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Minnesota ranks 8th nationally for its reliance on income taxes

The individual income tax is one of the main sources of revenue for states. For fiscal year 2015, the latest year of data available, it made up 23.5% of total U.S. state and local tax collections. The individual income tax ties with the general sales tax as the second largest source of state and local tax revenue after the property tax.

The Tax Foundation shows how the states rank in terms of their reliance on individual income tax revenues. Minnesota ranks 8th nationally. Here, individual income taxes generate 31.8% of total state and local tax collections.

From an economic perspective, this is not a good thing. Evidence suggests that income taxes tend to be more harmful to economic growth than consumption taxes and property taxes. Income taxes affect labor participation, saving, and investment. Consumption taxes, by contrast, such as sales taxes, tax what people spend as opposed to what they earn. Minnesota ranks 36th nationwide on the share of total state and local tax collections that comes from both sales taxes and property taxes.

As the Tax Foundation write,

under the system in place in most states, if you earn money from wages and invest it, those wages will effectively be taxed twice—once when you collect the wages, and again when your investment yields a profit. Consumption taxes, on the other hand, are more neutral, and only tax what you spend money on, therefore only taxing wages once. Further, since many households see their personal income change with the business cycle, the individual income tax tends to generate a less stable source of revenue than other forms of taxation.

In short, Minnesota’s tax system is overly reliant on sources of revenues which are less stable than others and more harmful to economic growth.

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




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