Why the proposal to create a fifth-tier income tax bracket of 12.45% in Minnesota is a bad idea
Today, the Minnesota House of Representatives held a hearing session for a bill to create a fifth individual income tax bracket with a 12.45% rate. In my testimony regarding this bill, I provided the following reasons why it is a bad proposal:
Firstly, Minnesota is already a high-tax state. Minnesota’s top marginal individual income is currently the fifth highest in the nation. The new tax bracket will give Minnesota the second-highest top marginal individual income tax rate.
Not only that, but for single filers, incomes between $250,000 and $1 million will face the country’s highest top marginal income tax rate. This is because incomes in that range are taxed at lower rates in California. California`s top rate of 13.3 percent kicks in only at incomes over $1 million for single filers.
Like it or not, Minnesota needs to compete with other states for workers, capital, and investment. This is a battle that our state has been losing. According to IRS data, between 2011 and 2018, Minnesota has seen a net outflow of individuals earning $$50,000 or more. More significant losses can be seen among those earning $100,000 or higher. Higher taxes will accelerate the outflow migration of high income, high-skilled workers. With increased remote work, fewer obstacles exist for individuals willing to move out of Minnesota.
The rich already pay a disproportionate share of Minnesota’s income taxes. According to the Minnesota Department of Revenue, in 2016, while the top 10% earned 43% of Minnesota’s income, they paid 59% of the state’s total income tax revenue. Further tax hikes will only drive them away.
Tax hikes and income growth
Research clearly shows that high taxes are bad for economic growth, income taxes more so. Income taxes are distortionary. They discourage work and investment. Research also specifically shows that raising taxes when they are already high has a more dramatic effect on income growth.
Lastly, and more importantly, higher tax rates are not associated with higher tax revenues. Tax revenues are a more direct function of the state`s economy — Gross Domestic Product — than its tax rate.
We can see by looking at the tax hikes of 2013 that in the years that followed, the proportion of income taxes paid by the rich did not go up. In fact, historically, Minnesota’s tax revenue as a proportion of GDP has remained constant despite the variance in tax rates.
The current proposal will likely, therefore, drive high-income Minnesotans to other states and stiffle Minnesota’s economy without raising revenue.