5 reasons Gov. Walz’s tax-raising proposals are bad policy

This op ed appeared in the Pioneer Press on January 31st, 2021.

Last week, Gov. Walz unveiled his proposed budget for the 2022-2023 biennium. Its proposals included a new fifth-tier income tax rate of 10.85 percent and a hike in the corporate income tax rate to 11.25 percent. As we explained in our recent report “Closing Minnesota’s Budget Deficit: Why we should make spending cuts and not raise taxes,” these proposals are absurd for five main reasons.

First, Minnesotans are already some of the highest taxed people in the United States.

Our state’s top rate of income tax – 9.85 percent on taxable income over $164,400 a year – is already the fifth highest: this hike would push us up to third. Likewise, our state has the fourth highest corporate income tax rate in the United States, 9.80 percent on the first dollar of taxable revenue; this hike would push us up to second.

This latter is especially harmful. While the corporate income tax might be levied on businesses, its incidence – who ultimately bears the burden – falls on either consumers in the form of higher prices, workers in the form of lower wages, or shareholders in the form of lower dividends. Empirical studies suggest that labor bears between 50 percent and 100 percent of the burden, with 70 percent or higher the most likely outcome. In short, this is equivalent to another income tax hike.

Even as Minnesota’s income tax rates have fluctuated, its tax revenues have remained a consistent 6.6 percent of the state’s GDP for the period 1974 to 2019. Indeed, Minnesotans handed over a larger share of their incomes to the government in the 1990s (with top income-tax rates of 8.50 percent) than they did in the 1970s (with rates of 17 percent).

There is an important policy lesson here: The dollar amount of tax revenue is much more a function of the size of the state’s economy – its GDP – than of how high its tax rates are. Those looking to boost state government revenues should be looking to increase state economic growth.

This brings us to the third point: Tax hikes depress economic growth.

The consensus from empirical studies is that higher taxes on corporate and personal income are particularly harmful to economic growth, with consumption and property taxes less so. So, if increased growth is necessary for increased revenues, higher tax rates which lower that growth will lead to lower revenues.

Fourth, in total and per person, and in real terms, Minnesota’s state government has never spent more money than it is spending right now.

Indeed, state government spending per Minnesotan was at record highs before the pandemic hit. The 2019 figure of $4,088 per Minnesotan is 27 percent higher in real terms than it was in 2010. Whatever problems Minnesota’s politicians might face, taking too little of their resident’s earnings is not one of them.

Finally, why not cover a forecast budget deficit of $1.3 billion – which will likely be revised down further in February – with the state’s $2.4 billion reserve fund?

If ever there was a rainy day, a once in a century pandemic is certainly it.

The conclusions are clear. If the goal of policymakers is to generate larger tax revenues to fund even higher government spending in Minnesota, raising taxes is the last thing they ought to do. These proposed hikes are terrible policy.

John Phelan and Martha Njolomole are economists at the Center of the American Experiment, which is based in Golden Valley.