How the Democrats tax proposal affects Minnesota
On Monday, September, 13th, House Democrats released their tax proposal which is supposed to pay for their $3.5 trillion spending plan. Among other things, the proposal raises the corporate tax…
Yesterday morning, Minnesota House Majority Leader Rep. Ryan Winkler had an epiphany:
— Ryan Winkler (@_RyanWinkler) February 2, 2021
This is, no doubt, true. Before 2017, Minnesota banned alcohol sales from stores on Sundays. Minnesotans didn’t go thirsty, however. They just skipped across the border to Wisconsin or Iowa, and picked up their booze — and paid the associated taxes — there. The traffic on the I-94 bridge could be brisk in the hour or so before the football kicked off. And, if neighboring states like South Dakota legalize marijuana, you can bet that there will be an uptick in traffic across that border as Minnesotans go shopping for ganja. Any weed taxes — finally a “green tax” I can get behind — will go to their department of revenue, not ours. Rep. Winkler is right to point this out.
But this isn’t just true of herb. As I noted yesterday, Gov. Walz’ budget, proposed last week, would impose a cigarette tax increase from $3.04 a pack to $4.04 a pack. Using 2019 numbers for the Tax Foundation, that would raise our cigarette taxes from the 7th highest in the United States to the 4th highest. And people don’t just swallow these higher taxes. Research finds that states with the highest cigarette taxes have the highest rates of smuggling. Once again, when people are able to, they will, in some cases, respond to a policy measure by relocating their activity. To put it another way, if people are willing to drive to Wisconsin in order to buy fireworks or South Dakota to buy puff, they’re sure as heck going to drive to North Dakota to get cigarettes.
It doesn’t stop there. Among the many bad provisions of Gov. Walz’ budget is a proposed hike in the top rate of state income tax to 10.85%, which would give us the third highest top rate in the United States. There is a large body of empirical research on the effects of taxes on migration. In a recent paper which summarized this literature titled ‘Taxation and Migration: Evidence and Policy Implications‘, economists Henrik Kleven, Camille Landais, Mathilde Muñoz, and Stefanie Stantcheva found that:
There is growing evidence that taxes can affect the geographic location of people both within and across countries. This migration channel creates another efficiency cost of taxation that policymakers need to contend with when setting tax policy.
Again, when people are able to, they will, in some cases, respond to a policy measure by relocating their activity. To put it another way, if people are willing to drive to Wisconsin in order to buy fireworks, South Dakota to buy puff, or North Dakota to get cigarettes, they will drive to any of those places to avoid high tax rates.
This is a key lesson which policymakers all too often forget. When you change tax rates you change incentives and when you change incentives you change people’s behavior. Indeed, as my colleague Martha Njolomole explained yesterday, Gov. Walz’ cigarette tax hike seems to be based — ostensibly, at least — on this logic. If South Dakota legalizes Mary Jane, people will have an opportunity to relocate their activity. With taxes, they already do. Hiking them further will just prompt more to do so.
John Phelan is an economist at the Center of the American Experiment.