Evaluating an Increase in the Minnesota Gas Tax

After evaluating the proposed increase in the Minnesota state gasoline tax, we believe that this particular tax hike has many attributes that make it a desirable type of revenue increase.  Its ease of implementation, economic efficiency, and sustainability over time make it an attractive option for the state to generate revenue.  However, we found that the tax may disproportionately impact lower-income residents, and because of restrictions on how gas tax revenue can be used, it may be difficult for lawmakers to find solutions to offset some of these consequences for poorer, auto-dependent Minnesotans.  Still, we believe that Minnesota must meet its responsibilities to maintain a high-quality transportation infrastructure for its residents, and that this increase makes sense for Minnesota at this time. 

The gas tax increase will be easy for the state to implement because it is already collecting taxes on gasoline.  An increase in this tax should not add any overhead to the state’s tax collection setup, and Minnesota taxpayers should at least be reassured somewhat by this fact.  The low cost of implementation could allow lawmakers to make a persuasive case to their constituents that no additional overhead makes this tax more affordable than other options, increasing the political feasibility of such an increase.

The tax is also economically efficient as a tool for generating revenue because demand for gasoline is inelastic.  Minnesotans are dependent on their automobiles, and cars are by far the dominant mode of transportation throughout the state.  While this may mean that many Minnesotans will be affected, it also means that the tax will be effective because of the demand inelasticity.  Driving patterns and habits are difficult for individuals to break, so the state should expect that revenue would be generated from across the population. This also indicates that the tax increase would be a sustainable revenue source, as the inelasticity will ensure that revenues will be relatively consistent over time.  In addition, current constitutional requirements that gas taxes only go to road infrastructure (and not public transit, bike infrastructure or pedestrian infrastructure) will ensure that these funds do not contribute to expanded transportation options, making auto dependence likely to continue into the future.

Our evaluation found that the most significant drawback to the gasoline tax increase is the disproportionate burden that it places on poor drivers.  Since the increase is a flat tax placed on each gallon of gas, a Minnesota gas consumer’s ability to pay the tax is not factored into the amount of the increase. This will have consequences for car-dependent households with lower incomes.  However, because revenues will be spent almost strictly on road improvements, the tax is more equitable from a benefits-received standpoint as those who drive the most will be paying an amount more closely proportional to their use of this public resource.

Overall, we believe that the increased gas tax is a good revenue increase.  Tax increases are never popular, but an increase in the gas tax has advantages that other tax increases do not have.  Lawmakers should attempt to mitigate the effects on lower income families, possibly through credits or other instruments whereby a Minnesota taxpayer’s ability to pay is considered.  Based on our evaluation of this tax, we expect it to be an effective instrument to generate revenue in Minnesota if it is implemented.

-- Group 4, PA 5113 - State and Local Public Finance, Spring 2013

Minnesota 'snowbird' tax: Is it a good idea?

Minnesota Governor Mark Dayton’s recent tax proposals include many changes to the state’s tax code, and one that stands out is the “snowbird tax.”  This tax is intended to address a perceived loophole in the state tax code that allows residents to not pay any income taxes to the state of Minnesota if they live there less than half of the year.  Governor Dayton is worried that so-called “snowbirds” (who are people, usually retired, who spend the winter months in warmer climates—some of whom who go to states like Florida and Texas that don’t have any state income taxes) are filing their taxes in other states while using Minnesota services for a considerable portion of the year.

The law would tax non-residents who live in the state for two to six months out of the year.  Rather than taxing income on wages and salaries, this tax would be only tax income earned from stocks, bonds, capital gains and dividends.  This strategy appears to indicate that the policy is aimed at retirees who may not be earning income from working anymore.  The Minnesota Department of Revenue estimates that the tax would generate $30 million in revenue, or 1.5% of Governor Dayton’s proposed $2.1 billion dollar overall revenue increase.  The proposed 2013 overall budget totals $37.9 billion.

One element of the issue that the governor is considering is the idea of equity.  The governor sees people who spend considerable time in the state and use Minnesota goods services such as infrastructure, public works, and parks, to not pay taxes that help maintain that level of services as being free-riders who are not paying their fair share for services that they are using.  Fairness is a concept that Governor Dayton is making a central part of his defense of this proposed tax. 

While in principal this tax might increase equity, it may be difficult to collect.  It would either force nonresidents to disclose the amount of time they spent in the state, or it would require the state to add some type of mechanism that would enable it to monitor and/or verify how long these nonresidents spend here.  Either of these options complicates the methodology for levying this tax, and with the expected revenue stream from the “snowbird tax” being so low, it may not be worth it.

If it passes, Minnesota would be the first state to implement such a measure.  It is strange that the governor would go to such an extent to pass a groundbreaking tax like this for such a small amount of revenue.  Perhaps this is a case where the governor’s sense of fairness is overshadowing practical considerations and political pressure. 

Sources:

http://www.ocregister.com/opinion/state-495497-minnesota-tax.html

http://www.minnpost.com/politics-policy/2013/01/dayton-s-controversial-snowbird-tax-may-not-fly

http://kstp.com/article/stories/s2929495.shtml

http://online.wsj.com/article/SB10001424127887324329204578271720286958796.html?mod=article-outset-box

Why do states produce health insurance?

While I was writing my paper about different redesign efforts for the MinnesotaCare program, I began to wonder, why does the government provide insurance? Insurance is an expensive business for state governments. According to the Kaiser Family Foundation, Minnesota spent $2.9 billion on Medicaid in 2009. So, why would the state spend valuable funds in a well-developed industry when they could use those funds for other need projects?

Normally a government intervenes only with instances of market failure. So what is the market failure that has occurred in the health insurance industry that requires government intervention? There are two central reasons why the government provides health care. First, the government redistributes income because pure markets do not enable all participants to earn an adequate level of income (Santerre and Neun 276). Insurance can be cost-prohibitive and therefore an unaffordable good for many Americans. According to the Kaiser Family Foundation the average employee contribution to a family health insurance plan was $4,000 in 2010 (Kaiser). This premium price makes insurance inaccessible for many families that are just above the federal poverty line. Therefore, the government implements income redistribution programs to assist low-income families in obtaining equal opportunities in the insurance market.

A second reason is that imperfect information exists in the insurance market because some consumers do not “understand the technical terms and conditions contained in health insurance policies” (Santeere and Neun 287). Insurance policies can be very complex and people often do not have the ability to directly compare competing policies to choose the best product. By producing insurance, the government prevents vulnerable consumers from the consequences of being deceived by imperfect information.

The United States government has found another method to intervene with an imperfect information market failure that does not require it to be an insurance producer. The Patient Protection and Affordable Care Act (ACA) of 2010 included provisions for each state to establish a health insurance exchange. The exchange is an online marketplace for consumers to compare all available insurance plans in their state. The plans will be categorized by type of benefits included and price. Consumers will be able to directly compare plans from competing companies in order to choose the one that best fits their needs. The exchanges will provider more information to consumers so they can participate the insurance market without fear of being deceived.

Wisconsin has made significant progress with create the infrastructure of its exchange. Check out the state’s prototype website here. Minnesota received a planning grant for the exchange from the federal government, but no legislations has passed to implement the program. A couple exchange bills have been introduced this session (one from Rep. Gottwalt and Rep. Erin Murphy), but neither bill has made it out of committee.

Kaiser Family Foundation. Family Health Premiums Rise 3 Percent to $13,770 in 2010, But Workers' Share Jumps 14 Percent as Firms Shift Cost Burden. 2 Sept. 2010. Web. .

Kaiser Family Foundation. "Minnesota: Federal and State Share of Medicaid Spending, FY2009." State Health Facts. Web.

Santerre, Rexford E. and Stephen P. Neun. Health Economics: Theory, Insights, and Industry Studies. Mason, OH: South-Western Cengage Learning, 2010.

Minnesota: Trying to reclaim the title of “Healthiest State in the U.S.”

According to the American Public Health Association, Minnesota is one of healthiest states in the U.S. From 2003-2006 the State was ranked number one for public health. However, in recent years, Minnesota has dropped in the rankings to number six. The Department of Health states that:

• 38% of Minnesotans are overweight and another 25% are considered obese.
• Minnesotans are not consuming the recommended serving of fruits and vegetables
• They are not engaging in healthy levels of physical activity
• And, approximately one in five Minnesotans smokes.

As a response, the Minnesota Legislature passed the Health Care Reform Act in 2008. It established the Statewide Health Improvement Program (SHIP), which provides competitive, categorical grants to local communities and tribal governments. The program builds upon existing health improvement initiatives implemented at the federal level by the Center for Disease Control. SHIP has been popular in its first years, as all 53 of the State’s local health improvement boards and 9 of 11 tribal governments have received grant money.

SHIP allocated $47 million over a two-year period, which translates to $3.89 per Minnesotan each year. This per capita amount is the minimum recommended investment for programs that aim to prevent chronic disease as outlined by the CDC. Most of the revenue for SHIP came from the State’s General Fund. SHIP grants require a local match of 10%, which has averaged about $40,000 per grantee each year.

Grantees are required to address obesity and tobacco use in four environments: work, school, community, and within the health care system. Local projects have varied, but generally try to address systems or policy change. For example, Minneapolis has started to incorporate food assistance programs like EBT and SNAP into local farmers markets and Anoka County has instituted a smoking ban policy on the property of all post secondary institutions.

As the initial two-year authorization of SHIP comes to an end, the future of the program is uncertain. If the program is reauthorized and extended to 2015, the Minnesota Department of Health states that, “SHIP could move as much as 10 percent of the adult population into a normal weight category and as much as 6 percent of the adult population into a non-smoking category.” It estimates that cost savings could be as much as $1.9 billion, or 3.8 percent of projected health care costs. This translates to a 12:1 benefit-cost ratio over the length of the program.

State-Level Health Care Assistance

With all of the recent discussion regarding the new federal health care bill, I thought it would be interesting to write about health care assistance already provided by the government at the state level. Among the most interesting aspects are the impacts of these programs on certain hospitals, and the policy decision of whether any of the expenses of childless, low-income adults should be covered.

The Minnesota Department of Human Services provides health care coverage for low-income Minnesotans through publicly subsidized programs. Nearly 750,000 Minnesotans have coverage through state programs. The largest and most significant are Medical Assistance, MinnesotaCare, and General Assistance Medical Care (GAMC). Medical Assistance is the largest of the government funded health care programs. It is Minnesota’s version of the Medicaid program, and is jointly funded with state and federal funds. The program provides coverage for more than 500,000 people each month—more than half of which are children and families. The remaining recipients are elderly or disabled. In fiscal year 2008, the total state and federal expenditure for Medical Assistance was $6.265 billion. MinnesotaCare is a state program for Minnesota residents who do not have access to affordable health care. The program is funded by a state tax on hospitals and health care providers, federal matching funds, and enrollee premiums. MinnesotaCare provides services to over 100,000 individuals each month. In fiscal year 2008, total MinnesotaCare expenditures were $463 million. Sixty-six percent was paid by the state, 27 percent by the federal government, and 7 percent by enrollee premium payments. GAMC is a state-funded health care program for low-income adults between 21 and 64, with no dependent children.

In total, Minnesota spent $8.8 billion (35 percent of the total state budget) on health care programs in 2009. This equals roughly $1,660 per capita. In comparison, Wisconsin spent approximately $6.6 billion (27 percent of the total state budget). This equals roughly $1160 per capita. These figures show that, in general, Minnesota’s state health care programs are substantially more generous.

In May 2009, Minnesota Governor Tim Pawlenty line-item vetoed GAMC, eliminating $381 million in expenditures from the 2010-11 biennial state budget. This was one of the Governors most significant, and controversial, steps to close the biennium’s $2.7 billion deficit. The governor proceeded to unallot an additional $16 million of GAMC funding for fiscal year 2010. With his veto and unallotment, the governor intended to transition about 21,000 of the 30,000 to 38,000 GAMC participants into MinnesotaCare. The governor’s actions were strongly opposed by DFL members in the legislature.

Besides its affects on current and future GAMC recipients, this veto strongly impacted hospitals and other medical facilities that treat low-income patients. Hennepin County Medical Center in downtown Minneapolis estimated that it would lose $43 million to $109 because of the cuts. In addition, Regions Hospital in St. Paul estimated loses of $46 million, 10 percent of its gross revenue. These hospitals are required by law to provide emergency services to low-income individuals. If GAMC is cut with no comparable replacement, the hospitals will lose all compensation they receive for treating those individuals formerly covered by the program.

DFL lawmakers and Governor Pawlenty reached a compromise on GAMC funding. GAMC would be temporarily extended through May 2010 using $28 million from Minnesota’s health care access fund. Beginning June 1, 2010, a new hospital-based, coordinated care delivery system will be created in partnership with county agencies.

While Medicaid and health care assistance for families is typical in most states, assistance for childless adults (like GAMC) is not. Twenty-nine states do not provide any health care assistance to adults without children. Compared to the states that do, the GAMC program in Minnesota is relatively generous. One reason that these programs are less common is because they lack federal funding or federal guidelines. When states are short on funding, these programs are more administratively and politically easy to cut. The result is that low-income childless adults will be particularly vulnerable during tough economic times.