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Minnesota should reduce its individual income tax rates

Minnesotans are some of the most heavily taxed people in America. As we wrote in our recent report, The State of Minnesota’s Economy: 2017, as a share of personal income, state-local taxes are higher in Minnesota than in all but seven other states, as Figure 1 shows. Minnesota is one of the 43 states to have its own income tax, but the top rate—9.85 percent on incomes over $156,911—is higher than anywhere else apart from California, Maine, and Oregon. Equally significant, perhaps, is the fact that Minnesota’s lowest income tax rate of 5.35 percent is higher than the highest tax bracket in 23 states. The government in Saint Paul doesn’t just tax ‘the rich’ heavily.

Figure 1 – State-Local tax burdens per capita as a percentage of income

Source: The Tax Foundation

If Minnesota’s politicians don’t act, this situation might be about to get worse. The 2017 federal Tax Cuts and Jobs Act was the biggest overhaul of the federal tax system since 1986. If legislators in Saint Paul don’t act to reform our state’s taxes, the interface between federal and state taxes will become horribly complex. On the other hand, if they enact conformity in its entirety, then the broader tax base will generate tax increases for many Minnesotans.

Among several bills at the Capitol which seek to address this, one is especially worthy of support. The bill, House File 3811, brought by Representative Jerry Hertaus (R), proposes to lower the state’s four individual income tax rates by one percentage point each, as shown in Table 1. It seeks to offset the additional taxable income under changes made in the federal Tax Cuts and Jobs Act with lower income tax rates.

Table 1 – Current and proposed individual income tax rates

Source: Minnesota Center for Fiscal Excellence

These cuts are modest. As Figure 2 shows, even if these were passed, Minnesota’s top rate of income tax would be higher than all but seven other states and its lowest rate would still be higher than the top rate in thirteen states.

Figure 2 – Top rates of income tax across the states with proposed top and bottom rates for Minnesota

Source: The Tax Foundation

With revenue base broadening on the way thanks to the federal tax bill, Minnesota’s tax rates will have to come down if our state’s residents are not to be hit with a tax hike. We wish Rep. Hertaus the best of luck with his bill.

John Phelan is an economist at the Center of the American Experiment. 




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