DFL deficit: A cautious welcome for the House tax bill

Yesterday, Republican and DFL leads on the House taxes panel unveiled their proposed tax bill. It deserves a cautious welcome and shows how divided government is paying off this session.

WCCO reports:

Not included in the sweeping bill is eliminating the lowest income tax bracket, creating a new fifth-tier income tax bracket for the wealthiest Minnesotans to backfill any cuts to Medicaid or trimming the state sales tax rate while expanding what services are subject to it, which Gov. Tim Walz-backed pitched earlier this year. 

All of these are sound policy.

Minnesota certainly needs to reduce its taxes, but I do not share Milton Friedman’s belief that we should be “cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible.” The Holy Grail for tax policy is to levy low rates on a broad base. The proposal to eliminate the lowest income tax bracket narrows the base and would make Minnesota’s income tax — already one of the most progressive in the United States — even more dependent on a relative few top earners.

At the other end, the proposal to give Minnesota the second-highest top rate of income tax in the United States is a complete non-starter.

Finally, the proposal to cut the sales tax rate at the same time as broadening the base is not, by itself, a bad one, but the devil is in the details. As I wrote in January:

…in practical terms, what matters is the extent to which the reduction in the tax take from the lower rate is offset by the increase from the broadened base. Under Gov. Walz’ budget, the average family will save about $42 a year in reduced sales taxes but that saving would be dwarfed by spending $620 on the newly taxed professional services. Overall, the expected impact is about $185 million in additional revenue for the state government.

…in Minnesota’s circumstances, the governor’s particular proposal is totally unacceptable. We would only support a base-broadening measure if the revenue effect was at least offset with lower rates, and with the sixth highest rate of state sales tax in the United States, there is ample scope for that.

The WCCO report continues:

But establishing a $100 additional “baby bonus” to the child tax credit, preserving local government aid and instructing the Department of Revenue to develop a free online tax filing service so Minnesotans don’t have to use third-party services like TurboTax did make the House deal. 

There’s also expanded property tax relief for veterans with a disability or their surviving spouses. 

The online tax filing thing and the disabled veterans property tax measure also make sense. But what of the “baby bonus”?

The $100 increase to the child tax credit is an expansion of the policy the DFL-led Legislature approved two years ago provisioning up to $1,750 per child in a refundable credit with income restrictions. Last year lawmakers authorized advanced payments of the credit which the Department of Revenue will roll out this year in order to achieve the state’s goal of slashing child poverty levels.   

The “baby bonus” provision would take effect in 2028 and families would see the credit boost for each child of theirs born in any given year. 

We do not generally look for ways for the state government to increase its spending — experience shows that it needs little help on that score. But if the state government is going to spend money on what we might call “welfare,” it makes sense to spend it when the recipients are young, where, to use an economist’s jargon, the return on investment is perhaps greatest.

In my 2023 report “The X-Factor? Social capital and economic well-being: A quantitative analysis,” I wrote that “…twin deficits of time and money faced by single parents have pronounced and lasting negative impacts on their children” and noted that expanding the earned Income Tax Credit, originally conceived by Milton Friedman, and the child tax credit, once advocated by Senator Mike Lee, might do something, however small, to help with the financial deficit. We ought not, however, to expect the problems arising from family fragmentation to be solved by throwing a load of money at them.