Responding to Minnesota's budget crisis, Dane Smith of the liberal think tank Growth & Justice offers "three fundamental facts" to support tax increases to solve the state's $5.2 billion shortfall. Unfortunately, Smith's opining is unsupported by economic principles. His "if government just spends more solution" is at odds with economic reality.

Smith's call for another tax increase continues the cycle of government expansion in good economic times, tax increases to support that expansion in bad economic times and then even higher taxes due to bracket creep when happy days are here again. He offers examples of a deteriorating infrastructure and an inadequate court system (constitutional obligations of state government) to justify tax increases, but the real problem is state legislators spending on non-essential but politically attractive programs.

Smith plays statistical games to claim Minnesota government is shrinking. Working with deceptive percentages instead of real dollar figures, Smith uses the Price of Government Index (POG), the percentage of statewide income (produced by your effort) consumed by government. So statistically, the price of government, at about 16 percent of state income, is a point lower than in the 1990s. Meanwhile in real dollars, the state budget has grown from $10.21 billion in 1998 to $17.35 billion in 2009. That's hardly shrinking government.

The fact is, the price of government as a percentage of income is economically irrelevant. Validity of a POG index assumes that government is entitled to some arbitrary percentage of private production. You work hard, earn more, and government is entitled to more of your income.

Smith's is also economically-challenged when he opines about the "fairness" of progressive taxation.  Top-earning Minnesotans, he says, pay a smaller percentage of income in state and local taxes than other income brackets, and "the unfairness, or regressivity (sic), of the total system is substantial and widening." Smith ignores the one and only reason that it is so – government imposition of regressive taxes.

All Minnesotans are, thanks to liberals in the legislature, paying a higher gas tax and an additional sales tax for transit funding, an arts and outdoors sales tax increase, and increased state fees plus a plethora of increased local fees and taxes imposed because local governments choose to support non-essential activities. Proposed property taxes for 2009 show a statewide increase of 6.8 percent. And there's legislative talk of expanding the sales tax to clothing and services. Smith wants a two-for-one deal: With one hand government burdens low- and middle-income families with increased regressive taxation; with the other, it raises income taxes on the high-wage earners to make the system "fair."

Fair? Today the top five percent of earners pay 27.6 percent of all state and local taxes and 43.7 percent of all income taxes. By Smith's logic, we should be well on the way to prosperity. But in fact, depending on a few individuals to produce the bulk of state revenue means that in an economic downturn, state revenues will drop more quickly than were the tax burden more broadly distributed. The $5.2 billion budget shortfall is evidence of that.

Even more unfortunate for low- and middle-income earners, the "fairness" Smith seeks through progressive taxation is an illusion contrary to economic reality. Increasing taxes on high wage earners does nothing to alleviate the current government-imposed regressive tax burden on low- and middle-income families. That's obvious. Plus, to attract and keep highly skilled mobile employees, Minnesota companies must pay higher salaries so net income to employees competes with low-tax states. Rather than reduce income disparity, progressive taxation actually increases it.

Which brings us to Smith's third misleading viewpoint: Minnesota is underperforming the national economy because, he contends, Minnesota no longer stands out as a high-tax state. When Minnesota was a high-tax state, we had a robust economy, says Smith. True, and during those years the state's top employers were the likes of Honeywell, 3M and General Mills. Today the number one employer in the state is state government. The federal government is number three. Of the top 10 employers in the state, only five are for-profit companies. Might not that shift from wealth-producing employment to wealth-consuming employment have something to do with Minnesota's economic climate?

Instead of looking in the rear view mirror of what Smith considers to be Minnesota's golden years. let's work to establish a blueprint for a better Minnesota economic plan for the future. 

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This article appeared in the Star Tribune on December 10th. You can read the article and add your comments here.