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Minnesota cannot tax its way out of its budget deficit

A while back, I asked ‘What should Minnesota’s government do with its forecast surplus?‘ Well, we don’t need to worry about that now. Figures released today by Minnesota Management and Budget show that the Coronavirus shutdown has turned that forecast surplus of $1.5 billion has turned into a deficit of $2.42 billion for the 2020-2021 biennium.

Given the requirement for a balanced budget, what should the state government do? To decide, it needs to bear two facts in mind.

Minnesotans are already heavily taxed

First, Minnesotans are some of the most highly taxed citizens in the United States. As we noted in our recent report, The State of Minnesota’s Economy: 2019, Minnesota’s top rate of state personal income tax—9.85% on taxable incomes over $163,890—is higher than anywhere else apart from California, Hawaii, New Jersey, and Oregon. And it is not just the rich who are taxed heavily: Minnesota’s lowest income tax rate of 5.35% is higher than the highest tax bracket in 25 states, as Figure 1 shows.

Figure 1: Top Rates of State Personal Income Tax and Minnesota’s Top and Lowest Rate, 2019

Source: The Tax Foundation

Minnesota’s government is already spending record amounts per resident

Second, Minnesota’s state government has never spent more money per resident than it is right now. As I wrote in March:

Using numbers from Minnesota Management and Budget, Figure 1 shows General fund spending (all figures adjusted for inflation in 2019 dollars) since 1960. Figure 2 shows General fund spending per capita since 1960. What both of these show is that in total and per person, and in real terms, Minnesota’s state government has never spent more money than it is right now.

Figure 1: Total General fund spending, 1960 to 2019, billions 2019$

Source: Minnesota Management and Budget and Center of the American Experiment

Figure 2: Per capita General fund spending, 1960 to 2019, 2019$

Source: Minnesota Management and Budget and Center of the American Experiment

Tax hikes cannot close Minnesota’s budget deficit

If we take these two facts together – that Minnesotans are already heavily taxed and that the state government is already spending record amounts of money per resident – it follows that the forecast budget deficit cannot be closed by tax hikes.

What should we do?

This new projection allows state policymakers to access the state’s budget reserve account, which currently contains up to $2.359 billion. This goes a long way towards covering the deficit. The remaining shortfall comes to just $67 million over the biennium ($33.5 million in each of the years 2020 and 2021).

We could cover this entirely with spending cuts if we reduced state government spending by just 0.1%. Per capita spending would be just $6 lower in each year and would still be at its highest level in history. That budget correction is hardly draconian.

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

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