and social media now make it impossible for someone like Buckley with more refined and nuanced ideas to be such a dominant voice and guiding light. That, of course, also gives free range to craziness.
There is an ebb and flow to many of the policy positions, especially on foreign policy – e.g., isolationism and internationalism (Bob Taft and Trump sandwiching years of anti-communist and neo-conservative orthodoxy) and trade policy (1920s and Trump championing tariffs sandwiching the Free Trade orthodoxy). There are some similar but less stark examples on domestic policy.
His account reveals ugly details on civil rights, McCarthyism, antisemitism and similar. I was aware of those strains but not the extent to which the intellectual Right (the Bill Buckley types) and elected officials had tip-toed around opposition (and sometimes outright enabling) to avoid alienating supporters. Recent developments – as the movement has become more homogeneously white and old and with social media giving every yahoo a potential platform – have made it more difficult to keep the ugliness underground or in the background. Trump naturally has legitimated and weaponized it.
Continetti, along with others, attributes some of the recent travails to the end of the Cold War dissolving the anti-communism glue for the movement. As an aside, I had not made the connection that opposition to “godless” communism was a strong attraction for religious conservatives, both Catholic and protestant evangelical flavors. They play a crucial role in the story with their solid GOP support turbo charged by the aftermath of Roe and its sorting of social conservatives into the GOP over a couple of decades. It’s easy to forget, of course, that five of the justices who voted for Roe were Republican appointees.
This quote captures a bit of his thinking on the effect of the end of the Cold War, which seem correct to me:
For at least five decades * * * anticommunism had been the one thing that united economic, religious, and national security conservatives. Then it disappeared.
Populism emerged as the X factor that could make or break GOP presidencies. Lacking an external threat of Soviet communism’s magnitude, conservatives turned inward. In the final decade of the twentieth century, conservatives became more southern, more religious, and more nationalistic. * * * An intra-Right civil war broke out between the conservative establishment based in Washington, DC, and New York City and the populist critics of immigration, foreign trade, and foreign interventions. The ensuing struggle shaped the nature of the Right for the next two decades. It culminated in the rejection of the establishment in 2016.
The Right, pp. 296-297
As an aside, Putin’s metamorphosis from a communist KGB officer to a socially conservative and proto-religious authoritarian is another foreign policy curveball for the Republicans. It certainly plays into the hands of those promoting nonintervention and isolationism in the Ukrainian War (Tucker Carlson and JD Vance, e.g.). Just for fun take Stuart Stevens’ quiz to test your skill in differentiating MAGA Republican rhetoric and Putin’s. I got two wrong. Stevens’ book is one of the more caustic indictments of the current version of the GOP by a former Republican partisan.
What disappointed me
My biggest disappointment was Continetti’s failure to spend more time dealing with the dominance of deficit-financed tax cuts in the GOP domestic policy orthodoxy. In my mind (obviously jaundiced by my tax centric views) this is a dominant theme of its fiscal policy agenda for the last 40+ years. Social conservatism and opposition to abortion were probably more important but are not fiscal.
He covers it (impossible not to) but never directly confronts the reality of its financial and economic irrationality that seems all too obvious. It began as political tactic to counter the perception, if not reality, by GOP politicos that the left’s willingness to use deficit spending conferred an unfair political advantage. That was based on the view that voters are inherently susceptible to the bribery of “free stuff” (the left’s deficit-financed spending) and that conservatives’ principles of fiscal rectitude severly disadvantaged them.
This led to Jude Wanniski’s famous “Two Santas Strategy” hatched in mid-1970s: the left’s spending Santa would be countered by right’s tax cut Santa. Supply side economics, never accepted by conventional economists, was used as a rationalization or justification to paper over the deficit/fiscal rectitude problems. (Continetti also points out that they suggested using supply side theory as an inflation fighting tactic in the mid-1970s – rather than dampening demand, the government should stimulate supply to fight inflation. That was so ludicrous economically, it never gained any traction.)
Traditional conservatives were reluctant to embrace the strategy. Recall GHWB’s characterization of it as voodoo economics. Of course, Reagan after some reluctance embraced it and his political success cemented allegiance to tax cuts as orthodoxy. But both he and the Elder Bush were still willing to raise taxes to hold down deficits. I assume that they (e.g., if subjected to truth serum) would admit that supply side economics (tax cuts paying for themselves) was little more than a rationalization for a political tactic.
Things became dicey (this is my view not Continetti’s) when Grover Norquist married his tax aversion to the orthodoxy of tax cuts. That combination, reduced to writing in Norquist’s nonsensical pledge, came to dominate during the 1990s and onward. It effectively relegated old fashioned fiscal rectitude to a rhetorical device to be used against Democrat’s spending social spending and to advocate for unclear spending cuts when they were out of power. But when they are in control (e.g., during first six years of GWB administration and first two years of the Trump administration), they enacted deficit financed tax cuts and spent with abandon.
Serious conservative thinkers, as far as I can tell, have not tried to come to grips with how to reconcile the persistent political tactic with conservative fiscal principles. Elected officials and activists embrace it for obvious reasons; everybody likes lower taxes if the price isn’t reductions in their favored government services. The complexity and uncertainty inherent in formulating long term budget plans allows fudging and obfuscating (see David Stockman’s magic asterisk and Paul Ryan’s magically wishing away virtually all discretionary federal spending), so it is impossible to categorically say they are phony. Extraordinary growth occasionally occurs (see Bill Clinton’s presidency, following big tax increases under GHWB and him, belying the tax increases kill growth narrative that is their complementary argument), even if appeals to the Growth Fairy are almost always fairy tales.
Advocating for unclear or general spending cuts when the Dems are in control also makes it look like they are sticking to principles of fiscal prudence, but they’re not, of course. The failure of the intellectual Right to explain how any of this works is a major hypocritical hole in the enterprise. Continetti’s book largely looks the other way, perhaps not surprising given his priors. Of course, his book is principally about politics, not economics or government finances.
It deserves more treatment; I assume that the hypocrisy has led to private hand wringing by the thoughtful types (e.g., conservative academic economists who wish to serve in GOP administrations but are reluctant to speak out forcefully). Maybe not and there’s no story there. One hypothesis is they believe in the Growth Fairy, uncharacteristic for a movement supposedly grounded in a sober view of reality (e.g., in the inability of the government to effectively improve economic output much). Unless you’re willing to cut programs their populist base wants and depends upon (Social Security, Medicare, and Medicaid per Trump), you cannot get back anywhere close to fiscal balance without raising taxes (anathema to all the Norquist pledge takers). Sorry situation and not traditional conservatism in my book.
Now that we own a second home in Florida, it’s harder to avoid the political news down here. I try to ignore the nonsense coming out of the governor’s mansion in Tallahassee, which seems more calculated to win Trumpy partisans’ love by counting coup on woke Disney, restraining free speech (pending what SCOTUS decides, of course), appointing out-of-state right wing regents, etc. etc. than by focusing on public policy. Positioning for a presidential primary run is the likely rationale.
The tax expenditures in Governor DeSantis’s budget (ESPN story – you can’t avoid it even when you’re trying to keep up with NBA developments), however, were too much for my tax sensibilities to ignore. Specifically, sales tax exemptions for:
Gas stoves – it’s not enough to make rhetorical political points about how out-of-control leftists are coming for your Thermador range, we’re going to provide a tax incentive for you to buy one and implicitly raise the relative after-tax price of people who buy electric. Take that you asthmatics and those concerned about climate change.
Pet meds – this one mystified me. Given the cost of the meds to keep my elderly mixed-breed mountain cur walking, I get the raw appeal. But this seems to verge over into an area uncharacteristic for a Republican (a PETA/vegan land view that equates animal and human welfare – assuming a baseline of a sales tax exemption for human prescription drugs, anyway?). On a principled policy basis, no reason to prefer this form of consumption.
Enacting tax provisions to make rhetorical political points is dumb, plain and simple. The pet med exemption must have some other weird backstory.
Update 3/2/2023
This blog is a hobby; I do it solely to amuse myself and receive no remuneration from it. (I can’t imagine anyone paying me for it, FWIW.) Good thing. Otherwise, this post could have subjected me to monthly reporting to the state under section 3 of SB 1316, if the Florida legislature and governor were to enact it into law (news story). Hard to imagine and a silly time tax for sure. The first amendment apparently is largely hortatory to some in Tallahasse. Just when you think stuff can’t get dumber and darker.
This is another in my series of bad high school book reports on nonfiction books that I have read recently. I write them to memorialize my thoughts in the vain hope that I will remember a bit more of what I read.
This book was a birthday gift from my youngest daughter but is exactly the type of book I would pick up and read on my own. Its subtitle characterizes it as covering “the Financing of the Civil War,” ticking two of my favorite boxes. I’m a bit of a Civil War history nut – have read most of the standard histories (Cotton, Foote, McPherson, etc.) and used to go out of my way to tramp around battlefields until I married a spouse who wasn’t interested in such. Economic history is a second big interest and standard treatments of the Civil War typically give short shrift to its financing and the vast changes it effected in national economic policy and regulation. Battles, military strategy, and similar are more compelling reading, aside from being much bigger sellers.
Lowenstein is a former Wall Street Journal writer whose columns I read regularly and often found insightful. I don’t think I have read any of his books, though. I passed on his accounts of the 2008 financial crash in favor of ones written by academic economists. He’s not a professional historian, but most academic historians these days focus on what I consider esoteric and economic and financial history tends to fall to economists (e.g., Brad DeLong’s new book – is on my reading list) or financial journalists like Lowenstein to write.
What I found interesting
The book covers the financing of the war in both the Union and Confederacy and the policy changes, enacted by a Congress freed from the fetters of southern Democrats, that transformed the national economy and the federal government’s role in it. These include the national banking act, homestead act, transcontinental railroad, Morrill Act (land grant university system), and more. Some changes were compelled by the exigencies of the war, such as creating a national currency (“greenbacks”), massive federal borrowing, and establishing the national banking system, while others were the former Whigs who dominated to the Republican Party doing what they had always wanted – using the government to promote national economic growth.
For anyone accustomed to the modern economy and banking system, it is hard to conceive how things actually worked in the before times – e.g., free banking, no currency other than individual banks’ notes with differing discount rates varying by where you used them, etc. (My son, the MBA banker, had a hard time wrapping his head around that when I described it to him.)
Samuel Chase, Lincoln’s Secretary of the Treasury for most of the war, is a central figure in the book. I was familiar with him from Team of Rivals and other accounts but learned more detail on the machinations involved with development of the currency and various methods of borrowing to finance the war. Chase’s competence and persistence were big factors in the Union’s victory. Jay Cooke’s bond peddling skills were critical as well.
Southern financial incompetence, economic reality, and hubris overcame their (initial) superior military capabilities. A rebellion based on state rights (reductively, of course – preservation of the slavery economic model being the primary and real rationale) gravely handicapped a national government which needed to impose some taxes to finance what became a war of attrition. Wealth concentrated in land and enslaved people with little industrial capacity made procuring necessary war materiel difficult. It’s hard to convert land, slaves, or cotton you can’t export into European guns and ammunition. King Cotton was an illusion. Rising prices worked wonders to increase substitutes and cotton production elsewhere.
The Confederacy’s big financial disadvantage was its need to rely on foreign borrowing. Once it was clear that the federal government would persist in prosecuting the war, foreign lenders (mostly anyway) realized repayment of confederate obligations depended on the South’s winning, one way or another. If it lost, confederate paper and bonds would be worthless. The converse was not true for the Union, which would persist as a viable government and presumably repay, win or lose. Moreover, the Union did not need to rely anywhere near as much on foreign borrowing. Jay Cooke’s bond peddling proved that the Union’s more diverse stock of household and commercial wealth could be tapped to finance its war effort.
That said, despite its vast economic advantages, the Union’s military incompetence (thank you, General McClelland and others) meant the fate of the Union hung in the balance until late summer 1864. Absent Chase and others’ ability to tap North’s economic capacity for war financing, a loss likely would have resulted. As with much of history, a little contemplation makes you realize how a few breaks or different people can make such a difference or so it seems. I do think it is fair to consider Lincoln, Grant, and Chase each as necessary conditions of the ultimate Union victory.
The war, like most, was heavily financed with borrowing, rather than taxes. But the sheer scale, as pointed out by Lowenstein, on the Confederate side had not sunk into my consciousness:
Over the entire war, the Union supplied fully 21 percent of the federal budget from taxes, decisively above the 5 to 6 percent mustered by the Confederacy and virtually identical to the 22 percent shared achieved in World War I.
Ways and Means, p. 287
Borrowing 95% of its cost with no working national tax infrastructure after 3 years of war, it’s no wonder the Confederacy collapsed financially. Conditions, as chronicled by Lowenstein, were truly grim, compounded by the patrician planter class insisting on maintaining their luxury consumption while many average southerners were starving. Deep into the war, the Richmond government finally limited how much of the holds of blockade runners could be used for such nonessential cargo.
Southern tax aversion (at least as to national taxes) was clearly a factor in the Confederacy’s failure. By the time they realized they really really needed to impose national taxes and could not depend upon the good graces of member states, it was too late – because building a tax collection infrastructure takes a long time and military setbacks kept shrinking their tax base, land, by the time they grudging accepted the need to tax. Once again, a key lesson of the failure of the Articles of Confederation had to be retaught.
The book is full of interesting details, many of which were new to me, especially on the Confederate side. Just to list a few:
The saga of Cotton Bonds – obligations sold in Europe repayable in cotton, located in the South, after the end of the war. I was familiar with them, but Lowenstein has a lot of details. Since their intrinsic value totally depended on Confederate success in the war, their varying discounts could be considered a European betting market on the war’s outcome – after adjusting for inflation and variations in cotton prices (more of which was being produced in Egypt and elsewhere as the war went on). Remarkably, these bonds continued to trade, albeit for a tiny fraction of their face value, in Europe well after the war ended and Confederate debt had been repudiated. A tribute to gullibility or eternal hope, I guess.
Confederate paper bearing the condition “redeemable after ratification of peace with the United States” making clear in print the financial reality of southern obligations
Extensive coverage of the saga of Port Royal, the sea island that the Union captured early on and which provided a preview of the coming failures of Reconstruction in the missed opportunity to give freed slaves even half a chance; it’s painful but telling to read the details. An ugly stew of greed and racism overcame the good intentions of Chase and others.
Lincoln’s commitment to immigration, which was true to his Whig, pro-economic development roots and contrary to the Know Nothing nativists, a contingent in the GOP coalition even back then; immigration surprisingly continued to occur unabated during to the war, almost exclusively to the north as one would expect.
Lincoln’s plan to retire to California; I undoubtedly had known about that but it had disappeared from my memory.
What disappointed me
My biggest disappointment was that Lowenstein spends relatively little time on taxes. If you want detail on how the federal taxes worked or the politics of enacting them, you’ll have to look elsewhere. Given the importance of borrowing on both sides to the war’s financing, I can’t fault his emphasis. I just had hoped for more.
Notwithstanding that, I enjoyed reading the book and wasn’t really disappointed.
SALT connection
States’ rights, a core southern value to this day and purported cause of the war, and the corollary antipathy to national taxation and power undercut the Confederacy’s long run viability.
This one of my signature long and boring posts. Now that more than two people appear to be reading my blog, I decided to add a summary so they can move on to something more interesting in 30 seconds or less.
The Tax Policy Center published a report last summer that used Colorado, Minnesota, and New York state tax data to analyze TCJA’s effect on charitable giving. Robert McClelland, Using State-Level Data To Understand How The Tax Cuts And Jobs Act Affected Charitable Contributions, (July 2022) (11 pages); blog post summary. It shows that TCJA did, as expected, reduce charitable giving but the state data shows that the effect is quite a bit smaller than looking at federal tax data alone. Not surprisingly but still useful.
The report showed an unusual effect for two states – the 2018 drop in Minnesota giving was twice as big as in Colorado. I was intrigued and took up the author’s challenge to explore why Minnesota givers appear (probably mistakenly) to be twice as sensitive to tax incentives as Colorado givers. After spending a bunch of time looking for answers and coming up empty, I decided to wait for another year of data. That shows that the effect reversed with Minnesota giving for 2019 increasing quite bit and Colorado giving declining below Minnesota’s new level (measured relative to AGI). I don’t know what is going on, but my best guess (and that’s all it is) is that the 2018 Minnesota data are goofed up (technical term). But I don’t know why or have a good hypothesis for it.
This post is a tedious explanation of what I did, essentially writing up my research notes, a long, tortuous ride that ends in a box canyon with blank walls.
An addendum reprises my previous rants advocating for changes to Minnesota’s tax incentives for charitable giving after TCJA. That won’t happen because of institutional factors in how the legislature makes decisions on stuff like this but I can’t stop myself.
Introduction
TCJA, the 2017 federal tax cut, dramatically reduced the number of taxpayers who qualify for income tax incentives for charitable giving. It did so by simultaneously increasing the standard deduction and cutting back on itemized deductions (mainly for SALT, home equity interest, and employee business expenses). That means many fewer taxpayers now itemize deductions (about 10% versus close to 30% previously nationally), the main way charitable giving federal tax incentives are provided.
These new itemizers experience a higher after-tax price of charitable giving as a result. For example, an itemizer in the 25% bracket could give her favorite charity $1 at an after-tax cost of 75 cents. If she becomes a nonitemizer thanks to TCJA, the price rises to the full dollar contributed. Econ 101 predicts that increasing something’s price reduces the quantity purchased (gifts given here). But TCJA’s tax cuts provided potential givers with more income to make contributions. So, that could cause more giving. As with many tax changes, economic theory does not provide an unambiguous indication of the behavioral response that will occur. Standard contradictory substitution and income effects are at play.
One would expect the substitution effect to be more powerful with big price changes coupled with modest tax cuts. But that and the magnitude are empirical questions.
So far, researchers have relied on survey or federal income tax data. However, charitable contributions by newly nonitemizers will not show up on federal returns even though many still give. You don’t report contributions if you can’t deduct them. Survey data and reporting by nonprofits are less reliable ways to track charitable giving than contributions reported on tax returns. See this AEI Report, Howard Husack, The Tax Cuts and Jobs Act and Charitable Giving by Select High-Income Households (April 2022), for an example of an analysis that relies on income tax data; it assumes (more or less) that a reported decline in deductions equals a decline in charitable giving.
James Chandler, The Effect of the TCJA on Donations to Medical Charities (2021), uses a different type of tax data, contribution reports on Form 990s. Although medical charities (his focus) are required to 990s, a fair number of others (e.g., churches) are not and more importantly the characteristics of donors must be inferred (i.e., they are not reflected in the tax data).
Robert McClelland, a researcher at the Tax Policy Center, came up with a clever way to use state tax data from Colorado, Minnesota, and New York to assess the first-year effects of TCJA on charitable giving. Using State-Level Data To Understand How The Tax Cuts And Jobs Act Affected Charitable Contributions, (July 2022) (11 pages); blog post summary. Because these states continued to allow many of those who no longer itemize federally to deduct contributions for state tax purposes, they provide state tax data on giving behavior by these new nonitemizers. This was such a clever use of Minnesota tax data that I wish I had thought of it.
He found that:
[C]ontributions fell by much less than indicated on federal forms. In Colorado, a 16 percent decline measured at the federal level was in fact a 1 percent decline when contributions on state forms are included. In Minnesota, a 33 percent decline at the federal level was actually an 18 percent decline using combined federal and state data, and in New York, a 15 percent decline at the federal level was more likely a 4 percent decline. However, given 5.6 percent growth in AGI, the decline represents an even higher reduction in the rate of giving. Regardless, residents of these states retained some tax incentive to donate even as they switch from itemizing to not itemizing on their federal forms.
If you’re interested in the effects of TCJA’s changes on charitable giving, I recommend reading McClelland’s report or his blog post. It suggests TCJA’s effects on giving may not be as dire as a growing body of research seems to suggest (Google Scholar has a fair number of papers).
Colorado and Minnesota mystery
As is evident in McClelland’s quote above, the data show a big difference in the effects in Colorado (1% drop) compared to Minnesota (18% drop). McClelland notes:
We are unsure of the reasons for the large disparity between Colorado and Minnesota. State officials may know additional information about reporting incentives in those two years.
Id. p. 8
On the surface, that suggests that Minnesotans are more sensitive to charitable giving tax incentives than Coloradans. That is, TCJA’s tax price increase caused a much bigger decline in Minnesota giving. Both by filers who remain itemizers and by newly nonitemizers. That seems odd. The difference in response is so striking that I thought I would take up McClelland’s challenge.
One year of data for two states is a small sample, so I waited until the two states posted another year of data (2019 in addition to 2018) figuring that might help clarify matters. Instead, it reversed the effect, deepening the mystery. Colorado’s 2019 reported giving dipped, while Minnesota’s increased.
The rest of this post records my efforts. The short answer is that I don’t have a good explanation. But that won’t stop me from droning on about the blind alleys I explored.
Five avenues seemed to me worth exploring:
TCJA’s differential effects
State data differences
State tax law differences
Reporting differences
Year-to-year variability or state differences in giving patterns
Differential TCJA effects on the two states
The first possibility that I looked at was whether TCJA’s itemized deduction changes affected the states differently. The big difference in itemized deduction amounts (33% drop for MN versus 16% for CO) suggested looking at that possibility. If TCJA caused a significantly higher proportion of Minnesotans to become standard deduction filers than in Colorado, that could account for some of the difference. That is so, because a higher proportion of Minnesotans would be subject to TCJA’s increased price of contributing than Coloradans. The graph shows the percentages of itemizers in Colorado and Minnesota for 2017 through 2020 using data from SOI Historic Table 2 (two more years of SOI data are available than CO and MN data).
It indicates there may be something to this. Pre-TCJA about two percentage points more resident Minnesota filers (35.5%) itemized than Colorado filers (33.6%). TCJA reversed that. In 2018, about two percentage points more resident Colorado filers (13.5%) itemized than Minnesota resident filers (11.3%). The effect persists in 2019 and 2020 (the further declines in 2020 may be pandemic effects).
As an aside, the likely explanation for that effect is that the SALT deduction cap adversely affected Minnesota filers more because of the state’s higher and more progressive taxes, which concentrate burdens on itemizers with their higher incomes. (If TCJA’s SALT cap was designed to punish high tax blue states, as I suggested here, it appears to have worked.) SALT deductions in 2017 were 6.6% of AGI in Minnesota versus on 4.4% in Colorado. Coloradans deducted one percentage point more of their AGI in mortgage interest (largely unaffected by TCJA) than Minnesotans, providing another part of the explanation.
That does mean that TCJA’s price increase for regular Joe and Jane charitable givers hit Minnesota a bit harder.
Another indicator for this effect is the extent to which the two states deviate in the income distribution of their givers. The standard deduction, as a fixed dollar amount, is an easier hurdle for very high income filers to overcome and itemize, all else equal. SOI data for 2017 – 2020 show that higher shares of Colorado itemized deductions for contributions come from high income filers. For tax year 2017 (pre-TCJA), 3.5 percentage points more of Minnesota’s itemized deductions were allowed to filers with AGIs of $100,000 or less, compared with Colorado. Post-TCJA, the difference persisted but dropped to 2.8 percentage points. By contrast, for the 4-year period, 7 percentage points more of Colorado’s itemized deductions were attributable to filers with $1 million or more in AGI than in Minnesota (41% versus 34% for the post TCJA period). The graph shows the latter data.
These effects could explain some of the 2018 difference that McClelland observes, but it has to be a small part of it and not the real explanation. If Minnesota had experienced the same drop as Colorado, it would have resulted in about 87,000 more itemizers, reducing the differences between the two states by maybe 10% to 15%. The fact that Colorado derives proportionately more contributions from higher income givers likely also accounts from some of the difference.
State data differences
Minnesota’s posted data on charitable contributions (i.e., the data used by McClelland) are incomplete because they do not include the contributions deducted as Minnesota itemized deductions. Colorado’s data, by contrast, has no similar omission. That could account for some of the difference. However, the posted Minnesota data also double count some charitable contributions. So, the combined effects could go in the wrong direction.
Undercounts. The data posted on the Minnesota Department of Revenue’s (MDOR) website show charitable contributions claimed on federal Schedule A, which are inferred from the Minnesota income tax sample. (McClelland used SOI numbers which differ because they are derived from the population of returns listing Minnesota addresses filed with the IRS. The SOI amounts differ from the MDOR amounts because of the sample and residency issues. I regard SOI’s numbers as likely more accurate than MDOR’s.) The Minnesota data undercount charitable contributions because they do not include the Minnesota itemized deduction for charitable contributions for filers who take the federal standard deduction but itemize for Minnesota purposes.
Minnesota’s standard deductions amounts equal the federal amounts, but its itemization rules differ. State income taxes are not deductible, while employee business expenses are deductible. Some taxpayers will claim the federal standard deduction but itemize for Minnesota purposes, That occurs when employee business expenses plus their other itemized deductions, other than state income taxes, exceeds the standard deduction. That results in them claiming their charitable contributions as Minnesota itemized deductions, rather than deducting them under the nonitemizer rules. MDOR’s posted data do not report these amounts. I think these amounts are small because for many filers disallowing the income tax deduction will offset allowing employee business expenses.
Overcounts. Conversely, some federal itemizers claim the Minnesota standard deduction and the nonitemizer deduction for charitable contributions. The typical example is a filer whose state income tax deduction is necessary to put them over the standard deduction amount. Thus, for those filers the Minnesota data on the web (either SOI or MDOR) double counts their deductions (the contributions are reported on both Schedule A and as Minnesota nonitemizer deductions). This effect is illustrated by data for the top income strata which show over 106% of returns claimed itemized and non-itemizer charitable contribution deductions, a legal impossibility.
Since I no longer have access to the HITS microsimulation model and income tax sample, I can’t calculate these amounts and I don’t trust my intuition to say even what the sign of the combined change is if these errors were corrected. Thus, this is a blind alley. If I were forced to guess, I would predict the overcounts are more than the undercounts. But I would have little confidence in that guess.
State tax law differences
Another possibility is that some sort of state tax law effect may be responsible. Both states have slightly different charitable giving incentives and differ in their rate structures (flat v. graduated) and bases. There are more similarities than differences, though.
The Colorado and Minnesota legislatures enacted somewhat similar responses to TCJA. Both states had used federal taxable income (FTI) as the starting point for their taxes, thereby incorporating the federal itemized deduction rules, and allowed nonitemizers to deduct charitable contributions. Both responded to TCJA by adopting its higher standard deduction and maintaining their nonitemizer deduction, which now applies to many more filers. Colorado did so under its rolling conformity law; Minnesota by linking to federal AGI but allowing a Minnesota standard deduction equal to TCJA’s and a itemized deduction for contributions following the federal rules.
There are some key differences in the two states’ taxes that may be relevant to charitable contribution behavior:
Rates. Colorado has a flat rate (4.63% in 2017 and 2018), while Minnesota has a graduated rate structure with higher rates (5.35%, 7.05%, 7.85%, and 9.85%). Most of the new non-itemizers after TCJA would be subject to 7.05% and 7.85% Minnesota rates.
Non-itemizer charitable deductions. Both states allow non-itemizers to deduct charitable contributions under similar rules. Contributions over $500 are deductible in computing each state’s taxable income. Colorado allows full deductibility, while Minnesota allows one-half of contributions to be deducted. The incentive effect is determined by multiplying the allowable deduction by applicable marginal tax rates. So, Colorado’s full deductibility offsets its lower tax rate. Of course, what we’re trying to explain is the difference in giving responses in the two states by itemizers that TCJA caused to become standard deduction filers. Thus, the relevant question is whether the combined federal and state changes under TCJA and state conformity for that group had a materially different effect on the after-tax price of giving in the two states. The chart shows the changes.
The graph shows how much TCJA increased the after-tax price of Minnesota and Colorado charitable contribution (expressed in cents per dollar contributed) for a filer who was an itemizer in 2017 and a standard deduction filer in 2018 by levels of AGI. It shows substantial increases in the cost of giving – by about 25 cents/dollar in the sweet spot for these types of givers ($90k to $160k). An increase of that size could be expected to reduce giving, obviously depending upon the elasticity.
But the relevant issue is whether Colorado law did something to mitigate this difference that Minnesota’s law did not. The graph shows that the differences for the two states (the area between the two lines) are small and are unlikely to explain the differences in response in the two states, given any reasonable assumption about elasticity. (The obvious question to me: why was the 2018 decline in Colorado giving so small – only 1% – with the large tax price increase? Standard literature on the elasticity, such as Bakija and Heim, would suggest a larger response. It’s also possible, of course, that 2018 was a particularly good year for charitable giving in Colorado with some very large gifts – for the five tax years I looked at, it had the highest concentration of gifts by resident filers with AGIs of $1 million or more by over 2 percentage points.)
Conservation easement credit. Colorado allows a tax credit for donations of conservation easements. It provides a 50% credit (75% on the first $100,000 of contributed value) – in addition to the deduction under the federal and Colorado state taxes. It has many more complicated rules; it can be partially refundable and can be transferred/sold, for example. This tax expenditure evaluation provides more detail. Minnesota has no comparable incentive. The Colorado credit should stimulate more contributions of conservation easements. This should also result in higher Colorado reported charitable contributions (likely itemized deductions in most cases), since claiming the credit does not appear to disqualify use of the deductions. For 2018 and 2019, Colorado SOI reports $16 million and $14 million in credits claimed respectively, implying about $30 million in value contributed per year. That’s a paltry amount compared to the over $4.6 billion in charitable contributions reported on tax returns by Colorado residents. It’s implausible that it explains the difference between the two states.
Conclusion. It is safe to conclude that state tax law differences do not explain the big difference the 2018 data show. They could explain a very small part of the Colorado advantage, at best.
Reporting differences
This is potential cause that McClelland suggested exploring. 2018 was the first year affected by TCJA’s changes. So, it could have disrupted reporting of contributions on state returns.
Both states responded somewhat similarly to TCJA’s enactment. But the timing of those responses was quite different, and that may have differentially impacted 2018 return filing and taxpayers’ understanding of the applicable rules in the two states. There was a lot more confusion and uncertainty in Minnesota than in Colorado. But it is not obvious why that should lead to different charitable contribution reporting.
Colorado. Colorado is a rolling conformity state. CO Rev Stat § 39-22-103 (5.3) (2018), That means when Congress enacts changes in the federal tax law that affect FTI, those changes automatically apply for Colorado state income tax purposes. Decoupling or failing to follow the federal changes would require the Colorado legislature to enact a law. As a result, when Congress passed TCJA in late December 2017, Colorado taxpayers could be almost certain that its rules would apply to their charitable contributions made in 2018 for both federal and Colorado state income tax purposes. Thus, if TCJA’s standard and itemized deduction changes made them nonitemizers, they would know that they no longer qualified for the federal deduction but would qualify for the Colorado nonitemizer deduction.
Colorado taxpayers, I presume, decided whether or not to make contributions accordingly. They had all year to figure it out, subject to the possibility that the Colorado legislature would make changes. The Colorado forms for 2018 reflected that reality.
Minnesota. If Colorado provided certainty to its filers, Minnesota did the opposite. How the state would respond to the TCJA was still unclear when 2018 filing began.
Minnesota is a fixed conformity state. It links the starting point for its tax (FTI in 2017) to the version of federal law at a fixed date. Minn. Stat. § 290.01, subd. 31. (This is required under a Minnesota Supreme Court decision, which held that a 1960s era rolling conformity statute unconstitutionally delegated legislative power to Congress. Wallace v. Commissioner of Taxation, 184 N.W. 2d 588 (1971).) As a result, how the state would respond to TCJA required legislative action. Minnesota had divided government in 2018 (Democratic governor and Republican legislature), which was unable to agree on a conformity bill during the 2018 legislative session. The legislature did not enact conformity to TCJA until May 2019 after tax year 2018 filing was mostly over.
To make matters worse, Minnesota law required that the election to use itemized deductions or the standard deduction must be made consistently for federal and Minnesota purposes. Minn. Stat. § 290.01, subd. 19 (2018). Because the Minnesota tax was linked to the old, pre-TCJA federal standard deduction, this created the prospect that Minnesota taxpayers would need to forgo claiming Minnesota itemized deductions to use TJCA’s standard deduction for federal purposes. For some taxpayers this would have meant paying higher Minnesota taxes to qualify for lower federal taxes. However, the Minnesota Department of Revenue (MDOR) issued a taxpayer friendly revenue notice in September 2018 allowing inconsistent federal and Minnesota standard deduction elections, even though this was incompatible with the text of the law. Revenue Notice 18-01 (Sept. 4, 2018).
Parsing the language of the revenue notice (last paragraph, p. 2) very carefully would suggest that the federal standard deduction election would determine whether a taxpayer qualified to claim the nonitemizer subtraction. That incongruous result (it would have allowed some taxpayers to double deduct some of their contributions – if they used the federal standard deduction and itemized for Minnesota) was not intended, as later revealed by the instructions (p. 12).
The revenue notice eliminated the uncertainty on the issue of consistent standard deduction elections but not the complexity and confusion as to overall status of TCJA’s changes for Minnesota purposes.
Most insiders expected that the 2019 legislature would enact conformity, much of which would be retroactive to tax year 2018 both to provide tax cuts and to mitigate the ongoing complexity under multiyear provisions like cost recovery allowances. The typical taxpayer, however, would not have had a clue about any of that, of course. The 2019 legislature ultimately did precisely that but not until May 2019.
By necessity, the 2018 filing season proceeded on the assumption that Minnesota was tied to pre-TCJA federal law. Forms were constructed and filers prepared their Minnesota returns using their income and deductions under prior federal law. Despite state law linking to FTI, the combination of TCJA and the failure to pass a conformity bill compelled MDOR to construct the forms starting with AGI and providing Minnesota itemized deductions based on pre-TCJA law. See 2018 M1 instructions. Thus, a filer whose itemized deduction were higher than the pre-TCJA standard deduction but lower than the post-TCJA standard deduction would file claiming itemize deductions, including if applicable those for charitable contributions.
The 2019 legislature passed a conformity bill in May that was retroactive to tax year 2018 with regard to the treatment of TCJA’s charitable contribution changes (higher standard deduction, now directly specified by Minnesota law; higher AGI limits, etc.). This did not require most filers to amend their returns. Rather, MDOR recalculated their tax (assuming the filed forms included the necessary information) allowing the higher standard deduction and converting itemized deductions for charitable contributions to the non-itemizer deduction if applicable (i.e., greater than $500).
So, did this complexity and the potential confusion resulting from temporary nonconformity cause Minnesota filers to underreport their actual charitable contributions on their Minnesota returns (or worse to change their contributing behavior)? As a matter of logic, it should not have. There were two basic possibilities, neither of which would have resulted in less favorable treatment of charitable contributions than provided in Colorado:
Legislature does nothing. MDOR’s revenue notice made it clear (as of fall 2018) that this would allow a state itemized deduction under pre-TCJA rules for state law purposes with the old lower standard deduction. This would allow full deductibility for itemizers.
Legislature adopts TCJA’s charitable contribution rules. This is what happened, of course, and variations on it had been proposed in the 2018 legislative session but were not enacted. As noted above, it provides roughly similar state tax benefits to those in Colorado because of the Minnesota subtraction for nonitemizers.
Thus, either of the two likely options would have resulted in about the same tax treatment as in Colorado. No one, for example, proposed or (to my knowledge) even publicly talked about the legislature repealing or curtailing the nonitemizer deduction. In fact, lobbyists for charities had instead proposed expanding it to full deductibility.
But it is certainly possible that the confusion around what the legislature would do and a general failure to recognize that the Minnesota nonitemizer deduction remained in place (or even existed) may have affected giving more in Minnesota than the certainty that prevailed in Colorado. Confusion about how the state would respond was certainly greater in Minnesota and could have been responsible. For example, some/many taxpayers may have simply assumed, based on media coverage of the federal effects of TCJA, that their relatively modest contributions were totally nondeductible and failed to track or report them. (It’s unclear why such an effect would be different in the two states, unless the confusion about a state response in Minnesota factored in.) That could be the explanation and is my best guess but is pure speculation. (FWIW, a MDOR staffer I contacted made a similar conjecture unprompted by me.)
Could MDOR’s re-computation of itemized and standard deductions (i.e., the conversion of reported itemized deductions to nonitemizer deductions) have been responsible? That is not a credible possibility to me. I trust MDOR’s competence and if a mistake like that had been made, it surely would have come to light.
In short, Minnesota’s response to TCJA was much more muddled and confusing than Colorado’s. However, there was never any public discussion or prospect for disadvantaging charitable giving in Minnesota (whatever the response the legislature landed on) than what ultimately occurred, and which is about the same as in Colorado. Thus, it should not have affected giving decisions differentially.
Yearly variations
My last possibility was to explore year-to-year variations as well as differences in giving patterns between the two states. Giving levels vary somewhat from year to year. And it is widely recognized that giving patterns vary from state to state. For example, because of Utah’s strong Mormon ethos it typically has the highest charitable giving relative to income of any state (CNN map) and is likely less responsive to the level of tax incentives.
So, it would be useful to compare giving patterns in Colorado and Minnesota before and after TCJA. Again, what we’re trying to measure is differences in tax responsiveness, not just basic charitable giving tendencies. Unfortunately, the Colorado DOR website has only 5 years of data. It revamped its data starting in 2015 and cautions that earlier data (only 2013 is available on its website) may not be comparable.
The first graph below shows giving by residents as a percentage of AGI from 2015 to 2019 for the two states. The pre-TCJA data show some modest variability (more in Minnesota than Colorado) with the two states showing similar patterns. In two years Colorado is slightly higher and Minnesota in one. The post-TCJA data are confounding with bigger state differences and oscillations between the two years. (Possible inference is that TCJA unsettled charitable giving patterns, at least temporarily.) It’s hard to conclude anything from this, since it implies a bigger response by Minnesotans in the first year and then by Coloradans in the second year.
Decomposing the 2019 effects, giving by itemizers in both states dropped (CO dropped 6%; MN 4%). The difference was that giving by Minnesota nonitemizers increased dramatically (77%), while giving by nonitemizers in Colorado dropped slightly (4%). The large Minnesota jump obviously raises questions about its 2018 data. Both states experienced small declines in the percentage of taxpayers who itemize, although Minnesota’s was larger. The bigger drop could explain some of Minnesota’s increase in nonitemizer contributions but nothing like what occurred. I’m mystified.
Giving reported on Minnesota tax returns has been fairly stable over the last ten years, putting aside TCJA’s impact. The graph below shows 2010 to 2019 data (again as a percentage of AGI). Simple year-to-year variation seems unlikely to provide much explanatory power to understand the two state’s deviations post-TCJA.
Take away
The differences between the two states remain a mystery. A couple factors (differential changes in giving patterns and Colorado’s concentration of more of its giving in the top income strata) could explain part of the big 2018 difference. But adding a year of data further confused things with Minnesota making up all the difference and more. It suggests to me that the responses in the two states were similar and the big dip in 2018 Minnesota giving was an anomaly – either in reporting (most likely) or actual giving. It may be that the failure to enact a 2018 conformity bill with attendant publicity about that and TCJA’s effects sufficiently confused a fair number of filers so they failed to claim the nonitemizer deduction. Illogical, but possible and pure conjecture.
Addendum
Tangential points that I cannot resist making
Reading McClelland piece, spending more time reading other research on TCJA’s effects on charitable giving, and mucking around with the Colorado and Minnesota charitable contribution data reinforced in my mind the case for reforming Minnesota charitable contribution tax incentives. I am being repetitive since I have made this case before (e.g., here, here, and here) but I couldn’t resist.
There has always been a good case for reforming the Minnesota and federal charitable giving tax incentives – to increase their equity and effectiveness. TCJA strengthened that case because it:
Adversely affected giving. This is the obvious emerging consensus from the research. McClelland’s piece shows that it is smaller than simply looking at the federal data would suggest. But it’s still meaningful and a concern for those who believe it is appropriate to encourage charitable giving with tax incentives.
Dramatically concentrated tax incentives in the top income strata with its increase in the standard deduction and cap on the SALT deduction. The chart below shows the decline in Minnesota returns claiming the itemized deduction for contributions by income strata, comparing tax years 2017 (pre-TCJA) and 2019.
The change is striking. There are big drops across the aboard, but especially below $500k. Yes, Minnesota’s nonitemizer deduction continues to apply and is claimed much more heavily by the filers in strata below $250k. But they get only half the benefit of itemizers.
My favored fix. I believe the way to do that is what I suggested in this blog post for a revenue neutral reform option:
Replace both deductions. The standard deduction now functions more as a zero-bracket amount (nontax threshold income amount) rather than a proxy for average itemized deductions. Given that, I see little rationale for bifurcating the level of incentive based on whether you use the standard deduction or not. The disallowance of the first $500 in the non-itemizer deduction was intended to represent (I believe) a rough measure of the portion of the standard deduction for charitable contributions. That rationale makes little sense with the much more generous standard deduction; having differing incentives is confusing without a policy rationale to justify the complexity.
Limit the incentive to giving over an income threshold (e.g., 2% of AGI or something similar) and a dollar minimum (e.g., $500), so more of the incentive applies at the margin. We don’t need to reward people for what most/many would give without an incentive, and this helps deter people from claiming small amounts they didn’t give because they know they won’t be audited on small amounts.
Use a credit so the same percentage incentive applies regardless of the tax rate and income level. Yes, high-income people may be more responsive to incentives, but appearances and equity considerations are more important.
Limit the credit to cash contributions, so the state does not amplify the double federal tax benefits for giving away untaxed appreciation. A big side benefit is to keep MDOR out of auditing and contesting valuations of hard to value property like real estate, art, and similar.
Disqualify federal itemizers from using the state credit. Given TCJA’s concentration of federal incentives, I would allocate a richer state incentive to those who lost their federal incentive. The way to do that in a revenue neutral proposal is to cut out federal itemizers. This should allow a revenue neutral credit rate of more than 15% to those who no longer qualify for the federal incentives.
Impose a maximum credit as a disincentive for big givers to forgo the federal deduction to qualify for a more generous Minnesota incentive. This would be a problem if the credit rate goes to 25% or more, for example. The savings from the cap will allow a higher credit rate under the revenue neutral constraint, a more powerful incentive for qualifying contributions.
My original blog post has more detail on my thinking.
Noncash contributions. One of my hobby horses is to get rid of the deduction for untaxed appreciation. Why should owners get a double tax benefit for giving appreciated assets away (no tax on the gain and its gift reduces tax on their other income), when cold hard cash is almost always more useful to charities? Other than for publicly traded securities, valuation challenges and abuses abound too.
Moreover, this benefit is concentrated at the top, raising equity concerns. The chart shows the percentages of noncash contributions by AGI class for Minnesota in 2019. About 75% of contributions by itemizers with incomes below $500k were made in cash. For those with incomes of $500k or more, about half of their contributions were. Put another way, the noncash proportion of the top group’s contributions are twice that of the rest of the filers. You can be sure that most of those contributions include untaxed appreciation that gets the double benefit.
SOI data (with more detail for higher income filers) shows the benefits are even more concentrated at the very top. Figure D in the SOI Report on noncash contributions for tax year 2017, shows that 39% of the noncash donations were made by returns with $10 million or more in income. Foundations and large charitable organizations are the largest beneficiaries of these donations. Id. (p, 5). This is not where Minnesota needs to or should be putting its tax incentives for donations, in my opinion. Federal largesse is sufficient.
Prospects for reform dim
The prospects for enacting a major change along these lines is slim to none. There is little legislative interest (I suggested it several times to legislators when I was working). If there were interest, lobbying would quickly snuff it out. The charity lobby generally opposes changes that take away benefits their constituent members now enjoy. They are happy to lobby for more benefits (e.g., expanding the nonitemizer deduction to 100%), but are unwilling to accept cutting back on existing benefits for a better designed incentive. At least, that was the pattern when I worked for legislature and legislators are loath to cross them.
This is just standard trade association behavior. Governing bodies and representative of trade associations have strong incentives to oppose proposals that create losers among any of their significant constituent member groups (e.g., arts or private higher educational groups that receive many large noncash gifts in this case). Policy collides with interest group politics and dynamics. This is also a big deal in trying to fix business taxation in ways that create winners and losers. Umbrella business trade associations hate mediating conflicts among their members over proposals (no matter how meritorious); it’s easier to just oppose them.
Last Thursday, the governor signed federal conformity changes into law (Laws 2023, chapter 1), less than two weeks into the legislative session, lightning speed by legislative standards. I can remember only two similar instances of the legislature acting almost as quickly on a conformity bill in the last 30+ years. In both cases the laws were signed on the last days of January (Laws 2005, chapter 1 on 1/27/05 and Laws 2009, chapter 12 on 1/29/09) and involved relatively inconsequential changes responding to end-of-the-year federal enactments. The 2005 law allowed an extended period to make charitable contributions for Indonesian tsunami relief.
Update and correction: Cynthia Templin, House Fiscal analyst, points out how defective my memory is. Early conformity bills passed in January of 2015, 2017, and 2022. I should actually look this stuff up. Of course, the 2022 legislation (after my retirement) was selective leaving important stuff for later. But things were not really as bad as I recalled.
The need for 2023 conformity changes before the start of the tax filing season was largely due to the previous legislature’s failure to act, of course. Congress did enact some modest changes after the legislature adjourned. Often in the past, it was Congress enacting “extenders” legislation retroactive for the current year. This time it is was self-inflicted by the 2022 political impasse.
The bill is scored as a tax cut of about $100 million for FY 2024 (mostly one-time, though), which I’m sure made it easier to pass and much more consequential than the two examples from the aughts. The Strib billed it as a COVID tax cut (print edition headline: “Walz signs COVID aid tax break”). But aside from the direct effect on state revenues (i.e., the explicit tax cut) it also is an implicit tax cut because of the vast time savings involved (time = money).
It will save tax preparers, taxpayers, and DOR staff thousands of extra hours of wasted time and effort – preparing returns under an out-of-conformity law and redoing them under a revised law that adopts the federal changes. I don’t think thousands is an overstatement when you consider the number of tax filers and how even those unaffected by the federal changes still must click through software questions or read instructions for those who still prepare their returns “by hand.” Even modest per hour assumptions of the value of the wasted time yield millions of dollars of savings.
All those hours wasted doing needless tax preparation and compliance when the legislature fails to pass a conformity bill are an implicit tax increase. It does not show up on legislative spreadsheets or revenue estimates, but it is just as real as an economic matter. That concept, however, was hard to convince legislators of – probably because it is not the sort of thing that shows up on campaign literature (explicit cuts and increases do) and is a long and complicated point to make to voters. Few legislators would attempt to do so during a campaign unless they were speaking to a group of tax preparers.
Delay or total failure has occurred so many times in recent years that I now expect it. That stimulated me to reflect on the why of past failures and whether this year could become the new normal, the real reason I’m writing this. I think the following factors are at play:
The large surplus made life relatively easy, given chapter 1 is a big tax cut. In a tight budget, legislators become unwilling to take money off the table early in the process. $100 million is chump change relative to $17 billion. And since the cut is largely one-time, few permanent decisions are being made. That unusual combination is unlikely to reoccur.
Unified party control helps. When the GOP controlled one or both houses of the legislature with a DFL governor, they would think (falsely in my opinion) that the governor was responsible for conformity (it was in his budget and the executive branch administers the tax) and, therefore, would make political concessions to get it in a final budget deal. That was rarely, if ever, true. Governors did not consider it much of a political priority as a good government responsibility. Thus, its trade value was minimal in budget negotiations. (Note that Pawlenty was governor with DFL control of one or both houses for the two other examples of early conformity passing. DFL legislators either recognized the value of conformity or the lack of trade or bargaining value, not sure which.)
The tax chairs likely are on the same conformity page. During the Lenczewski and Bakk era, this became a factor. Representative Lenczewski was a big advocate for conformity, while Senator Bakk seemingly did not consider it to be big deal. He, being a master negotiator and deal cutter, naturally assumed he could get something for agreeing to conformity in a final deal, even if he favored it. As a result, decisions tended to be delayed. Again, he probably overvalued the trade value but why throw chips away if getting the maximum deal is your default frame of reference.
A final factor that militated against passing multiple bills was tax chairs’ distaste for floor fights. Bringing tax bills up to the floor typically leads to the minority offering multiple gotcha amendments for various and sundry tax cuts (to get bad political votes on the record) and long debates for consumption by the viewers of legislative TV (who are those people and why don’t they have anything better to do?). This is an unpleasant process to go through once, much less twice. This distaste/pain looms larger if you think you probably can’t get a deal until May anyway. (As an aside, I always doubted the utility of getting two sets of the same bad votes on the record and why that would matter. But I have never been involved in campaigns.) In this case, the minorities apparently decided not to make the majority run that gauntlet twice. I have no clue why, but applaud the decision to forgo a meaningless exercise.
Is this likely to continue in future sessions? I hope so but would not put money on it. But even one-time victories are a cause for celebration.
The Bad
By contrast, the first action of the U.S. House of Representatives was to repeal the increased funding for the IRS that passed last year in the Inflation Reduction Act. House Republicans use first vote to gut IRS funding boost (Politico 1/10/23). It left in place the funding for increased taxpayer services and some of the IT improvements. (WaPo reports “a little over half [of the original $80 billion w]as targeted for enforcement.” The House GOP bill repeals 7/8th of the funding, so well beyond the enforcement money.) Because Biden is president and the Dems control the Senate, it won’t be enacted into law but is nevertheless a bad thing.
Since the big 2022 federal budget deal froze IRS funding (at the insistence of the Senate GOP), if enacted it would return the IRS to starvation funding for purposes of enforcement and system modernization. That is a recipe for more noncompliance and unfairness. One takeaway from the Joint Committee’s report (12/14/2022) on Trump’s tax returns is how under-resourced the IRS is in dealing with the complicated returns of high-income business owners (400+ PTEs to review, a fair number of which had a lot of revenue and magically identical expenses, and one auditor!).
It would increase the deficit by more than a $100 billion according to CBO, money that is owed under current tax law. It reflects a common pattern in Congress – Dems enact new spending that is supposedly paid for with revenue increases – GOP feigns concerns about deficits but proceeds to advocate for and repeal the revenues (with support from Dems) without doing anything about the spending. That is what happened to much of the revenues that funded the ACA (remember the Cadillac insurance and medical device taxes?). The fact that the new House GOP rules replaced PAYGO with CUTGO (Politico) reveals that the GOP’s concern about deficits looks the other way when reducing revenues is the proposition. Deficits apparently don’t matter if you’re cutting taxes? Weird asymmetry calculated to curry political favor from those who want government services/benefits but don’t want to pay, contrary to Milton Friedman’s classic aphorism: “To spend is to tax.”
It took 15 votes to elect a speaker. By contrast, all but one of the GOP members voted to repeal the IRS funding, and none voted against it. That is sobering (so much for the idea there are GOP moderates when it comes to taxes) and a clear message about where their priorities lie. It is easy to reflexively hate taxes but irrational. Everything (including government services) has a price that must be paid. A measure of honesty would reveal what spending they plan to reduce. Of course, they simply regard the CBO estimate as inaccurate if the past is any guide.
Expect the 118th Congress to travel a bumpy fiscal road. Let’s hope they figure out that the debt ceiling must be increased without the need for a financial meltdown lesson. It’s probably too much to expect them to remember what happened in 2011. According to the Council on Foreign Relations:
The protracted and politically acrimonious debt limit showdown in the summer of 2011 prompted Standard and Poor’s to take the unprecedented step of downgrading the U.S. credit rating from its triple-A status, and analysts fear such brinksmanship in late 2013 could bring about similar moves from other rating agencies. “Failure to raise the federal debt ceiling in a timely manner (i.e., several days prior to when the Treasury will have exhausted extraordinary measures and cash reserves) will prompt a formal review of the U.S. sovereign ratings and likely lead to a downgrade,” said Fitch Ratings, which maintains a “negative” outlook on the U.S. triple-A rating.
A 2012 study by the nonpartisan Government Accountability Office estimated that delays in raising the debt ceiling in 2011 cost taxpayers approximately $1.3 billion for FY 2011.
The stock market also was thrown into frenzy in the lead-up to and aftermath of the 2011 debt limit debate, with the Dow Jones Industrial Average plunging roughly 2,000 points from the final days of July through the first days of August. Indeed, the Dow recorded one of its worst single-day drops in history on August 8, the day after the S&P downgrade, tumbling 635 points.
I personally don’t think there is any credible case for the claims the Republican sponsors are making for the defunding (preserving the middle class from nasty IRS audits or some such). For what passes for supposedly thoughtful case for the defunding see here: National Review (Nate Hochman) and the counter from the left, New York magazine (Jon Chait). Attributing assertions from a GOP press release to the Tax Foundation is pretty low stuff, especially for a reputable publication like the National Review (Bill Buckley must be turning over in his grave). The Tax Foundation has a conservative tilt but (in my experience) does not make stuff up; they just make sure the stuff they put out skews right. You can trust their numbers but need to be careful about what’s missing or the spin they put on it – typical of most of similar beltway outfits, whether on the left or right.
The Ugly
According to Fox News, Kevin McCarthy has promised a floor vote on replacing the income, corporate, and estate taxes with the Fair Tax, which abolishes the IRS (states would collect the tax). This was apparently part of the deal to get him elected speaker and will obviously be purely symbolic.
The Fair Tax, a national retail sales tax, has long been a favorite among very conservative Republicans nationally and at the state level (versions have been introduced in Minnesota). But it’s largely a collection of talking points and not a practical proposal.
The U.S. does need a broad-based consumption tax to supplement (not replace) existing taxes. Every other major developed nation has one and none of them spend as much on defense as the US. That is the only way we will be able to continue funding our current level of government services. Since the turn of the century when the budget was last balanced, the deficit spending – due to the combination of tax cuts, two wars, and the baby boom tapping into social insurance – is simply not sustainable, even ignoring COVID relief spending. Cutting spending isn’t going to do it under any realistic political scenario (see this Committee for a Responsible Federal Budget piece on spending cuts; for example, 85% of discretionary spending would be cut if social security, Medicare, veterans, and the military are off limits; just imagine what the health care world would look like without Medicaid funding).
The consensus across the spectrum of experts is that it should be a VAT, rather than a retail sales tax with all its problems of enforcement and administration. The rest of the world abandoned retail sales taxes decades ago as suboptimal. For a full bore treatment of the flaws in the Fair Tax you can read this old Tax Notes article by Bruce Bartlett, Why the Fair Tax Won’t Work (available on SSRN). Bartlett is a former deputy assistant Treasury secretary for economic policy during the GHW Bush administration and an engaging and accessible writer.
If one wants to stay optimistic, this could be a baby step forward in the conversation about the need for a national consumption tax. Obviously, it won’t be with the focus instead on abolishing the IRS, its artificially low tax inclusive rate, and other silliness.
The whole idea of turning tax collection over to the states is the height of foolishness. Do we want to rely on likes of Mississippi and Nevada, to take two examples, to collect federal taxes when inattention or outright corruption can curry favor with local voters and businesses? A sure recipe for undermining revenues and national unity. The founders discovered a similar problem with the Articles of Confederation, after all. The power to impose taxes (the prime reason for the Constitution) necessarily involves the ability to collect them, rather than relying on the good graces of semi-autonomous and occasionally hostile state governments (see, e.g., Texas when a Democrat is in the White House).
My sympathies go out to the nonpartisan Congressional staffers who will spend hours working to provide the symbol, complete with drafts, revenue estimates, summaries, explanations, etc. They will also likely be criticized and/or ordered to fix flaws that are revealed, as they inevitably will be by expert commentary and media coverage. If the underlying concept is unworkable – it is – fixing it technically is not possible. Explaining it accurately without implicit disparagement is not easy.
Both St. Paul and Minneapolis raised their levies for taxes payable in 2023 by quite a bit, as have Ramsey and Hennepin counties. St. Paul’s increase is magnified by the city shifting street and other assessments to its property tax to respond to a lawsuit invalidating frontage assessments. The combined effect is a 15% city levy increase. Disproportionately large increases in home market values add to their tax increases since property taxes spread fixed dollar levies over the tax base. The effects appear to be largest in neighborhoods with lower value homes, according to the article. So, the increases will affect lower income homeowners most heavily.
The article does not mention it, but the structure of the state homestead exclusion, which drops as values rise, contributes to the increases for lower-value homes with value increases. This is a side effect of the legislature’s denial of the exclusion to higher value homes.
The story provides the standard fare, based on interviews of homeowners with big increases (55%, 28%, and 19% are three examples cited), as to the adverse effects on their personal budgets. The third graph of the story quotes one homeowner:
“You are squeezing us out. Why don’t you buy us out, us older folks?” said Stickney, a runner for a title and escrow company. “It’s just impossible.”
This is a scenario that periodically plays out. I cannot remember how many similar stories that I have seen over the years. A lot. So, a story like this is not something I would ordinarily pay much attention to, but in this case three of its paragraphs highlight a systematic problem with how state homeowner property tax relief is delivered and thus perceived.
These are the first two paragraphs of the story:
St. Paul homeowner Roxanne Stickney will spend 10% of her take-home pay on her property tax bill next year.
The taxes on her two-bedroom East Side home will jump more than 55% in a year’s time to more than $3,000. The single mom’s frustration spilled out as she, along with dozens of other demoralized homeowners, addressed the City Council last week.
Take-home pay is not a complete measure of income. But Ms. Stickney must be paying well over 7% or 8% of her income in property tax, well over her state income tax rate.
A large portion of the story is spent interviewing local and state officials, a fair number of whom blame the problem on the state’s failure to increase aid to local governments, which help to hold down property taxes. The third paragraph (the one caused me to write this post) is buried near the end of the story, when it discusses potential state property tax relief programs:
Homeowners who see property tax increases of more than 12% can tap into a state property tax refund program. There’s also a state program that allows older homeowners earning less than $60,000 a year to defer tax payments.
I had two reactions to that paragraph, one mundane but revealing of a second more systematic problem with the political economy of “circuit breaker” style property tax relief. The first was that it reflected inattentive or incomplete journalism that illustrated the effective invisibility of the income adjusted property tax relief provided though the state Homestead Credit Refund or HCR.
Incomplete reporting
I don’t want to be too harsh. Tax issues are complicated and most journalists cover them only sporadically. Reporters typically are liberal-arts-educated generalists with little finance or economics training, putting the nuances of tax outside their wheelhouses. But the story has an important omission in the third paragraph I quoted above. It ignores the state’s main property tax relief program.
The paragraph identifies two state property tax relief programs that could help the homeowners covered by story – (1) special (“targeting”) refunds of up to $1,000 for those with property tax increases of more than 12% and $100; and (2) the deferral program for seniors who have owned their homes for more than 15 years and have incomes below $60,000.
This is accurate, as far as it goes, but is incomplete. These two programs are minor, at best. The special refund or targeting will pay an estimated $7.4 million in refunds for FY2023, based on the November MMB forecast (p. 9). That compares with more than $5 in billion property taxes paid by homes. In other words, a trivial amount. Yes, it is explicitly directed at the crux of the story, large property tax increases on homes, so it will help the homeowners with the increases for a year or two. The second program, senior deferral, has struggled to attract enrollees. In 2020 it was reported to have 341 enrollees. An even more minor program.
By contrast, the state has a very generous income adjusted, property tax relief program for homeowners, the state Homestead Credit Refund or HCR, which the story does not mention. This program is estimated to deliver $616.7 million in state refunds to homeowners for FY 2023 under the November forecast. It provides relief when property taxes exceed specified percentages of household income (the highest threshold is 2.5%) and income is below about $125,000. It often pays half of the tax (even more for those with incomes below $60,000) up to a maximum of more than $1,500.
Applying this to the very sympathetic case in the first two graphs of the STRIB story, Ms. Stickey is very likely to have this program provide a refund of 50% or more of her property tax, considerably mitigating the impact of the increase. If she was getting a state refund for half or more of her property taxes, the lower numbers involved make for a less compelling a story. (Algebraically, the percentage increase does not change, but the dollar amount is more modest.) Unlike targeting, the HCR’s relief applies year after year. The failure to include this in discussing state relief programs is an unfortunate oversight, an error of omission. Especially when two minor programs are referenced. Targeting will likely provide additional temporary relief for Ms. Stickley further mitigating the short run effects of the increase.
Interestingly, when I looked at the article online. The Internet link included in the story was to a DOR page that described both the special refund or targeting credit and the regular HCR. So, if whoever generated the link had read the detail, they would have discovered the more generous and widely applicable program. I don’t want to be too critical given the time demands on reporters and decreasing numbers of them with the hard times the newspaper business has fallen on.
Invisibility of the HCR
More importantly, the story illustrates a more systematic problem with the HCR program. It too often is overlooked or forgotten in the public conversation about homeowner property taxes.
The HCR is a circuit breaker style program; as property tax rises as a percentage of income, the circuit breaker kicks in and provide state relief. Hence, the description as a circuit breaker. The income thresholds that trigger relief range from 1% at the lowest income levels to 2.5% at the highest eligible incomes. The refund percentages (i.e., how much the state refund effectively pays above the threshold percentage of income) ranges from 95% (!!!) at the lowest income level to 50% for those with the highest eligible incomes (about $130,000 for 2023). The maximum credit is over $1,500. The maximum starts to phase out above $100,000 of income.
Describing its parameters make it obvious how very generous the program is for modest income homeowners. If the state’s goal is to provide relief to average income homeowners who have a difficult time affording their property taxes, it is a cost-effective way to do that. It only provides relief to homeowners (e.g., not owners of other property types) and only to those whose property taxes are high relative to their incomes. Providing state aid to local governments (extensively covered in the story) is a very expensive and untargeted way to provide relief to homeowners.
The political economy problem with the HCR is its relative invisibility. Hence, the story’s failure to discuss its effects (I assume anyway). I think that stems from a confluence of factors:
It’s disconnected from the actual property tax bill. Because it is based in part on income, homeowners must pay their property taxes and separately apply to the state for a refund. Providing it directly on property tax bills would require either making property tax bills private or disclosing homeowners’ incomes to the public. In many cases, application will be done by their tax preparer as part of filing income taxes or by individuals using income tax preparation software. As a result, many individuals may not perceived it as reduced property taxes but just some state refund, perhaps of income tax.
Many eligible homeowners likely do not claim their refunds. A recent DOR revenue estimate asserts 425,000 eligible individuals (that includes renters eligible for the renters property tax refund) do not file. I’m not sure how that estimate was done or how accurate it is, but it follows conventional wisdom for circuit breaker programs generally. (As an aside, if nonparticipation is really that high, it is borderline scandalous. It dramatically undercuts the effectiveness and equity of the program.) The circuit breaker/HCR structure is complicated, making it hard for people to know if they qualify. A typical homeowner may check to see if she qualifies in one year and if she doesn’t, then assume that will continue in future years. If her income drops, property tax increases, or both, she may become eligible but be unaware. Tax preparers may not check. Most taxpayers who do their own income tax use tax preparation software. Some software does not include the HCR and if it does, users may simply opt not to go through the necessary routine (questions) to see if they qualify because they did not in a prior year.
It is a PR and political orphan. There is no natural interest group that publicizes the availability and parameters of the HCR. This is what the STRIB story illustrates in spades. No one, other than homeowners themselves, has a vested interest in publicizing or reminding the public about the HCR. By contrast, state aid to local governments has a legion of lobbyists and local officials banging the drum for aid program funding in the legislature and public conversations to justify their legislative asks for more aid or the lack of it to justify why they increased their levies. Reporters who heavily rely on information from public meetings, legislative discussions, and interviewing elected officials pick up on this. By contrast, nobody publicizes the HCR. As a result, it fades from view and public consciousness.
It’s worth noting here, repeating points I made in my post on city sales taxes, that property tax relief or reduction is not a principal purpose for state aid to cities, counties, and schools. It is a nice side effect, but the real purpose of those aid programs lies elsewhere. Their primary purposes differ somewhat for categorical aid (e.g., transportation aid for schools) and block grant aid (e.g., LGA). But in general, they seek to ensure an adequate level of service across the state (e.g., a quality education. social services, etc.) without regard to tax base and/or to adjust for the effects of spillover costs and benefits resulting from local government service delivery and taxation. But local governments and their lobbyists for obvious reasons tend to play up the property tax relief effects of state aid, rather than focusing on their primary purposes which are less politically appealing. Both Democrats and especially Republicans like tax cuts. So, no surprise proponents of state aid increases pitch them as property tax cuts. But state aid to local governments is an expensive and a very cost ineffective way to deliver property tax relief to homeowners. The HCR is more targeted and effective, as well as cheaper.
What can be done?
Since one of HCR’s fundamental problems is a lack of a natural mouthpiece or megaphone publicizing its benefits, one solution is for the state to take responsibility or to hire others to do so. That could be through advertising (beyond PSAs run when no one is watching), outreach to tax preparers, providing online tools on DOR’s website to calculate eligibility and estimated benefits, and similar. The legislature would need to appropriate money to do that and provide some direction as to how to do so. However, it is not something that government entities are typically very good at doing.
Another possibility would be to simplify HCR’s parameters to make program eligibility and benefits easier to understand. That could help homeowners more easily intuit its benefits without going through complicated calculations. A favorite idea of mine is to set one threshold – e.g., 2% of income to pick an arbitrary number – that applies to all income levels. This would allow saying something like: “If you pay more than 2% of your income in property taxes and your income is lower than $130,000, you can get a refund.” Making a change like that would shift benefits under the program around a bit (full disclosure: hurting those with lower incomes). But if it results in more people benefiting because they now file, that may be a reasonable tradeoff.
In any case, greater efforts to publicize the program are needed and simplification of its parameters (perhaps sacrificing some equity and progressivity) could help.
Other HCR improvements
I can’t let the opportunity pass without listing my three pet ideas for improving the HCR. I pitched these ideas at various times to legislators when I was working and they were rebuffed or ignored, so I am under no illusion that they will be seriously considered but I still feel compelled to describe them and why I think they make sense. Their lack of political appeal will be especially true in the current environment of mega surpluses, because the first two changes are premised on the idea that the program is overly generous and could be cutback without harming its basic function.
My three ideas are:
Limit the tax that qualifies for the HCR to that attributed to a specified amount of market value, i.e., limiting the qualifying tax on very high value homes.
Redefine household income to add back depreciation deductions.
Increase the maximum refund by a material amount but only if the first two suggestions are adopted.
Short explanations of my rationale follow.
Market value limit. The HCR allows a homeowner to claim a refund based on the total tax paid on the home without regard to its value, whether it is worth $150K or $2M. The maximum limit on the refund (about $1,500) prevents this from getting out of hand. But allowing the tax on an unlimited amount of market value rewards individuals with a strong preference for consuming housing. So, one family that prefers spending a high percentage of their income on housing benefits at the expense of another that allocates more resources to other consumption. That is both unfair and market distorting.
It also helps people who have variable incomes like business owners and those working on commission; they buy homes based on their average incomes over multiple years and the HCR helps pay their property tax in years when their incomes are low. If their incomes were more stable, they would get less. I think this is a flaw; others disagree and think it is a feature.
[More explanation on the politics of this change: Individuals who purchased homes long ago in now hot real estate areas, causing their home values to rise a lot, present sympathetic political cases. Their luck in realizing outsized value increases (they won a mini lottery of sorts) is now “taxing them out of their homes” in political parlance. Legislators usually want to protect them. As an abstract policy matter, they probably don’t deserve it. Few elected officials would dare to tell them that, even indirectly by limiting their HCRs.]
I would address this by limiting the tax that qualifies for the HCR to a maximum market value amount – it could be some multiple of the state median homestead market value, the market value break point for the 1% class rate, or another amount. It should be indexed for inflation but should not vary by county or region to keep things simple, even though that favors homeowners Greater Minnesota where home values are systematically lower.
Obviously, this change would reduce refunds paid. The savings could be plowed back into the program by increasing the maximum credit (see below) or by making other enhancements. Or it could wait to a time when the state budget it tight and savings need to be found.
Redefine household income. Circuit breaker programs are based on income, so a definition of income must be devised. In a perfect world, a comprehensive measure of annualized lifetime (permanent) income would be used. This would filter out the year-to-year variability and the distortions caused by tax accounting. Of course, we’re stuck in a world where practicality dictates reality.
The HCR (and property tax refund for renters) uses household income, a very broad definition of income that includes most exempt income, such a tax-exempt bond interest, untaxed social security benefits, and similar, to determine eligibility and the refund amount. The idea is to come up with as broad a measure of a homeowner’s ability to pay property taxes as practical using tax accounting rules.
One flaw in this definition is that it fully allows owners of businesses, including real estate investors, who qualify as active under the passive loss rules to reduce their incomes with depreciation deductions. These deductions are (in common parlance) “paper losses.” Economic depreciation (i.e., the economic cost of a business’s machinery wearing out) should be allowed to reduce income but tax depreciation rules allow much faster deductions to encourage investment. Section 179 and bonus depreciation allow full deduction in the year a machine or equipment that may provide years of service is put in service. Allowing these paper losses mismeasures the ability to pay property taxes. It’s not practical to disallow only the acceleration (so true economic depreciation could be deducted), so I would disallow all depreciation as a better compromise than allowing the accelerated amount. This is, after all, a low and middle-income relief program, not an income tax.
As it stands now, I suspect that quite a few business owners (particularly of real estate) qualify for maximum HCRs on valuable homes. In my opinion, this is inconsistent with the purpose of the HCR. I do not have hard evidence for it but two anecdotes (the first of which I privately pointed out to a few legislators to no effect) provides what I think is good evidence for it.
In 2011, Governor Dayton’s budget proposed a state tax on homes with estimated market values over $1 million dollars. DOR prepared an incidence analysis of the taxes in his budget (i.e., an analysis of the economic burden of proposed taxes by income class). This analysis (Table 1, p. 5) showed that 9% of the tax on million-dollar homes would be paid by individuals in the very lowest income decile (income lower than $11,298). As the analysis notes (p. 2) that “reflects taxpayers with low incomes because they reported large business losses.” Obviously, almost 10% of the state’s most valuable homes are not owned by its lowest income residents. That anomaly occurs because we’re not measuring income very well, (DOR’s incidence database was used to do the estimate. It assumes tax depreciation is a real reduction in measuring business income and, of course, is stuck using annual rather than permanent or lifetime income, so year-to-year variability is a factor.) Much of that is likely attributable to depreciation deductions. To be fair, some of the effect may be due to the recession, since the income data used for that analysis were from calendar year 2008, extrapolated to 2013. 2008 was the first full year of the Great Recession. In any case, most of these individuals (i.e., for homesteads not second, third, or fourth homes) received the maximum HCR. One would assume that most have plenty of ability to pay the full taxes, despite either paper losses or transitory low incomes.
The ProPublica stories revealed a fair number of very wealthy individuals paying little or no federal tax because they used business losses (again, probably mostly accelerated depreciation or similar paper losses) to zero out their incomes or simply by living on borrowing against their portfolios. If they lived in Minnesota, they would get the maximum HCR on their homesteads. ProPublica’s stories, of course, revealed that some of them received federal tax benefits intended for lower income taxpayers.
As an aside, the 2022 House tax bill greatly simplified the definition of household income by adopting AGI as its income measure. I generally support simplification for a variety of reasons, but not in this case. Major simplification could be achieved by dropping some adjustments for retirement plan contributions and distributions, which involve more minor amounts but add a lot of complexity, but it is unnecessary to drop large categories of income, like untaxed social security, tax-exempt bond interest, and similar, that are easily known and simple. Those changes increase the cost of the program while decreasing its horizontal equity. Using the broadest practical measure of income become even more important if efforts are undertaken to increase participation or the maximum refund is raised.
Raise the maximum credit. My third idea is to increase the maximum HCR amount substantially, perhaps doubling or tripling it. This should only be done if both the market value limit and income definitional changes are made. Otherwise, increasing the maximums would be a bonanza for those faux low-income owners of very valuable homes. For example, wealthy owners of real estate interests (the Donald Trumps or Steve Rosses of Minnesota) would get multi-thousand-dollar refunds of their property taxes year after year. Proposals to do that were made various times during the last decade without any changes in income or qualifying tax. Fortunately, they were not enacted.
Another illustration: When the targeting refund program was reenacted in the early 1990s, it did not have a maximum refund limit. That caused at least one 5-figure refund to be paid to a homeowner with a very large tax increase. The legislature responded by imposing a $1,500 maximum refund limit in 1992 (art. 2 § 30), the first year after the sizable refund was revealed. That limit was further reduced to the current $1,000 in 1994 (art.4 § 3) and has not been adjusted for inflation. It probably should be increased after almost 30 years of inflation.
Update 1/20/2023
A recent MinnPost column on St. Paul’s proposal to increase its sales tax for street improvements provides another illustration of the disconnect regarding the effects of the HCR. The column grudgingly accepts the idea of increasing the sales tax because of the desperate state of the city’s streets. It allows that the tax is regressive but waves that off as still being slightly better than using property taxes:
Even though Minnesota exempts food and clothing, sales taxes remain regressive (though marginally less so than the property tax).
That statement may be close to accurate if you ignore the effect of the HCR. Here’s a quote from the Department of Revenue’s 2021 Tax Incidence Study that directly addresses the issue of the two taxes’ relative regressivity (its use of “PTR” and “property refunds” refers to the program that includes both the HCR and the similar program for renters):
Although residential property tax burdens (after PTR) are regressive, they are noticeably less regressive than either sales taxes or “all other taxes.” This is mostly due to the impact of property tax refunds. In their absence, the Suits index for residential property taxes would be -0.194 – much closer to that of state and local sales taxes (-0.196).
Moreover, if the city were to raise property taxes to pay more for streets and roads, homeowners who qualify for the HCR and are not receiving the maximum refund (most) would see an increase in their HCRs pay part of the tab. Put another way, the state would indirectly pay some of the cost through the HCR. For many homeowners, it would be half of the cost. The HCR functions as a sort of indirect state aid paid to homeowners, rather than local governments.
Note: I’m not advocating St. Paul finance street and road improvements with property tax increases, just pointing out the HCR’s interaction with property increases and how that reality is typically missed by thoughtful observers. I may (or not) post some of my thoughts about St. Paul’s proposal from a more general perspective. A big element of the problem, not discussed in the MinnPost column, results from inflation’s erosion of gas tax revenues. Local governments receive a share of the state’s gas tax revenues. Its failure to keep pace with inflation (i.e., the legislature’s failure to increase its fixed-cents-per-gallon rate) has caused those revenues to lag dramatically. I covered that in this post. The failure of the tax to keep up with inflation has cost local governments billions of dollars in state aid for streets, road, and highways over the last few decades. That lost aid surely has been a factor in the deferred maintenance of St. Paul streets.
Based on my preliminary scan, Congress appears to have included very few tax provisions in its lame duck $1.7 T spending deal that was released at 1:30 am today (12/20/2022 NYT story). A deal on child tax credits and business extenders (e.g., continued expensing of research and development costs) was dropped to get 10 Republican votes in the Senate to avoid a filibuster. See Senate Appropriations Committee overview for summary of the deal’s nontax provisions.
Of course, the SECURE Act 2.0 made it in. So, The Great American Retirement Fraud marches on (my earlier takes here and here). The deal (bill, section 107 on page 2085) splits the difference between the House and Senate on RMDs – increasing it to age 73 starting in 2023 and to 75 starting in 2033 (outside the budget window, so “no cost” to the budget deficit, cynically speaking). I’m conflicted as to which is worse but they’re unnecessary and will increase long run federal debt. The Minnesota update cost, which is automatic (no update bill required), will show up in the February forecast and be minor.
The deal also includes the fix to syndicated conservation easements (section 605, starting on page 2372) that limits the deduction to 2.5X modified basis from the Senate bill. The changes are prospective (contributions made after enactment), so the IRS will need to continue fighting old deals in court. That includes the admin law issues with making them listed transactions. Conservation easements – not just the syndicated deals – are rife with abuse, e.g., illustrated by The Former Guy’s contributions of various golf course easements (box p. 112), apparently a common practice. The Caspar Milquetoast limits on syndicated deals in the bill are at best a battlefield tourniquet on a wound that needs extensive reconstructive surgery.
Battles over IRS funding appear to be deferred until the GOP takes over the House. The Republicans, according to Roll Call, are considering that a victory:
Other “wins” GOP lawmakers touted include * ** flat-funding the IRS. Republicans have repeatedly lambasted the $80 billion, 10-year increase Democrats granted the tax collection agency in this year’s partisan budget reconciliation law.
My guess is that the 2023-24 Congress will enact very little in the way of tax changes. I expect battles over expiring provisions and IRS funding to be the main events. TCJA’s individual provisions do not expire until 2025, so that almost guarantees that will be put off until after the 2024 election.
Update
12/26/2022: The Joint Committee on Taxation posted its revenue estimates for the tax provisions last Thursday. They reveal the usual gaming of budget rules – virtually all the revenue to offset the tax reductions results from expanded use of the Roth model or provisions that are variants on it (new emergency savings plan). That, of course, is just an acceleration of when revenue is collected (upon contribution rather than distribution). Limiting syndicated conservation easements is one significant exception that does not just accelerate revenue.
One could argue that looser RMD rules are just a deceleration of revenue, so it’s no big deal. The changes are symmetrical. But I remain skeptical because of the flaw I see in the Roth structure. For the reasons I have made in prior posts, I think the Roth structure undercuts progressivity on a permanent income basis. It does that because, all else equal, it imposes lower tax rates on retirement savers with higher rates of return on their savings. That surely means those recipients also have more income. Given the progressive rate structure, that should also mean lower revenues.
The RMD increase from age 73 to 75 has no revenue offset because it is outside the budget window. The increase from 72 to 73 had about a $7 billion effect over the 10-year window. The increase from 73 to 75 should be just short of twice that.
Howard Gleckman at TPC (The Good, the Bad, and Ugly) sees more positives in the package than I do. Other than the conservation easement changes and expanded 401(k) auto-enrollment and coverage, I don’t see much good. Money for the savers credit would be better sunk into low end social security benefits.
As I noted before, I expect the matching contribution regime to present some serious administrative challenges for the government. I will be interested to see how they do it and how many glitches result.
The November forecast has put the stadium reserve in front page headlines (STRIB) with the projection that by fiscal year 2027 its balance will be more than double the outstanding bonds. Its gargantuan size almost guarantees the 2023-24 legislature will politically need to resolve what to do with this largely accidental account. Its big forecast balance has led legislators, per the STRIB article, to call for paying off the bonds when they can be called beginning June 2023 (projections show there will be sufficient funds in the account to do so).
The reserve is a political construct, a gift that continues giving to the Vikings
I have written about the stadium deal and reserve fund (here, here, and here). The last of those posts was written 18 months ago and argues for repealing the reserve account. Its projected balance has increased since then but the financial and legal reality that underlies the reserve has not. For anyone who wants the gruesome details of my thinking, you can read Stadium Reserve – it’s time to move on. The following is a shorter summary:
The stadium bonds are general fund appropriation bonds. Their only legal security is a general fund appropriation. Under the constitution, the bonds are not considered debt because they are not secured by a pledge of state taxes. That allowed passage of the stadium bill by a simple rather than 60% majority vote, which was correctly considered politically impossible. Payment of the bonds is a responsibility of the general fund, pure and simple. The reserve does not provide legal or financial security for the bondholders.
To offset the general fund’s cost of paying the bonds, the 2012 legislature authorized electronic pull tabs. The operative political narrative was that would provide enough new gambling tax revenues to pay the one-half billion in stadium bonds. That provided a political argument that financing the stadium would not reduce general funds for ordinary state purposes (education, human services, etc.). Minneapolis city sales tax revenues also are legally obligated to pay the bonds but that obligation was deferred until the city’s convention center bonds were paid off in 2021. So, the initial annual drain on the general fund was bigger than now.
The 2012 revenue estimate projected a bonanza of revenue from e-pull tabs, pretty much immediately – a lot more than needed for the stadium, even with the Minneapolis sales tax contribution deferred! That led to concerns by some legislators that those moneys would be used for other purposes. (The vast majority of insiders did not believe the estimate FWIW.) That estimate proved woefully wrong in the short run because it took multiple years for sales of e-pull tabs to ramp up. The data now show that they have done so.
The reserve account was set up not to pay the bonds (that was a legal no-no according to bond counsel because it would make the bonds look like general obligation bonds). MMB has, however, treated the reserve as the way the bonds are paid. That probably was done to serve former Governor Dayton’s political purposes, to cover his support for the stadium. He (and legislative supporters) wanted to say the stadium did not divert regular general fund resources; of course, it did initially and thanks to the reserve continues to do so.
This was a bipartisan deal, Democratic governor and GOP legislature. Republican and Democrats typically do not agree on how public money should be used and they certainly would not want the other party to decide if it controlled all of state government in the future. So, the bill had to make provision for how the estimated extra money – if it materialized – would be used. The deal did that by putting it into a reserve to pay for cutting lawful gambling taxes (that option expired before the revenue increase occurred) and stadium costs (the only legal option that remains). But importantly, the law’s set aside did not accurately measure “new” revenues; it sequestered any nominal increase in lawful gambling taxes off an artificially low baseline set during the Great Recession. The legal dedication (all money above a fixed dollar amount based on the February 2012 forecast) was done to make the accounting simple and easy for the state bean counters. No one was thinking about the effects a decade later when all of the cumulative growth in gambling tax revenues would be dedicated to the stadium. That’s where we are now.
Bottom line
The public share of the stadium, about $500 million, always was and is a state general fund and Minneapolis sales tax responsibility. The bonds are payable from the general fund and lawful gambling taxes have always been a general fund resource. They are in lieu of general sales taxes. The Minneapolis sales tax contributes after the convention center bonds were retired in 2021.
The dedication of tax revenues to the reserve, thus, sets aside more lawful gambling taxes than necessary to pay for the state’s share of stadium costs and related expenditures. That is obvious because the general fund is both paying the bonds and setting aside large balances in the reserve. If the law remains unchanged, the reserve will double how much taxpayers are subsidizing the Vikings and pro football. Spoiler alert: the law will be changed. The details of how that is done will determine how much extra the Vikings realize from the reserve dedication.
Changes to the reserve (e.g., as proposed by Governor Walz in 2021) likely were blocked by key senators (Bakk and Rosen) who were architects of the 2012 deal (Bakk, for the 2013 augmentation of the reserve) and were committed to the goofy reserve dedication. Both will be gone in 2023, clearing the way for commonsense changes that restore general fund resources to more traditional government uses (not pro sports owners).
Much of the reserve’s money was not generated by the stadium bill and it’s unclear why the stadium and Vikings should have a claim on them.
Those assertions go against the popular narrative that circulates in the media and halls of the capitol. There is a general perception that:
The stadium bill’s authorization of e-pull tabs created a lot of new general fund tax revenues that otherwise would not have been collected; and
Because the stadium deal caused that to happen, the stadium (i.e., Vikings since it is de facto their facility, notwithstanding its technical public ownership) has an implicit claim on or should be a beneficiary of those revenues.
First, the stadium reserve does not measure (in economic terms) the additional state general fund revenue that resulted from passage of the 2012 stadium deal. This is so for several reasons:
It captures all growth in gambling revenue, not just that from e-pull tabs, over the 2012 February forecast baseline. That baseline was during the Great Recession. Economic recovery and inflation, thus, are big contributors to the stadium reserve balance – beyond whatever effect allowing e-pull tabs had.
Taxes on purchases of e-pull tabs are not necessarily “new” money to the state. In many cases, money spent on e-pull tabs would have been spent on other taxable items (entertainment, restaurant meals or whatever). So even if the accounting were limited to e-pull tabs, it would overstate whatever new revenues the 2012 gambling expansion created. (Money that otherwise would have been spent on tribal gaming, trips to Las Vegas, illegal gambling is new state revenue. It’s not at all clear why the tribes should be expected to pay for a disproportionate cost of the stadium, To the extent e-pull tabs generated truly new state revenues, much of that likely came from tribal gaming interests. But that is another issue.) Do e-pull tabs materially increase Gross State Product? Doubtful. The reserve account dedication likely diverts a lot of revenue from other general fund purposes to the stadium, revenues the general fund would have had even if the stadium bill had not been enacted. Answering that question would require a sophisticated econometric analysis, obviously. But conventional economic wisdom suggests that neither pro sports subsidies nor a minor gambling expansion will generate a material increase in state economic activity (certainly not over and above paying for a half billion public subsidy for the stadium itself).
Because the projected shortfall in estimated gambling tax revenue became quickly, the 2013 legislature allocated millions more to the account from cigarette and corporate tax revenues. (It did this, in my opinion, to provide political cover for the questionable – short-run – financial assumptions in the original 2012 deal.) Those moneys are still trapped in the reserve.
Second, there is no reason in principle that the stadium or the Vikings should have a claim on tax revenues from lawful gambling. The tax on lawful gambling is in lieu of the sales tax, a general tax on consumption. It’s not practical to tax gambling with a sales tax (re-bet moneys get taxed multiple times), so alternatives must be devised. The fact that the expansion was part of a political deal made a decade ago does not create a moral claim on the money. It would be different if the tax fell on users or beneficiaries of the stadium. It does not. Continued diversion provides an ongoing budgetary advantage for pro sports subsidies.
Nor was it what the 2012 supporters of the deal intended if they had presciently known what would happen. Reviewing the circumstances a decade ago will explain why I’m quite sure the legislators supporting the 2012 stadium deal did not intend to allocate materially more general fund money to Vikings than the explicit dollar commitments made in the bill. This was the political context:
The prior (2011) legislative session was dominated by an acrimonious budget deadlock. The state had a $5 billion budget shortfall. The GOP legislature sought to make up all of that with budget cuts while Governor Dayton insisted on some tax increases. It was only resolved after a multiweek government shutdown and by agreeing to deficit borrowing. A Minnesota Supreme Court decision was required to validate that borrowing. So, neither side got what they wanted and prudent budget practices (don’t borrow for current operating expenses) took it in the shorts.
Matters looked a little, but not much, better in 2012 when the Vikings stadium bill was passed. Neither side was willing to cut the budget or raise general taxes to finance the stadium. That’s almost a pro sports subsidy iron political rule. But they wanted to finance a stadium and keep the Vikings in Minnesota on a bipartisan basis, albeit by the narrowest of margins. That required turning to a budget ruse (i.e., the illusion that tax revenues from expanded gambling are truly incremental and that they would materialize almost instantly). It passed on close margins and was never a sure thing. Many important legislators had conflicted feelings about it. For example, the House Speaker voted against it but obviously implicitly supported it, since he allowed it to proceed through the legislative process, something he could have easily prevented.
Moreover, how much to spend was contentious. The exact amounts were undecided until the 11th hour. I recall sitting in the Governor’s retiring room in the wee hours of the morning of the last day the legislature could pass bills waiting for Governor Dayton, key legislators, and representatives of the Wilfs to agree on the precise numbers so we could draft the final agreement. (Aside: they likely misjudged how much the Wilfs were willing to pay, since they anted up a lot more than their required team contribution after the deal was done.) The idea that – had the course of future revenues been known – 10% or 25% more would be set aside for the Vikings is not credible. These same elected officials less than a year earlier had shutdown government because they opposed either more spending cuts or tax increases. Setting aside more gambling tax revenues than needed did either or both, since it prevented their use for general fund spending or tax cuts.
Given the amounts involved, the reserve was the result of miscalculation and/or inattention. Not a conscious, considered decision, mainly the common mistake of focusing only on the near term. The happenstance of the reserve should not create a de facto legal entitlement. But, of course, codification into law and the difficulty of making changes (always easier to play defense in the legislature) has precisely that effect.
These considerations led me to the natural conclusion that the reserve should simply be repealed. Subsidizing the Vikings stadium beyond the $500 million committed in 2012 should be an issue for the legislature to debate each time it sets the state budget. Arbitrary dedications of revenues (e.g., other than user charges and benefit taxes like the gas tax) go against good budgeting practice, which has all uses compete against one another for scare resources. Dedications can be an effective method for overcoming political opposition to raising taxes but budget rigidity is the price you pay. In this context allowing it to continue seems borderline silly.
Given the surplus, there is no need to do anything with the stadium reserve in the 2023 session (i.e., there is plenty of general fund money without tapping the reserve). In fact, waiting until 2024 or 2025 may have the salutary effect of holding off using its money until the state’s financial future is clearer. I’m still not convinced as to the permanence of the amazing jump in individual income and corporate tax revenues.
Should the bonds be paid off?
None of this answers the question of whether available general fund moneys should be used to pay off the stadium bonds when they become callable. Two considerations are relevant in that regard – financial and budgetary/political considerations.
Financial. From a financial perspective, whether to pay off the bonds (or to refinance them) simply depends on interest rates when the bonds are callable. If the state cannot borrow more cheaply at that point (i.e., if the relevant interest rates are higher than on the stadium bonds), it makes no financial sense to pay off the bonds. Since the state consistently issues new bonds, that would mean that it would be substituting higher interest rate debt for them. Instead, it should use the cash to pay for whatever it would have issued new bonds for and leave the stadium bonds in place. That is the least cost approach. Of course, the future course of interest rates is unknowable. So, that is a judgment that must be made when the bonds become callable. Current municipal bond interest rates would justify paying off or refinancing the bonds. Whether that holds in six months is unknown.
Statements by legislators, quoted in the STRIB article, that of course the bonds should be paid off do not make financial sense. The correct financial answer is that it depends on interest rates. Even that leaves unanswered whether the bonds should be refinanced if interest rates are lower. That’s where political and budgetary policy factors come into play.
Political/budgetary considerations. Pure financial considerations rarely determine state financial decisions, political and budgetary policy decisions more often dictate. Some possibilities in the context of paying off the stadium bonds include:
Doing so might be politically necessary to repeal the reserve account. That is not true legally, but the political and popular narrative has linked the two. Incurring higher state borrowing costs may be a reasonable price to free up gambling tax revenues for other general fund purposes.
Similarly, paying off the bonds will free up the Minneapolis sales tax from its legal dedication to pay the bonds. That could allow it to be used for other purposes or even repealed (highly unlikely). So, city interests may favor paying off the bonds. Of course, whether paying off the bonds will free up the city sales tax to be used for other purposes is ultimately a question for the state legislature to resolve and inevitably will involve unrelated issues in the political horse trading that is the legislative process.
The Vikings likely favor paying off the bonds, since that will help the half billion dollars the public paid for the stadium recede more quickly into faint memory. That will make their inevitable future requests for more public money (e.g., maintenance, improvement, or a new facility) an easier political sell. So long as bonds are outstanding, that is a harder political case to make (“@#$%&!, we’re paying $30 million/year on the bonds, and you want more?”). They’re sure to also argue for continued dedication of some gambling taxes to pay for maintenance and improvements as the price for giving up the current dedication.
Keeping bonds in place (i.e., refinancing them if interest rates are lower or leaving them in place if not) is consistent with the principle of matching the benefits provided by the facility with the taxpayers who pay for it.
The stadium is publicly owned because (among other reasons) that is only way tax exempt bonds could be used to finance the public share of its cost under federal tax law. If a long-term goal is to free the public from the burden of owning it (by transferring it to the Vikings, along with the ongoing obligation to maintain it), paying off the bonds could hasten that possibility. A transfer cannot be made until the bonds are paid and likely some additional interval would need to lapse to prevent the public ownership to appear little more than a ruse to qualify for federal tax exempt bonds. That could enable the IRS to challenge the bonds’ tax exemption.
Some combination of these considerations is likely to play a more important role in deciding whether to pay off the bonds than whether it makes sense financially. I have no insight into how the 2023-24 legislature will resolved them, but it seems certain to do so.
Addendum
Opinion columnist and media company behaving opaquely – assertion on stadium financing
12/22/22 update. I did not include this in my original post, but on reflection decided to add it because it continues to irritate me. D.J. Tice, a STRIB columnist and editor, included an erroneous reference to stadium funding in his December 4th column (Who’s Afraid of the DFL?) on an unrelated topic, the ongoing lawsuit challenging the adequacy of public education for minority children. He falsely attributed “heavy spending” on the stadium to the 2013 DFL-controlled legislature.
My jaw dropped when I first read his column in my print newspaper, attributing heavy stadium funding to the DFL’s total control of the legislature. When I was writing this post, I went to the online version and the sentence I remembered was not there. I assumed that I had falsely remembered. I’m old and my memory is far from what it was, and no correction noted its omission. (There was a correction for a more egregious mistake, attributing an assertion in the case to the plaintiff rather than the defendant.) Going back to the print version, I discovered I wasn’t forgetful. He and the STRIB deleted the mistake without fessing up to doing so. I consider that to be bad journalistic practice. It is not good form to delete mistakes and hope no one notices, at least in my book.
The relevance to the merits of stadium financing or the reserve are marginal, but it is somewhat revealing about partisanship and pro sports subsidies. So, I thought I would catalogue it. (I use my blog as a sort of personal archive.)
Here are the details.
Print version
This is the sentence I remembered from the print version. You must trust me since it is no longer online. (I do have an iPhone picture of the column that I’m too lazy to crop to isolate the sentence and, then, insert as a jpeg.) The italics are mine to highlight the deletion:
Remembering the array of tax hikes on businesses and higher incomes enacted in 2013-14, the last time DFLers ruled unchallenged in St. Paul, along with regulatory expansions and heavy spending on the Vikings stadium, Senate Office Building, and much more, at least some business leaders are bracing for more of the same next year.
D,J. Tice, Who’s Afraid of the DFL, Star Tribune (12/4/22, print version only)
Online version
Remembering the array of tax hikes on business and higher incomes enacted in 2013-14, the last time DFLers ruled unchallenged in St. Paul, along with heavy spending, at least some business leaders are bracing for more of the same next year.
The online version conveniently wipes out the erroneous stadium example, along with the Senate Office Building and putative regulatory expansion. There is an editor’s note preceding the online column that says nothing about the deletion:
(Editor’s note: An earlier version of this column referred to a legal brief filed in the Cruz-Guzman case, which asserted that plaintiff’s counsel had admitted certain charter schools were “killing it” academically. That reference did not accurately describe plaintiff counsel’s position and has been removed.)
Id.
My take
The 2013-14 legislature did not authorize or spend any money on the Vikings stadium. What it did do – as my posts outlined – was to put more money into the stadium reserve. That spent no money; it just set it aside, allowing a future legislature or governor (under his or her authority to manage the reserve) to spend it. So far, doing so has not caused any additional general fund money to be spent on the stadium. The only money spent is money that would have been spent under the original 2012 appropriations whether or not there was a reserve account.
Characterizing what the 2013 legislature did on the stadium as “heavy spending” is flatly false. Tice was reaching for examples of spending excess and his biggest example (the Vikings stadium) was enacted by the 2012 GOP legislature. That legislation (signed by a DFL governor) enacted the general fund appropriations that fully funded the stadium.
Two footnote observations about Tice’s column:
His two concrete examples of heavy spending would cause me to question his premise, i.e., tagging the DFL for heavy spending. His cited and deleted examples are the stadium and the Senate Office Building. The stadium spending enacted by a legislature totally controlled by the GOP dwarfed DFL funding of the Senate building by 5X. Subsidizing a venue used 90%+ by a commercial for-profit entity owned by billionaires is hardly a traditional government function. A legislative office building, by contrast, is. (Additional context: The DFL funding of the Senate Office Building was used as a hot campaign issue by the GOP legislative caucuses in the 2014 election, when the DFL lost control of both houses of the legislature. Conventional wisdom is that it helped the GOP flip DFL seats. The stadium was not much of an issue in either the 2012 or 2014 campaign. It would have been consistent with their limited government principles and tight control over state spending for Republicans to make stadium funding a caucus campaign issue. Hard to do, I know, when the legislature you controlled passed it. I assume that the fact that it wasn’t a campaign issue that garnered attention is what caused Tice to mistakenly assume the DFL was responsible for it. At least, that’s best rationale I can come up with to explain such an obvious mistake, along with some inherent bias on his part that being parsimonious with government money is a GOP-monopoly. Their tight-fistedness is selective, obviously. It sure doesn’t extend to tax expenditures which they have been lavish in doling out.)
I agree with Tice to the extent he asserts the Minnesota Supreme Court should not use the Minnesota Constitution’s education clause to dictate how much to spend on or how to design education policy for minority children. (Disclosure: when I was still working, I was part of a team of lawyers representing the legislative defendants in the case.) But that would be a problem for either a DFL or GOP legislature and it is a big policy problem that needs to be addressed by nearly all accounts. I just don’t think the court is institutionally well positioned or qualified to do it. I guess a GOP legislature is more likely to create a constitutional crisis/confrontation if the court orders funding.
I regularly read David Ignatius’s columns on foreign and military policy in the WaPo. Yesterday’s column, A week in the life of Vladimir Putin, describes five days of Putin’s activities, drawn from his calendar, which the Kremlin apparently posts on the Internet for anyone to read (Ignatius used Google translate to do so).
Ignatius thinks this could provide some insight in his mindset – important to understanding one’s adversary – or at least the day-to-day mundane life of an autocrat. As he says, “you can see how governance works, Russia-style.”
This paragraph (getting around to taxes) describing Putin’s Monday caught my eye:
Putin’s other big Monday event is a “working meeting” with Daniil Yegerov, the head of the Federal Tax Service. As usual, Putin quizzes his subordinate about details, starting with collection rates over the past 10 months (during which the “special military operation” in Ukraine was underway). The tax man cheerily (and not quite believably) reports that receipts are up 18 percent over the previous year. “How are things going with you on VAT refunds?” Putin asks.
David Ignatius, A week in the life of Vladimir Putin Washington Post (12/5/22)
Can you imagine Trump or Biden sitting down with the Charles Rettig to review how corporate collections are coming in after TCJA? I can’t and wouldn’t want them to do so. (One could guess where the conversation could go with The Former Guy. Of course, he wouldn’t be the only one – clearly Nixon (documented in articles of impeachment passed by House Judiciary Committee) and allegedly Kennedy, among many others).
According to the IRS History Timeline (slide 24) only one U.S. President, JFK, has visited the IRS headquarters (image from Kennedy Library):
Two theories on Putin’s working meeting with the tax collector:
Unlike elected heads of democracies who must worry about voters, independent legislatures, and so forth, autocrats have plenty of time to focus on the nuts and bolts of government operations (okay, bad theory) or
As Ignatius puts it “It’s as if Putin has a compulsion to demonstrate that he has a handle on every issue.”
For me, the details of tax collection loom larger than animal husbandry, another big topic of Putin’s Monday according to the column:
“We have spoken many times about the importance of creating our own selection and genetic reserve in animal husbandry and in poultry farming,” Putin admonishes his agriculture apparatchiks on the video call [on the state of Russia’s livestock and poultry industry].
Id
It’s a whole ‘nother world I’m glad I don’t live in. Congress starving the IRS is better than living under a blood-thirsty autocrat concerned about the details of tax collection. And sending the IRS after political enemies pales compared to poisoning or pushing them out of windows. Be thankful for the blessing of messy and divisive democracy over autocratic efficiency.
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