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For our economic health, Minnesota must cut tax burdens

This op-ed appeared October 13, 2018 in the Duluth News Tribune

Minnesota is one of the highest-taxed states in America. Our top rate of income tax, 9.85 percent, is the fourth-highest in the country. And it is not just “the rich” who are hit hard. The bottom rate of state personal income tax in Minnesota, 5.35 percent, is higher than the top rate in 23 other states. Our corporate tax rate of 9.85 percent is the third-highest in the country.

There is ample evidence of the negative impacts of these excessive tax rates. High rates of personal taxation drive productive workers out of the state and stop others from moving here. In a forthcoming report from us at the Center of the American Experiment — titled “The State of Minnesota’s Economy: 2018” — we report that between 2011 and 2016, Minnesota saw a net loss of residents with incomes over a modest $25,000 annually. At income levels below that, the state actually gained residents. The exodus isn’t just snowbirds. Over the same period, our state lost residents in every single age category, those under 26 seeing the second-biggest net loss.

The effects of the heavy corporate tax burden can be seen in the relative lack of investment and innovation in Minnesota. Our state’s workers had 4 percent less capital per worker than the national average and 63.5 percent less venture capital per worker. On new and young businesses as a share of all businesses, Minnesota lags the national rate by 4 percentage points, and we spent just 2.5 percent of state GDP in research and development compared to 2.7 nationally.

For the sake of Minnesota’s future economic health, we need to cut these tax rates. Using figures from the Minnesota Department of Revenue, a 2 percentage point cut in each of our state’s income tax rates, coupled with the abolition of both the corporate tax and the inheritance tax, would cost the state government $4.5 billion on a static basis, or about 19 percent of revenues. As the state government cannot run a deficit, this means spending cuts.

This sounds draconian. In fact, in real terms, it simply would take revenues back to the levels of 2011. And state government spending is hardly so leanly efficient that much of this cannot be accounted for by eliminating waste. Indeed, according to a poll in the current edition of our magazine, Thinking Minnesota, 47 percent of Minnesotans think that at least 20 percent of state government spending is wasteful compared to 28 percent who think the level is less.

And the economy is dynamic, not static. To get some idea of what the dynamic effects over time might be, we can look at the impacts on state government revenues of previous episodes of tax cutting in Minnesota. Between 1984 and 1988, Minnesota’s top income tax rate was cut from 16 percent to 8 percent (at the same time, the bottom rate increased from 1.6 percent to 6 percent, as the tax structure was flattened). What happened to revenues? Income tax collections rose from $2.32 billion in 1984 to $2.62 billion in 1988.

More dramatically, if we compare the 10 years up to 1984 with the 10 years beginning in 1988, income tax collections went from an average of $3.9 billion to $5.8 billion in constant 2017 dollars. In other words, tax collections rose dramatically. Another round of tax cuts occurred between 1998 and 2000, when the top rate was reduced from 8.5 percent to 7.85 percent while the bottom rate was also cut from 6 percent to 5.35 percent. Again, income tax revenues rose from $7.1 billion in 1998 to $7.9 billion in 2000, in 2017 dollars.

These policies have support across Minnesota. According to our Thinking Minnesota poll, Minnesotans back lowering all income tax brackets by 65 percent to 31 percent. Majorities of both Republicans and independents support this. Minnesotans also support 10 percent to 20 percent cuts in government spending by eliminating waste and fraud by 76 percent to 18 percent. Surprisingly, perhaps, even Democrats support this proposal, by 64 percent to 31 percent.

Minnesota’s economic growth has been lackluster so far this century. We have a hard-working labor force but low productivity. We need lower taxes that will retain and entice productive workers and incentivize innovation and investment. Only then will working Minnesotans start to see the returns their efforts ought to generate.

John Phelan is an economist for the Center of the American Experiment (AmericanExperiment.org), which is based in Golden Valley, Minn. He wrote this for the News Tribune.

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