A Budget Agreement in Minnesota


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After a partial government shutdown, Minnesota leaders have reached a tentative agreement on a budget for the next biennium. The linchpin of the plan: a 75-cents-per-pack cigarette tax hike, styled a "health impact fee" by Gov. Tim Pawlenty (R), which is supposed to raise $380 million over two years. As far as new state revenue sources go, that's it--no income tax increase (as proposed by DFL'ers a while back, no closing of corporate tax loopholes, no new gambling revenues. Just the cigarette tax.

For many people in the state, the initial reaction to this deal is a sigh of relief. MN Politics Guru sees adequate funding of health care and education as a plus. And he's correct, in a way--the prospect of Pawlenty's proposed cuts in MinnesotaCare health insurance is something few wanted to see. So this is a victory, of sorts, for adequate services in Minnesota.

But there is more (and less) to this picture than meets the eye.

More, because the absence of new state revenue other than the cigarette "fee" doesn't mean Pawlenty has meaningfully upheld his "no new taxes" mantra; rather, it means that the costs of funding education have been shifted to locals. While details are sketchy at this point, it sounds like locals have been authorized to raise close to $140 million in local property taxes.

Less, because the cigarette tax is not a revenue-raising solution for the long term. That $380 million will definitely be useful to the state as it seeks to keep the Interstate rest stops open until 2008. But if the cig tax is supposed to fund the preservation of MNCare health insurance, that's just not gonna work. Health care is one of the fastest-growing costs facing state governments-- and the cigarette tax is about the slowest-growing revenue source lawmakers could have picked. In fact, cigarette consumption has been in decline for about a quarter century. It seems likely that MN smokers will respond to this tax hike by quitting entirely or by smuggling cigs in from other states or via the Internet. There's a fundamental mismatch here between the services that lawmakers want to provide and the way they've chosen to pay for it. This mismatch may not be apparent in the upcoming year-- but eventually it will become painfully obvious.

So in my book, Minnesota joins Illinois in the ranks of midwestern states that have recently balanced their books with little more than fiscal duct tape--and Pawlenty joins Blagojevich in the club of "no-new-taxes" governors who meant "no visible broad-based taxes on today's generation of taxpayers."

Thank you for visiting Tax Justice Blog. CTJ and ITEP staff will soon retire this domain. But ITEP staff are still blogging! You can find the same level of insight and analysis and select Tax Justice Blog archives at our new blog, http://www.justtaxesblog.org/

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