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Income tax hikes didn’t close Minnesota’s budget deficit

While we at the Center often raise concerns about Minnesota’s economy, there are states in far worse situations than ours. Illinois is one. As the state’s economy struggles with ballooning government debt, some of its policymakers are looking to us for answers. There are Minnesotans ready to offer them. But are they offering the correct ones?

As CBS in Chicago reports,

“We realized the first thing we had to do [on taking office in January 2011] was to stabilize revenue. And in order to stabilize revenue and fund government that means we needed to increase taxes,” Frans said.

Especially on the wealthy. While Illinois has a 4.95 percent flat tax for everyone, Minnesota raised its tax on couples earning over $250,000 from 7.85 percent, to 9.85 percent.

But Minnesota Department of Revenue data doesn’t support Commissioner Myron Frans’ interpretation.

Minnesota’s top rate of income tax was raised in 2013. Figure 1 shows what happened to Individual Income Tax revenues in nominal terms in the five years before the hike and the five years after it. From 2008 to 2010 revenue slumped as the state went through the recession. But, in 2011, two years before the tax hike, revenues bounced back. They have continued to grow in nominal terms in each subsequent year, but at declining rates.

Figure 1 – Minnesota’s Individual Income Tax revenues, billions current $

Source: Minnesota Department of Revenue

But not in inflation adjusted, real terms, as Figure 2 shows. Again, we see that revenues began to recover in 2011, two years before the tax hike. But we also see that revenues have essentially flatlined in the last three years. Indeed, adjusted for inflation, Individual Income Tax revenues in Minnesota were lower in 2017 than they were in 2016.

Figure 2 – Minnesota’s Individual Income Tax revenues, billions 2017 $

Source: Minnesota Department of Revenue

It is simply not true that the 2013 hike in Minnesota’s top rate of state personal income tax lead to a boom in state personal income tax revenues that closed the state’s deficit. Commissioner Frans is just wrong. Policymakers in Illinois would be making a mistake if they thought that they could use similar hikes to fix their budget woes.

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

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