Minnesota’s Budget Deficit: The state already has some of the highest tax rates in the United States

Today, Minnesota Management and Budget (MMB) forecast a $641 million surplus for the two-year budgeting period starting July 2019 and ending June 2021 — the 2020-21 biennium. However, the state faces a potential $1.3 billion deficit in the following budgeting period —  2022-23 biennium.

As we explained yesterday when we launched our new report, ‘Minnesota’s Budget Deficit: Why we should make spending cuts and not raise taxes’, the state constitution requires a balanced budget. Lawmakers in St. Paul must ask themselves the question: How will we close this deficit? They will have three options: higher tax rates, lower spending, or some combination of both.

But as we argue in the report, the first option, and, by extension, the third, ought to be ruled out on the basis that Minnesota already has some of the highest tax rates in the United States.

Minnesotans are already heavily taxed

As Figure 1 shows, Minnesota has the fifth highest top rate of state personal income tax in the United States – 9.85 percent on income over $164,400 a year: only Oregon, New Jersey, Hawaii, and California have higher top rates. But Minnesota doesn’t just tax ‘the rich’ heavily. Our state’s lowest personal income tax rate – 5.35 percent on the first dollar of taxable income – is higher than the highest rate in 25 states.

Figure 1: Top rates of state personal income tax and Minnesota’s lowest rate, 2020

Source: The Tax Foundation

The same is true with the corporate income tax. At 9.80 percent on the first dollar of taxable revenue, our state has the fourth highest state corporate income tax rate in the United States. Only Pennsylvania, New Jersey, and Iowa have higher rates.

Figure 2: Top rates of state corporate income tax, 2020

Source: The Tax Foundation

These facts alone should rule out any further increase in Minnesota’s tax rates. The economist Milton Friedman once said:

“I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible.”

If, with our state’s tax rates already some of the highest in the United States, some push for raising them even higher, we can only conclude that they are in favor of raising taxes under any circumstances and for any excuse, for any reason, whenever it’s possible.

John Phelan and Martha Njolomole are economists at the Center of the American Experiment.