Jensen’s tax cut would require deep spending cuts Minnesotans of both parties will reject

October 25, 2022 1:14 pm

By now you have probably heard that Republican nominee for governor Scott Jensen has proposed eliminating Minnesota’s income tax, which provides more than half of all state general fund tax revenue. Last week, a Minnesota Reformer analysis showed this would overwhelmingly benefit the highest-earners while requiring substantial increases in sales and property taxes that fall heavier on lower-income households. 

But lopsided tax cuts are only one side of the equation. Jensen says his tax cut would also require a 10% reduction in general fund spending. Where would it come from?

Bold tax cut proposals like Jensen’s are premised on the notion that state budgets are filled with wasteful spending, and that annual spending growth reflects unchecked largesse. But in truth, the cost of essential state investments simply rise along with the size of the economy, which is why the budget grows every year in normal terms despite split partisan control. Republicans and the Democratic-Farmer-Labor Party may disagree over the size of marginal funding increases, but net spending reductions like Jenesen has proposed are rare.

Census data compiled by the nonpartisan Tax Policy Center shows that Minnesota’s nominal operating expenditures have declined only once since 1977 — by just 0.5%. Effective cuts as a result of inflation have been more frequent — flat spending with 1% inflation is equivalent to a 1% cut, for example — but even those instances have been rare and relatively minor, ranging generally from 1-3.5%. Jensen’s initial phase of cuts, then, would be orders of magnitude larger than anything the state has experienced in recent memory. 

Budget analysts typically measure government spending as a share of the economy. Besides a brief uptick due to state and federal COVID response, Minnesota’s spending has been relatively flat for over a decade. Jensen’s plan would represent an unprecedented downturn.

Is this realistic? Jensen is fond of citing Southwest Light Rail cost overruns and alleged Feeding Our Future fraud, but these are major news stories for a reason — they are extraordinary examples. And, troubling as they might be, each adds up to only a small fraction of the budget. A review of major spending areas suggests that an actual Jensen administration would struggle to find the substantial savings he has promised. 

At the highest level, comparing Minnesota to other states does not provide the evidence of obvious over-spending that Jensen and other fiscal conservatives would have us believe. Although Minnesota is a comparatively high-tax state — ranking 12th nationally according to the conservative Tax Foundation and 9th according to the Minnesota Center for Fiscal Excellence — we pay comparatively lower fees and receive less in federal support. When it all nets out, Minnesota ranks between 17th and 24th in total revenue. In other words, we are not the profligate state that Jensen and other state Republicans like to portray.

It is also worth mentioning the broader global context — the United States raises and spends a far smaller share of its total economy on public goods and services than almost any other developed nation. So while Minnesota is not, in fact, a high-spending state, we might be wise to do more to match the social welfare expenditures of other countries with lower poverty rates, less crime and better health outcomes.

Digging further into the details does not make Jensen’s case for waste any easier. 

At around 40% of the total state budget, E-12 education is an oft-cited source of government bloat. But the evidence that schools could run much leaner is hard to come by. In 2020, Minnesota ranked 20th in school funding per pupil, according to CFE, and schools across the state struggled with canceled bus routes and staffing shortages driven by low wages. A recent report published by North Star Policy Action shows that, with inflation and attendance factored in, Minnesota public schools now receive 6% less than they did in 2003. Cutting state support for schools would also lead to unpopular property tax increases at the local level.

And school staff are far from the only public sector workforce in need of support. Minnesota is short at least 20,000 long-term care workers employed mostly through the state’s Medicaid program, while Twin Cities Metro transit has raised wages and offered signing bonuses for bus drivers in hopes of avoiding service reductions. Public defenders, who handle as many as 120 cases at a time but often make tens of thousands of dollars less than prosecutors, are resigning at a rapid pace. Just to name a few.

The Jensen administration may drag its feet on increasing funding for these basic services, but it is very hard to imagine a net savings from the current baseline. 

Health care is one major cost center where Minnesota’s expenditures do stand out compared to other states, but that doesn’t mean savings would come easy. As former Minnesota House tax researcher Joel Michael pointed out in a recent blog post on the Jensen plan, federal matching for state health care expenditures means that Minnesota would save only $0.50 for each $1 in health care cuts.

More importantly, Minnesota’s above-average health expenditures go to a clear and good purpose. In a recent report analyzing Jensen’s plan, the conservative-leaning Minnesota Center for Fiscal Excellence compared Minnesota’s Medicaid eligibility threshold for children and pregnant women to that in five states without an income tax. Minnesota covers children in families making up to about 275% of the federal poverty rate, compared to just 130-200% in states like Tennessee and South Dakota. Would Scott Jensen take health care coverage away from low-income children to pay for his income tax cut? 

On infrastructure, one-time funds to match and maximize federal dollars will be a top priority for communities eager to upgrade outdated roads and bridges. Foregoing the federal match would mean increased state costs in the long-run, but Jensen has already pledged the surplus to help cover the revenue gap his tax cut would create. 

In short, there’s no easy path to Jensen’s cuts.

If there is a conciliatory note here, it is that there may indeed be ways to curtail spending growth over the long-term. But this likely calls for greater investments up front: For example, one study of supportive interventions with unaccompanied minors found that providing stable housing and other services could reduce social welfare expenditures by $300,000 per person, saving $50 million of taxpayer money with even a modest success rate. 

Unfortunately, Jensen doesn’t appear to be thinking so constructively. Unrealistic tax plans like his exist to drum up support from a perceived anti-tax base. Thankfully, reactions to Jensen’s plan indicate Minnesotans from both parties know better.

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Eric Harris Bernstein
Eric Harris Bernstein

Eric Bernstein is a policy analyst focused on state tax and budgetary policy. Since the summer of 2020, he has been policy director for We Make Minnesota — a coalition of labor and community groups organizing to raise state revenue for investment in health care, education, racial equity, sustainable environmental stewardship and other public priorities.