Research shows that high taxes harm economic growth

Even with a forecast budget surplus of $17.6 billion over the next budget biennium, the DFL leaders in St. Paul are proposing to raise a range of taxes.

There are hikes proposed to existing taxes, such as a massive increase in the annual car registration tax and a new, fifth, top-tier of state income tax. And there will be completely new taxes, like a new 0.7% payroll tax and a 40-cent retail delivery tax. These come despite the fact that Minnesota already has some of the highest tax rates in the United States. As my colleague Bill Glahn noted yesterday, “it’s never enough.”

Research shows that taxes are a factor in where people choose to live. Minnesota, which is already hemorrhaging residents to lower-tax states, can then expect to see this exodus continue as the DFL hikes our taxes ever higher.

But what will the impact of these hikes be on Minnesota’s economic growth more generally?

As I’ve noted before, in a 2012 review of the literature measuring the impact of taxes on economic growth, economist William McBride concluded:

…that there are not a lot of dissenting opinions coming from peer-reviewed academic journals. More and more, the consensus among experts is that taxes on corporate and personal income are particularly harmful to economic growth, with consumption and property taxes less so. This is because economic growth ultimately comes from production, innovation, and risk-taking.

As Alex Durante of the Tax Foundation noted in 2021, “many papers have been written since, some using more sophisticated empirical methods to identify a causal impact of taxes on economic growth.” Reviewing this this new evidence, Durante finds that it confirms:

…our original findings: Taxes, particularly on corporate and individual income, harm economic growth.  

Even more recently, Timothy Vermeer, also of the Tax Foundation, reviewed the empirical research and found that these studies:

…broadly conclude that tax changes generate significant behavioral responses from individuals. They also largely indicate that tax increases can generate increased revenue for government but often at the expense of economic growth and mobility for taxpayers. Conversely, tax cuts tend to produce short-lived revenue decreases while promoting long-term economic growth.

The empirical evidence is clear: Minnesota’s high taxes and DFL plans to raise them even higher will push people out of the state, deter others from coming here, and lower employment and economic growth. For those who like to “follow the science,” this ought to offer a pretty clear path forwards.