Regressive Tax Hike Gains Overwhelming Support in Minnesota

An unusual event took place in Minnesota this past week – support for increasing taxes was widespread enough in the Minnesota legislature to override Republican Governor Tim Pawlenty’s veto of a transportation finance bill. Unfortunately, the roughly $6 billion in transportation funds will come from a variety of regressive revenue sources, including increases in gasoline taxes, license fees, motor vehicle excise taxes, and general sales tax rates in several counties.

Also included, however, is one interesting measure designed to partially offset the disproportionate burden placed on low-income Minnesotans by the bill: a refundable gasoline tax credit. The credit, totaling $12.50 for single taxpayers and $25 for married filers, is available only to low-income Minnesotans. Though a credit this small would normally be seldom applied for, Minnesota’s generous EITC and property tax circuit breaker encourage more low-income persons to file state income tax forms than is the norm in many states. Applying for the additional $12.50 per-person credit should therefore be only a minor inconvenience for most eligible filers.

The credit does suffer from another problem, however. A credit of $12.50 per-person is enough to offset the 5 cent gasoline tax increase on only the first 250 gallons of gasoline purchased. Data released by the U.S. Department of Transportation, however, suggests that the average annual per-capita consumption of gasoline by Minnesota motorists is much closer to 500 gallons. Ultimately, while the idea behind the Minnesota gasoline tax credit is very sensible and relatively unique (and will hopefully catch on around the nation) the credit itself, as a mechanism for improving the fairness of the state's tax system, is not incredibly exciting.

The coupling of a slew of regressive tax increases with the insufficient gasoline tax credit prompted one Republican legislator to question what the bill would mean for “the little guy, the striver, the dreamer”. Though the impact on “strivers” and “dreamers” specifically is difficult to determine, the sentiment behind the statement is valid: low-income Minnesotans will be harmed by this bill.

The bottom line is this: Minnesota was justified in increasing its gasoline tax. Since gas taxes are traditionally levied on a per-gallon basis and not indexed for inflation, the real value of the revenue raised from gas taxes inevitably declines with time, leaving states with insufficient funds to maintain their transportation infrastructure unless they continually increase gas taxes to keep up with inflation. Given this reality, the gasoline tax credit enacted by Minnesota was simply too small. Preferably, the credit would have covered not only the entire gasoline tax increase, but also some of the existing (regressive) gasoline tax to which the increase was added. Aside from the gasoline tax issue, the local sales tax, license fee, and vehicle excise tax increases are regressive tax policies enacted only because they were easier to muster support for than an even higher gasoline tax increase would have been. The vehicle excise tax is especially poorly formulated - a $20 tax is levied on any vehicle bought through a retail establishment regardless of if that vehicle is worth $5,000 or $250,000. Not only is such a tax even more regressive than a regular sales tax, but the real returns on that tax, like the gasoline tax, can be expected to fall with time as inflation erodes the value of that $20 collected.

Despite its shortcomings, given political and budgetary realities in Minnesota and the obvious necessity of financing transportation, this bill should at the least be given praise as a fiscally responsible method of paying for transportation projects. At the very least, most everyone should be able to agree that the bill enacted by Minnesota is a better alternative than allowing the state’s transportation infrastructure to fall into disrepair.

Other states seeking solutions to their transportation funding shortfalls have plenty of lessons to learn from Minnesota, both good and bad.