American Experiment Testimony on the House DFL Tax Bill

On Monday, House Democrats unveiled their Omnibus tax bill — HF 1938. Among the numerous provisions in the bill, a couple of things that we have written about at the American Experiment stand out.

These include:

  • A provision to raise taxes by creating a fifth-tier income tax bracket, with a rate of 10.85 percent for incomes over $650,000 for single filers, and $1 million for married joint filers.
  • A provision to expand the Minnesota Working family credit and combine it with a newly created child tax credit of $1,175 per child.
  • One-time rebate checks of $275 for single filers and $550 for married couples, with $275 per dependent, up to three dependents.
  • A provision allowing 100 percent social security subtraction for incomes less than $100,000 for married taxpayers, and $78,000 for single filers.
  • A provision to raise taxes on corporations by imposing a worldwide reporting system.

Overall, the bill includes $3.03 billion in tax relief, with the majority — $1.715 billion — in the form of tax credits. The bill also includes a $2.2 billion income tax hike for the next 4 years (this does not include other bills that will raise other taxes, like the Paid Family and Medical Leave, as well as taxes in the transportation bill).

At American Experiment we have advocated time and over again for broad tax relief for all Minnesons, especially considering our punitive income tax system. We have argued that tax credits are especially problematic for the tax system and for the state budget. Moreover, Minnesota’s income tax system is highly progressive. Raising taxes on the rich would make it even more progressive, which would be detrimental to the state economy.

Earlier today, I provided testimony specifically opposing the provisions to create a fifth-tier income tax bracket as well as expand the Minnesota Working Family Credit and create a child tax credit. In my testimony, I argued that these two provisions will make our tax system more progressive, narrow the income tax base, and make us even more reliant on a tiny segment of high-income payers who already pay a majority of income taxes. This is unsustainable for the state budget.

Below is my testimony, more or less as recited.

Good morning, Madam Chair and Members of the House Taxes Committee:

My name is Martha Njolomole, and I am an Economist at the Center of the American Experiment. I am here to speak specifically in opposition to provisions in sections 22 and 26 to create a fifth-tier income tax bracket as well as expand Minnesota’s Working family credit and create a child tax credit.

According to the Minnesota Department of Revenue, in 2018 — the most recent year for which data is available — the bottom 30 percent of Minnesota households received nearly 6 percent of all state household income. However, they paid no income taxes. In fact, after accounting for tax credits, they received money back from the state. On the other hand, the top 10 percent of Minnesota households — Which are those households earning over $164,000 — received 43 percent of state household income, and they paid about 60 percent of all individual income taxes in the state.

Rich Minnesotans, on average, contribute a disproportionate share of Minnesota’s individual income tax revenues, and they also pay a disproportionate share of their income in income taxes. As a matter of fact, in 2018, the top 30 percent of all households paid 85 percent of all income tax revenues. And while the households in the bottom 20 effectively faced a zero percent income tax rate, those in the top ten percent paid a 6 percent income tax rate.

As it currently stands, Minnesota’s tax system is heavily reliant on income taxation. And because we have a progressive individual income tax system, we are heavily reliant on high-income taxpayers. The numerous provisions in the bill expanding credits while raising taxes on the rich makes it even more so.

Rich Minnesotans are, however, leaving Minnesota at higher rates compared to the average taxpayer, taking their income tax revenues with them — a trend that has only worsened in recent years. According to data from the US Census Bureau, in the period between 2011 and 2020, Minnesota, on net lost about 27,000 residents to other states. And while our state gained residents for every income bracket under $50,000, it lost residents for every income bracket over $50,000.

Creating a fifth-tier income tax bracket will only worsen the out-migration among the rich that we have seen in the recent decade. At the same time, expanding the working family credit, or any other credit, will reduce or entirely eliminate tax liabilities for more taxpayers at the bottom of the income ladder — most of whom already do not pay income taxes. This will narrow the tax base, making our income tax system more inefficient, thereby threatening not only Minnesota’s economy but also the sustainability of the state budget.

Thank you, Madam Chair and members of the committee.

In addition to my oral testimony, I also provided written testimony that explains in more detail why raising taxes on the rich while narrowing the tax base is problematic. You can access it here: CAE comments on HF 1938