Slouching Toward Hawley

First things first: Charlie Quimby of “Growth and Justice” and Dave Mindeman of MnpACT are two of a small, select set of Minnesota liberal bloggers who needn’t be under police surveillance or at the very least restraining orders.  I’m just giving credit where it’s due (although the idea that a group can be named “Growth and Justice” yet still stand for neither is just a tad bemusing).

But over this past week, both of them assailed Rep. Pat Garofalo’s statement on this past week’s “TPT Almanac” program; the Lakeville Republican claimed, in what struck me as a bit of hyperbole, that the broadening of the state’s sales tax to cover clothing will “destroy” border communities like Moorhead.

Always on the lookout for hyperbole to dissect, Mindeman and Quimby were on the job pronto.

Quimby was – as is his unfortunate wont – dismissive, in a post subtitled “Do We Believe Our Lying Eyes?”

Back in 2007 when Growth & Justice was presenting its Invest for Real Prosperity tax proposals to the legislature, I recall a member waxing nostalgically about his parents hauling the family across the North Dakota border to buy untaxed clothing in Minnesota.

The point of his anecdote was that if Minnesota lowered its sales tax and broadened its tax base—as economists recommend—this lucrative cross-border school clothing traffic would dry up, with terrible consequences for Minnesota’s border city retailers.

We’re hearing a version of the same tale…This week, Rep. Pat Garofalo objected on TPT’s Almanac: At the Capitol. He reported that a North Dakota Democrat was proposing eliminating the state’s tax on clothing as a form of tax relief.

“Retail businesses in border communities like Moorhead will be destroyed,” Garofalo said, attracting blogger Dave Mindeman’s skeptical response:

Mindeman interspersed some facts with the snark (which is to his style what dismissal is to Quimby’s) in his piece, noting – correctly – that North Dakota has a 5% sales tax, onto which Grand Forks and Fargo lard 2% in city sales taxes.

Oh my God….how would Minnesota compete?…Garofalo loves that flaming rhetoric doesn’t he?

Fact: North Dakota sales tax is currently 5.0%. Fargo, ND which is the booming ND metropolis across the river from Moorhead adds a 2% city tax. So here is the facts. Under Dayton’s tax proposal, Moorhead (which adds no city tax) would be 5.5%. Fargo would charge 7.0% Clothing may be exempt in the future, but Moorhead will still have clothing under $100 exempt as well.

And like most DFLers, Mindeman, like Quimby, can’t resist taking a homer shot at the Dakotas:

But let’s suppose North Dakota finally drops its state clothing tax just when the gap with Minnesota is closing.

Then what? Will Minnesota border towns really suffer? Were North Dakota retailers in the thriving cities of Fargo and Grand Forks suffering in silence all these years?

To which Quimby assents – with, to be fair, an actual study with real numbers:

As the Minnesota legislator said in that 2007 hearing, should I believe you or my lying eyes?…Looking at the literature studying economic activity in response to sales tax rates, I found research that supports the following points:

Response to differences in the sales tax depends on proximity of border communities. In other words, the farther you have to drive to avoid the tax, the less likely you are to do so.

How much does distance matter? A 2010 Utah study of local option sales taxes PDF* that investigated distance as a variable found increasing the tax rate lowers taxable sales (all else held equal) when there is a jurisdiction with a lower tax rate within 5 km, or about three miles. The effect disappears altogether within about 40 miles. This is to be expected for low-cost goods and everyday commodities. But it also appears to hold for expensive major purchases such as new or used automobiles.

All of that may be true.

But the effects of an individual tax like the Sales Tax, and its nuts ‘n bolts comparison with other sales taxes, while potentially interesting and certainly economics-class-fodder, are the trees that help you miss the forest.

For the real comparison between the states’ tax burdens – not just sales taxes, mind you, but taxes across the board – you need to ask yourself a key question:

“What did I see last time I went to the Moorhead/Fargo area?”  Or you could fill in the “East Grand Forks / Grand Forks area”, or the “Breckenridge / Wahpeton” area, or for that matter the “Worthington/Sioux Falls” metro area?

For starters, you’d know they’re called “Fargo/Moorhead”, and “Grand Forks/East Grand Forks”, “Wahpeton/Breckenridge” and “Sioux Falls”.  Because in every case, the North/South Dakota side is where the action is.

And it’s not just force of habit; it’s not even close.  The Minnesota sides of each of these metro areas (or clusters, in the case of Wop/Breck) are sleepy, moribund and dismal out of all proportion to their North Dakota neighbors.  They’re not competitors in any meaningful way.  They are all sleepy little bedroom communities with highway exits; whatever commerce, dynamism and action is happening in the area is happening west of the Red (or the Bois de Sioux, or County 17, as the case may be).

Forty years of wide tax disparity – Minnesota has the #7 overall tax burden in the US, while North and South Dakota are 35 and 49, respectively) has left a clear choice to all of those places; move west, and keep more of what you have.  The choice was more nuanced, of course, 40 years ago – when North Dakota was a sleepy agrarian backwater.  Today, with my home state an economic dynamo in both energy and technology, things are a little clearer-cut.  And at any rate – as noted by Quimby and Mindeman – fluctuations in the sales tax, or any individual tax, are background noise to the larger effect of decades of disparity; the Dakotas have better business climates; while the western 3/4 of both states are limited by their sparse populations (which is why working on the rigs out in the Bakken pays so very very well), but Fargo, Sioux Falls and Grand Forks are all well-developed cities with young, highly-educated populations and, at least in North Dakota, K-12 schools that are as good as or better than those in Minnesota.

So once you take a step back and stop the pointillistic crabbling about this remark or that individual tax rate, you see that the real issue is the long-term effects overall tax burdens have.  As the Dakotas prosper more generally and gain more people and – as seems to be their goal – turn more of that prosperity into tax relief, that disparity is only going to get starker.

Put briefly – the reforms of the sales tax won’t destroy Moorhead, because tax policies took care of that forty years ago.  There’s really not that much to destroy.  It’d be like harming business in Saint Anthony compared to Minneapolis; who’d know?

So here’s another question:  Up until 2 years ago, Wisconsin was addled by governments more dementedly “progressive”, as a rule, than ours.  That changed in 2010, right about the time Minnesota seemed to have some hope of shucking off some more of the dross of DFL legislative control.  Now, as NPR noted last week – in a report I’ll be going over later this week – Minnesota’s economy is stronger as a whole than Wisconsin’s.  But the improvement in Wisconsin since 2008 is dramatic;it’s improving fast, bouncing back from decades of neo-socialist perfidy.  What’s going to happen in Minnesota?

What do you think?  We’re raising taxes in the middle of a recession!  What happened in California, Illinois and France?

That said – we won’t know what’s going to happen until things tamp down for a while.  Will Minnesota’s government remain the shiny toy of Alida Messinger’s band of plutocrat dabblers and union fixers?  Will Republicans retain control in Wisconsin?  If so, give it a few years.  Then we’ll check back.

As to Fargo versus Moorhead?  That train left the station decades ago.  Changing the sales tax one way or another is just bouncing the rubble, as it were.

10 thoughts on “Slouching Toward Hawley

  1. Apparently, neither of these two utopians get out of their mommies basements very often, because a weekend trip through the parking ramps at MOA would strongly suggest that “studies” are often wrong. I guarantee you that the people that drive here from other states, didn’t do so just to have a bigger selection of movie theaters.

  2. As an extra exercise, they should also cruise through the parking lots of the hotels and motels that are within ten miles of MOA and count the out of state plates. Liberats NEVER see the big picture, nor do they acknowledge the overall damage to the economy that their “trickle down” taxation wreaks!

  3. An example of the sleight of hand they use over at growthandjustice.org:
    A recent U.S. Labor Department study concluded that each $1
    given to a laid off worker in unemployment benefits generates $2.15 of economic
    activity

    Let’s increase unemployment benefits to $10k/week, and then lay everyone off! We’ll all get rich!
    ‘economic activity’ is not ‘economic growth’.

  4. Let me explain the above.
    Two guys, Bob and Ted, are each having a garage sale. Bob picks some random piece of junk from Ted’s garage sale and gives him a dollar for it. Ted turns turns around and picks out a random piece of junk from Bob’s garage sale and pays for it with the dollar Bob just gave him. Repeat 100 times and voila! One hundred dollars worth of economic activity and nobody is any richer. Bob and Ted still have just $1 between them.

  5. “Two guys, Bob and Ted, are each having a garage sale. Bob picks some random piece of junk from Ted’s garage sale and gives him a dollar for it. Ted turns turns around and picks out a random piece of junk from Bob’s garage sale and pays for it with the dollar Bob just gave him. Repeat 100 times and voila! One hundred dollars worth of economic activity and nobody is any richer. Bob and Ted still have just $1 between them.”

    Be careful now, Terry! Analogies like that will confuse our resident liberat trolls.

  6. In econ 101, they taught us something called ‘Bastiat’s Broken Window Fallacy’. Basically, it says that you have to make allowances for every possible use of money. It’s like an energy budget to an engineer building a machine. You have to account for every milliwatt. If you can’t, heat is going some place you don’t know about, and it will probably screw up your machine and make it fail in some embarrassing way.

    Where Bastiat’s broken window fallacy wrecks growthandjustice.org’s fanciful brand of economics is where Carol gets her unemployment check. She is getting something of value (dollars) while producing nothing of value (no gainful employment, remember?). The dollars came from money that would otherwise have been spent in an exchange that produced value. Growthandjustice says A recent U.S. Labor Department study concluded that each $1 given to a laid off worker in unemployment benefits generates $2.15 of economic activity, what they don’t tell you is that a person with an actual paycheck from a private sector employer will generate much more ‘economic activity’ than $2.15, and the more money you take from the private sector to pay Carol’s unemployment benefits, the fewer people you will have working for the private sector.
    Keynes knew this. The Keynesian formula for GDP is C+I+G+X-M =GDP, where C is Consumption (eg consumer spending), I is investment, G is government spending, X is exports and M is imports.
    Consumer spending and investment spending have positive multipliers because consumers and investors spend money in order to get a positive return. Government spending does not have a multiplier in the Keynesian equation because government does not spend in order to get a financial return.

  7. First, I really don’t have a problem with the proposed tax on clothing over $100…assuming the sales tax overall is reduced.

    But what about cross border shoppers? When I lived in NW Wisconsin, Superior business interests would talk about being unable to keep a clothing store in a city of 30,000 due to no sales tax on clothing in Minnesota. Target, Walmart, and Younkers did okay, but most others closed. The flip side? Go to a Superior liquor store and watch the stream coming across from Minnesota.

  8. Working for then Daytons, I made several car trips to its Fargo and Grand Forks stores in the early 1980′s. For you DFL, G+J et al math-challenged out there, that’s about 30 years ago. We would often stay in Moorhead, always cheaper. The contrast between dying Moorhead and vibrant Fargo was obvious even then. Ditto Grand Forks / East Grand Forks, again well before the 1997 flood. Close Moorhead State (part of MnSCU) and you can plow Moorhead under.

  9. I’m not sure what Mitch found dismissive in my preferring actual studies to unsupported anecdotes, to which I do plead guilty. The studies I quoted don’t say there is no effect at all when tax differentials exist across jurisdictions. They say sometimes there’s an effect and sometimes there isn’t, but that the degree of effect is small. It does not decimate businesses so far as people studying the subject have been able to determine.

    As for failing to address the entire universe when my subject was sales tax differentials between communities—guilty again. But that’s not the same thing as not seeing other things are going on.

    Let’s take the superiority of the North Dakota sides of the border towns. One way to look at that is the way that’s been done here, as a sign that North Dakota is somehow preferable to neighboring Minnesota based on localized commercial development. Another way to look at it is that these towns are among the most desirable places in North Dakota to establish businesses and thus attract population and commerce, while the same geography is among the less desirable places in Minnesota, and other parts of the state attract much greater development and population.

    I don’t mean to knock North Dakota, and I’ll take back a casual Twitter crack I made. But the state is attracting people right now with natural resource-based jobs that aren’t available elsewhere, not based on its fundamental charms. Fargo aside, it has not attracted droves of people based on its tax policies, and it has lost talents (not sarcastic) like Mitch.

    We are all free to pose theories like this based on personal observation, nostalgic experiences and random trips through the MOA parking lot, and we will probably not convince each other. But when legislators try to make policy, let’s look at research and not rely on rhetoric or ideology.

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