Who Should Pay for the States Budget Deficit?

By Minnesota State Senator Julianne Ortman Just 4 weeks to go this session, and the states budget gap continues to grow: tax revenues dropped another $46 million in February and March (2.1% less than anticipated in our previous dismal forecast). So how should we balance the budget, and who should pay? In my view we should put the residents budgets ahead of state governments. We should do no harm to families and businesses already facing near-desperate financial circumstances. We should cut state government budgets, use one-time shifts of education reserves, and borrow against the tobacco settlement payments just as the Governor suggests. But heres where my view differs, and falls somewhere in the fiscal middle. We can and should raise some revenues to make targeted tax reductions that will help to stimulate the states economy. For that reason, I proposed a tax increase this year; we should change our tax code to charge a tax on all lending institutions and other businesses that extend credit to Minnesotans and charge an APR interest rate in excess of 15%. Lenders and others may still charge whatever interest rate they would like. Those that charge less than 15% interest will be unaffected. On those transactions where they charge more than 15% they should pay a tax of 30% on that portion of the interest that exceeds15%. If, as a byproduct, lenders reduce rates or reform lending practices, then so much the better. rate of return! If they charge more than 15%, then these profit margins should be taxed to help pay the societal costs of predatory and usurious lending: foreclosures, credit card judgments (creating overwhelming burdens in our courts and county offices), bank and insurance company bail-outs (to be charged back to our children), and the States burden in providing the safety net for folks who agreed to loans that lenders recklessly failed to qualify, or But lets be honest, 15% loans intentionally priced for should be more than enough a high risk of default. interest in an economy when banks can borrow at the fed- As a State we face record leveral funds rate (0.25%), and els of unemployed Minnesothe prime lending rate hovers tans, with lost health insurat 3%. Charging 15% interest ance benefits and pensions, on funds obtained at 0.25% enormous costs to the jusyields a stratospheric 6,000% tice system, and businesses

Julianne Ortman is in her second term as a member of the Minnesota State Senate (R-Chanhassen). She has been a member of the tax committee for seven years; this is her third year as the ranking minority member.

that cannot obtain the credit they need to continue operations, re-invest for new hires, training, and purchasing new equipment. The loss of confidence in our lending institutions has had a crippling effect on the economy, and lenders should be part of the solution. The special- interest lobbyists contend that this tax will be shifted to the cost of borrowing and further tighten the credit market. We should not be fooled into believing this. If there is any tightening, the effect will be to discourage precisely the sort of reckless lending that got us here in the first place. Sound and healthy lending practices will remain unaffected by the proposed tax. If lending institutions continue to engage in risky and reckless lending, then they should face the loss without the guaranty of the taxpayers, and they should pay taxes up front for the costs they shift to Minneso-

tans for the legal remedies made huge profits when borwe provide in our courts and rowers made their payments county offices. for the first 10 36 months before defaulting. They benThis tax will generate $200- efited again by re-packaging $300 million in the next bien- and selling the remaining nium, and significantly con- debts as securities, borrowing tribute to solving the budget against the proceeds of bad gap. I hope that a part of the loans, or reducing their tax new revenue will be used to liability for writing off losses buy down the income tax as bad debt. To add insult rates at the low and middle to the taxpayers injury, they income tax brackets to help were offered big government stimulate our States econo- bailouts to buy off their toxic my, and relieve the dispro- assets and clean up their balportionate financial pressure ance sheets. that recent gas tax and sales tax hikes have had on hard- So lets have the conversation working Minnesotans. at the capitol.who should pay for the States budget Let me be clear: I prefer not to deficit? raise any tax, but if we have to raise taxes to resolve our deficit and stimulate economic Senator Julianne Ortman recovery, then this is the right Capitol Ofce: tax, at the right time, for the 100 Rev. Dr. Martin Luther King Jr. Blvd. right reason -- and it places State Ofce Building, Room 125 St. Paul, MN 55155-1206 the burden squarely where it 651.296.4837 should fall. These lending inEmail Address: stitutions (not just the execusen.julianne.ortman@senate.mn tives) have profited immensely by their greed. First they