As a result of its distant observations of Minnesota's experience, The Post has editorially concluded that several arguments for indexing have been left in shambles. Nothing could be further from the truth.
In shambles, The Post says, is the argument that indexing automatically adjusts tax rates to the economy. In Minnesota, before indexing, tax revenues in relation to income automatically grew at a ratio of 1.35 to 1, even if the growth of income was due to inflation only. That automatic upward adjustment of tax revenues created a situation over the years in which state spending rose at a rate greater than the real rate of growth in the economy.
Automatic pilots, as The Post refers to our system, work in many ways. Before indexing, our automatic pilot was locked in the takeoff position with regard to income tax revenues, making it ever so tempting for legislators to create new spending initiatives without having to ask for added tax revenues. With indexing, our income tax revenues are on automatic pilot in the cruising position, maintaining a constant relationship between tax revenues collected by the state and taxable income generated by the economy. If that taxable income should fall, our automatic pilot adjusts our revenue "altitude" appropriately, preserving the relationship once legislated by our legislators. If legislators wish to permanently raise the altitude of our ship of state, they must pull back on the throttle, occasioning an open debate on the desirability of high flying.
In shambles, The Post says, is the argument that indexing was intended to hold down state spending. Not so. It has never been argued that indexing is intended to hold down state spending, only that indexing intends to make spending increases more difficult by requiring, in general, a corresponding decision to raise taxes. Conversely, when the tax base declines, as we are now experiencing in this severe recession, indexing simply requires that spending be openly cut or that tax revenues be increased by broadening the tax base or raising the tax rates. Again, an open debate is a desirable consequence.
The Post asserts that indexing can never be perfect and that it affects taxpayers differently. These are valid points. No indexing scheme can be left unattended. Its performance must be reviewed to be sure that it is meeting its objectives. With our unindexed progressive income tax structure, there is no denying that inflation affects taxpayers differently depending on their location within our tax brackets. Therefore, it should be no surprise that if you reverse the impact of inflation, the resulting benefit will represent that adverse inflationary impact in reverse. To argue that indexing affects taxpayers differently and, therefore, should not be enacted is really to argue that progressive taxation affects taxpayers differently and should, therefore, be repealed. Failure to index, in fact, was destroying progressivity.
Finally, in shambles, The Post says, is the argument that indexing leads to open decision-making on taxes. No one, The Post says, proposed the outcome of the tax increases we have enacted in the last year. I ask: what could have been more open that the five special legislative sessions we have had over the last year? And how could anything have been enacted without someone's first making a proposal? The fact is, all of the options were laid on the table, all legislators had a chance to participate in the process of painfully reordering state spending priorities in the glaring light of day, unassisted by accommodating inflationary revenue windfalls.
Nor are revenues today as high as revenues before indexing. When the economy failed, new taxes were enacted to restore revenues to the expected level, but that was a level far lower than without indexing. But the important point is that the higher taxes of today were legislated in an open process. Had we not enacted indexing, that roughly same level of revenue would have been obtained automatically without taxpayer input. I call that taxation without representation.