DFL deficit: DFLers push second highest top rate of income and top rate of business tax in America
The DFL deficit
In February 2023, Minnesota Management & Budget (MMB) forecast a state government budget surplus of $17 billion for the 2024-2025 biennium. In that “historic” session, the DFL trifecta blew through that surplus and, between 2019 and 2024, Minnesota’s state government spending per person and adjusted for inflation increased by 23%.
That “historic” trifecta also hiked taxes and fees by $10 billion, but even this wasn’t enough to cover the explosion in state government spending, and, in November 2024, MMB forecast a state government budget deficit of $3.5 billion in the 2028-2029 biennium, or $5.1 billion if you account for inflation.
This month, we learned that Minnesota’s fiscal situation had deteriorated even further. The forecast budget surplus for the 2026-2027 biennium is down $160 million — from $616 million in November to $456 million — and the forecast deficit for the 2028-2029 biennium is up to $4.0 billion, or $6.0 billion if you account for inflation.
This deficit — the result of gross fiscal mismanagement by the state government over the last two years — is the central fact of state government finance. How we deal with it — with higher taxes, spending cuts, or some combination of the two — will dominate political and policy discussion in Minnesota for the next two years.
Taxed Enough Already
We have been clear that there should be no more tax hikes.
On the spending side, such is the scale of the explosion of state government spending in recent years, that, according to the November 2024 numbers, Minnesota could close its looming budget deficit entirely with spending cuts and real terms, per capita spending would still be higher in 2029 than in any year before 2024. That is probably true with the more recent numbers.
On the revenue side, Minnesotans are already some of the most heavily taxed citizens in the United States. As Figure 1 shows, the Tax Foundation finds that Minnesota has the fifth highest top rate of income tax in the United States, at 9.85%. Furthermore, the income level at which the top rate kicks in, $330,410 for a married couple filing jointly, would be taxed at a lower rate in each of those states except Oregon.
Figure 1
The Tax Foundation also finds that Minnesota’s corporate tax rate is the second highest in the United States, as Figure 2 shows. It currently stands at 9.8% on the first dollar of taxable income, second only to New Jersey’s rate of 11.5%.
Figure 2
Minnesotans agree. Last month, KSTP reported:
At some point after the Minnesota House settles its political stalemate, legislators will start focusing on issues. When they do, lawmakers will find that Minnesotans want them to focus on lowering taxes, addressing health care and stopping fraud in state government spending, according to the latest KSTP/SurveyUSA poll.
“You are getting a public reaction against tax increases,” said Carleton College political analyst Steven Schier after reviewing the survey results. “Now Republicans hope they can use that and ride that through the legislative session and into the next election as a winning issue for them.”
When asked to name what they consider to be the most important issue facing Minnesota lawmakers, 25% said “lowering taxes,” making it the single most mentioned top issue in the survey… [Emphasis added]
Our own polling supports this. Recently, my colleague Bill Walsh wrote:
Sixty percent of Minnesotans said spending cuts are the way to close the budget gap.
“‘Cause I’m the taxman…”
Others disagree.
Last week, I wrote about a bill in the Minnesota House, HF 1958, which would hike the top rate of income tax in Minnesota to 12.45%, the second highest rate in the United States after that poster child of Blue State governance, California. Furthermore, this rate would kick in at a level of income — $500,000 for a married couple filing jointly — which the Golden State taxes at “only” 9.3%.
In the Senate, these provisions are found in SF 2290, authored by Sens. McEwen (DFL), Port (DFL), Dibble (DFL), Mohamed (DFL), and Marty (DFL). But, in addition, an amendment to the bill “Increases the corporate franchise tax rate from 9.8 percent to 12.45 percent.” This would give Minnesota the highest rate of corporate income tax in the United States.
No doubt this measure will be sold as a squeeze on “the rich,” but this ignores the important fact of tax incidence, which is who actually bears the burden. A company might be responsible for handing cash labelled “corporate tax payments” over to the government, but the true burden — that incidence — might be felt by its employees in the form of lower wages or its customers in the form of higher prices.
Indeed, even the Minnesota Department of Revenue makes this point. In its 2024 Minnesota Tax Incidence Study, they calculate the “incremental incidence of a change in the corporate tax”. They find that 46% of the burden of this increase falls on Minnesota’s consumers in the form of higher prices and 27% falls on our state’s workers in the form of lower wages and employment opportunities. None of the burden falls on capital in the form of lower dividends. It is ordinary Minnesotans, not “the rich,” who will get hit by this hike.
Minnesota has an economic growth problem. Research finds that corporate tax cuts boost investment, increase capital expenditure and employment, and raise income and productivity, while hikes, such as that proposed by the DFLers, increase income inequality. On these grounds, we hope that SF 2290 and its amendment do not pass.