After the State of the State speech, Senate Majority Leader Larry Pogemiller argued that Gov. Pawlenty's proposal to reduce corporate income tax rates to increase job creation is a "failed strategy" at the national and state level. See for yourself at the end of this clip.

There has long been debate over the responsiveness of business location and employment to state corporate tax rates, but to call it failed is almost certainly an overreach. Chile is a good example of a country that grew after tax rate cuts in the 1980s (see Perry and Leipziger, for example); evidence for the US could be found in Alan Auerbach's work (see for example the 1994 NBER Macroeconomics Annual.) More recently, Djankov et al. (2008):

We present new data on effective corporate income tax rates in 85 countries in 2004. The data come from a survey, conducted jointly with PricewaterhouseCoopers, of all taxes imposed on �the same� standardized mid-size domestic firm. In a cross-section of countries, our estimates of the effective corporate tax rate have a large adverse impact on aggregate investment, FDI, and entrepreneurial activity. For example, a 10 percent increase in the effective corporate tax rate reduces aggregate investment to GDP ratio by 2 percentage points. Corporate tax rates are also negatively correlated with growth, and positively correlated with the size of the informal economy. The results are robust to the inclusion of controls for other tax rates, quality of tax administration, security of property rights, level of economic development, regulation, inflation, and openness to trade.

Wheeler [2006] also documents the evidence on reduction of state taxes; she summarizes the findings:

1. Employment -- "Four out of seven studies found small effect on employment; one found 6 percent increase in employment when 1 percent tax decreases were offset by transfer payment expenditures. Two studies found effects only in limited cases using data prior to 1975."
2. Domestic investment-- "One study found that a 1 percent decline in the ratio of taxes to personal income that is financed by an equal reduction in transfer payments would lead to a 9 percent increase in investment."
3. New firms -- "One study found that a 1 percent decrease in the effective tax rate leads to a 9.5 percent increase in the number of firm births in the communications industry and a 2.7 percent increase in the furniture industry."

I would hardly call this "discredited". I would argue instead that Sen. Pogemiller's reaction is informed more by ideology and a fear that he might have to make larger spending cuts, and without much concern for the level of economic activity in Minnesota.

Labels: DFL legislature, economics, Minnesota, Pawlenty, pogemiller, taxes

The special session, that is. Starts tomorrow night, 5pm, expected to be for one day. According to the StarTribune report,

Pawlenty's announcement, which came at a quickly-called news conference this afternoon, followed weeks of negotiations in which Pawlenty and legislative leaders dickered over the agenda for a one-day session.

On Monday, flanked by top House DFL and GOP leaders, Pawlenty said the package, which could go as high as $160 million, should be divided between the state�s cash-on-hand and long-term borrowing.

Senate Majority Leader Larry Pogemiller, DFL-Mpls., who has been the hold-out against any special session-borrowing, was absent from this afternoon�s announcement.

Earlier in the day he had sent Pawlenty a frosty letter saying that he would not stand in the way of a special session that included borrowing, but did not see the need for it when the state has more than $300 million in surplus funds.

Attaboy, Larry, peevish to the end. "I won't stand in the way" -- now that's real leadership. I suspect Tom Bakk is measuring curtains for the new office.

Pawlenty split the baby with the DFL on the split between borrowing and drawing down the reserve -- $80 million could be missed come February if the budget forecast comes out as badly as I think it might. But I suspect this was a quick way of solving the impasse, a fig leaf for the DFL that gets nothing on transportation and LGA and has to like it.

The PiPress initial piece says

Most of the relief money will help the August flood victims. A bit of it will help victims of the summer's drought and previous natural disasters.

I'm quite certain that isn't the Rogers tornado from last year, so I can't quite figure out what "previous natural disasters" this refers to.

Labels: Minnesota, Pawlenty, pogemiller, politics

Many thanks to Speed Gibson for transcribing the David Strom Show interview with Larry Pogemiller. The whole thing needs reading, but in relevant part:

DS: [...] You are the leader of your caucus.

LP: It's a democracy. People get to vote yes or no. I can't tell Steve Murphy how to vote. I can't tell Tim Pawlenty whether to veto a bill or not. All I can do is control my own vote [and] keep my public rhetoric focused on the two things that are crucial to do right now, which are fix the bridge and do the flood relief. Every public comment I have made has been around those issues. That's all I can do.

DS: That's all you can do, but you are the leader of your caucus. When Steve Sviggum would go and cut a deal with the Governor, there were a lot of people I know in the Republican caucus who would complain, "Weill I'm sorry, this is not what I like. I don't want to vote for this." But at the end of the day, that was the deal that was cut.

LP: [...] The Governor have an agreement.

DS: Can you keep your agreement?

LP: Ahhh... In my 25 year history in the State Senate, I don't think you'll ever find one instance where someone says I haven't kept an agreement.

DS: I asking: can you keep your caucus in control or is it going to turn into a circus?

LP Absolutely it's not going to turn into a circus. The Speaker and I have the power to make sure it's a limited, short agenda. Absolutely.

DS: And are you assuring the people of Minnesota now ...

LP: I'm assuring the people of the state that we're going to do the right thing.

DS: No no, is it going to be a limited short session?

LP: It absolutely is going to be a limited, short session. Absolutely.

DS: So there's not going to be an attempt to pass a "compo", what you call a comprehensive, which is a sales tax people can't vote on ...

LP: David, I have no idea what members of the Senate and the House will try to do. All I can tell you is that it will be a short, limited agenda. We will accomplish flood relief and what's necessary on the bridge. That's all I can guarantee. That's what we will do.

Steve Murphy, Senate Transportation Committee chair, 3 Aug 07:

"I think people are clamoring for us to do something about this," Murphy said. "Our system is underfunded. I hate to tap taxpayers, but we haven't had real money in the system since 1988." That's the last time gas taxes, now at 20 cents per gallon, were increased.

"If someone gets in the way," he said, "they should be prepared to get steamrolled."

Murphy, 22 Aug:

Senate Transportation Committee Chairman Steve Murphy, DFL-Red Wing, said a temporary [gas] tax would be problematic and wouldn't meet ongoing road-and-bridge needs.

"It's snake oil, that's all it is," he said.

Murphy, 29 Aug:

We've got a long way to go from five cents, but at least the governor is making the move in the right direction," Murphy said. "I think that the more people find out what the depth and breadth of this problem is, they're going to be more willing to listen."

Murphy said that a nickel increase falls short because "five cents raises $150 million and we have over a $3 billion underfunding in transportation a year."

Still, he said, Pawlenty is showing courage.

"I've got to give the governor some kudos because that was an incredibly difficult thing for him to do. He's for all these years had this 'No new taxes' pledge, and for him to stand up and say, 'Maybe a nickel is not that outrageous,' is a huge step in the right direction."

Murphy said that state highways, which represent only about 18 percent of all the roads in Minnesota, are $1 billion behind in funding, and that that amount is needed every year for a 10-year construction cycle. Township roads, county roads, city streets and transit add another $700 million to $1.5 billion, he said, and rural Minnesota needs $710 million worth of bridge improvements.

Murphy said a long-term comprehensive plan should include increases in the gas tax, in license tabs, and maybe a wheelage tax and a metrowide or statewide sales tax initiative.

Tarryl Clark, Senate Assistant DFL Leader, 4 Aug:

We hoped all along the governor would be willing to compromise and we're glad to see he's willing to be flexible and move Minnesota forward. Hopefully, (a special session) would be about jobs and infrastructure, including transportation, bonding and Local Government Aid.

Keith Langseth, Senate Capital Improvement Chair, 30 Aug:

Sen. Keith Langseth, the chairman of the Senate Capital Investment Committee, also wants to see a borrowing bill on the special session agenda.

During a special session, Langseth predicted, lawmakers would repass the $334 million borrowing bill that the House and Senate approved during their regular session earlier this year.

If Pogemiller is just saying he can't control his caucus, perhaps it's time for that caucus to get a new leader. Either that, or ...

The biggest obstacle on the road to a special session may be a shortage of trust between Senate Majority Leader Larry Pogemiller, DFL-Minneapolis, and Pawlenty.

Flashback: Pogology.

Labels: Minnesota, Pawlenty, pogemiller, politics