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Two Heads Are Better Than One: Bipartisan Tax Reform

by Kristen De Pena | February 29, 2012

Despite sharing a border, Big Ten teams, and cripplingly cold winters, Iowa and Minnesota really don't have very much in common. The differences between the Hawkeye state and the Gopher state are very apparent regarding their approaches to tax reform. In 2010, both states led polls for highest economic confidence, yet the 2012-13 budget season has strained lawmakers' efforts to create practical tax reform policies, diminishing that certainty.

Minnesota

Minnesota conveyed a less than favorable impression of government competency last July after lawmakers' budget standoff lead to a record-setting nineteen-day government shutdown. Although the state's reputation is tarnished by the "longest state shutdown in U.S. history," Minnesota also represents the ability for two parties bitterly entrenched in their positions to reach a compromise. Once again, Minnesota lawmakers are setting their differences aside, this time to tackle taxes.

Following findings that the state and local tax system is flawed and ill adapted to the changing demographics of the state, the Minnesota Legislature began pushing for tax reform that is "simple and transparent; beneficial for job creation; fair and equitable to all Minnesotans; and [is] neutral and efficient." Authored by Minnesota Representative Jennifer Loon, HF 1822 called for an inspired Tax Reform Commission, among other initiatives.

Although tax reform committees are hardly cutting-edge, the makeup of the Tax Reform Commission in Minnesota is just that. The 15-member commission would be comprised of three members appointed by Governor Mark Dayton, four members appointed by the Senate Majority Leader, two by the Senate Minority Leader, four by the House Speaker, and two by the House Minority leader. In addition to the House and Senate legislators, seven of the fifteen experts will be from the private sector and the remaining two from the executive branch.

Iowa

Oppositely, in neighboring Iowa, partisanship rules as lawmakers attempt to bridge differences over tax reductions plans. Governor Terry Branstad approved a plan to reduce commercial property taxes, offset by lowering the tax revenue to local governments by $100 million initially and ultimately by $240 million annually. Despite a Des Moines Register poll showing 60 percent support of the plan, Iowa Democrats will not consider the tax plan until Republicans concede to increase the state's earned income tax credit, increased twice in 2011. The result is stalemate.

Re-Election Constraints

The stark contrast between the two states, similar in demographics and geography, demonstrate the growing recognition for bipartisan reform and the frustrating lack of results from unrelenting positions. What is holding up reform efforts in Iowa?

Often counterproductive to actionable reform, in this case specifically tax reform, are re-election efforts. Scholars suggest that electoral accountability often acts as a constraint on supporting legitimate policies. In Iowa, Senator Joe Bolkcom, Chairman of the Senate Ways and Means Committee, stated that Branstad's attempt to build public support is good, but noted that it makes sense for the Governor's re-election campaign not to find a solution during the legislative season. In fact, that observation is relatively common: anchoring action to public approval is inefficient and an often self-serving means to bolster re-election, as opposed to taking necessary action.

A first step to overcoming re-election paralysis is through bipartisan reform. Theoretically, if both parties are working together on specific legislation and reform, then neither can attack the other during the campaign season for efforts pursued by both parties.

Mimicking Minnesota's Tax Reform Commission approach may also provide more insulation against re-election constraints. Incorporating a plethora of lawmakers, in addition to private members of the community, will likely increase the knowledge about the topic as well as related concerns, crucial to encouraging bipartisan reform. Still, bipartisanship will not solve everything. 

Admirable as the efforts of bipartisan reform are, there still remains the ever-present threat of partisan trench warfare. Last Thanksgiving, the country watched as our "Super Committee" each dug out their respective trenches and fired media assaults at one another until their time for negotiation had expired. Compromise is certainly a first step, but requiring action is a necessary second step.

Tax Reform

Bipartisanship aside, tax reform is imminent in a number of states. Since 2000, at least 37 states conducted new tax studies, studying how to better increase revenue elasticity, improve overall fairness, reduce efficiency, and ease administrative and compliance efforts.

Additionally, states must contend with the possibility that federal lawmakers may repeal the federal deduction for state and local taxes, because it reduces federal revenue by more than $70 billion annually. As states play with ways to increase revenue and decrease the burden on their constituencies during the economic downturn, so too is the federal government. And states recognize the need for reform. New York is considering state property tax reform; California is looking to reduce the state income tax rate; Kentucky is researching fair tax propositions. The reforms are broad in nature, but the means of getting there are the same.

Bottom line: state legislators need to be open-minded about the reform process and consider the many bipartisan opportunities to reform taxes in each state. 

 

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