A Competition For “Tax Fairness”? That’s Delusional

In yesterday’s Star Tribune, the paper’s editorial board hailed a recent study that found Minnesota’s state and local taxes are distributed nearly equally across all income categories. Minnesotans, the study found, generally pay around 12% of their incomes in such taxes.

The Strib’s editorial board thinks this is terrific, and credits the tax increase that Governor Dayton and the then-Democratic legislature pushed through in 2013. Of course, the Strib acknowledges that “tax fairness” comes at a price:

Some Minnesotans are bound to argue that flattening the “tax incidence curve” has been undesirable. It undoubtedly came at a competitive cost among those who compare top-bracket state income tax rates. Minnesota’s was third-highest in the nation in 2016.

Certainly the editorial board is right about that: who wants to move to a state with the third-highest top income tax rate in the country? But the board sees a silver lining:

But if states can compete on tax fairness, Minnesota is positioned to do well. The national Institute on Taxation and Economic Policy ranked Minnesota the fifth-fairest state in the country in 2014 for taxing those at higher incomes at nearly the same effective rate as the poor.

This is, frankly, delusional. States don’t compete for residents on the basis of “tax fairness.” States compete by having lower taxes. And this is where the editorial board doesn’t seem to understand the facts. It is true that Minnesota has the third-highest top income tax bracket in the U.S. But more significant is that Minnesota has one of the five highest per capita tax burdens in the country. That burden isn’t just heavy on “the rich,” it is heavy on everyone. Minnesota’s lowest income tax bracket is 5.35%. That is higher than the highest tax bracket in 23 states. And seven states have no income tax at all.

The editorial board is implicitly buying into the notion that it is only high earners (the “rich”) who care about tax rates, and whom Minnesota is in danger of losing due to high marginal rates. But this is a myth. As Peter Nelson showed in his study on tax migration last year, Minnesota suffers a net loss of taxpayers to lower-tax states in every household income category over $25,000 per year. The idea that Minnesota can compete with lower-tax states by boasting of its “tax fairness” is–to put it gently–unrealistic.

The fact is that Minnesotans are overtaxed, period. Minnesota will never have a vibrant, growing economy as long as its per capita tax burden is one of the highest in the country.