An Economist’s View: Stop taxing to support more spending in St. Paul
This op ed appeared in the Duluth News Tribune on March 20th, 2021
The COVID-19 pandemic has played havoc with Minnesota’s state finances. Late last year, Minnesota Management and Budget forecast a state budget deficit of $883 million for the 2022-2023 biennium. By the last week of February, that had vanished, replaced by a forecast surplus of $1.6 billion. Yet, despite this good news, in his revised budget announced on Thursday, Gov. Tim Walz still proposes to hike Minnesota’s taxes with, among other measures, a new fifth income tax rate of 10.85% and a hike in the corporate income tax rate to 10.8%.
These policies ought to be resisted for five main reasons.
First, Minnesotans are already some of the most highly taxed citizens in the United States. The top rate of income tax, 9.85% on taxable income over $164,400 a year, is already the fifth highest: The proposed hike would push us up to third. Likewise, we have the third-highest top corporate income tax rate in the United States, 9.8% on the first dollar of taxable revenue: The proposed hike would push us up to second.
This latter measure is particularly harmful. The corporate income tax might well be levied on businesses, but its incidence — who ultimately bears the burden — falls on either consumers in the form of higher prices, workers in the form of lower wages, or shareholders in the form of lower dividends. Research finds that labor bears between 50% and 100% of the burden, with 70% or more the most likely result. Minnesota’s Department of Revenue calculated the “incremental incidence of a change in the corporate tax” and found that 46% of the burden of this increase falls on Minnesota’s consumers and 27% on our state’s workers. None falls on capital in the form of lower dividends. In short, this measure is equivalent to another income tax hike.
Second, hiking tax rates does not appear to increase tax revenues. An increased tax rate is an attempt by government to claim a greater share of its residents’ income in tax. Yet, even as Minnesota’s income tax rates have fluctuated, its tax revenues have consistently remained at around 6.6% of the state’s GDP for the period 1974 to 2019. Indeed, Minnesotans handed over a larger share of their incomes to the government in the 1990s (with top income tax rates of 8.5%) than they did in the 1970s (with rates of 17%).
This has an important consequence for state fiscal policy: The dollar amount of tax revenue available to the state government is much more a function of the size of the state’s economy — its GDP — than of how high its tax rates are. If you want to boost state government revenues, you should be looking to increase state economic growth.
This brings us to the third point: Tax hikes depress economic growth. The consensus from empirical studies is that higher taxes on corporate and personal income are particularly harmful to economic growth, with consumption and property taxes less so. So, if increased growth is necessary for increased revenues, higher tax rates that lower that growth will lead to lower revenues.
Fourth, in total and per person — and in real terms — Minnesota’s state government has never spent more money than it is spending right now. Indeed, state government spending per Minnesotan was at record highs before the pandemic. The 2019 figure of $4,088 per Minnesotan is 27% higher in real terms than it was in 2010. Whatever difficulties Minnesota’s politicians might be facing, taking too little of your money is not one of them.
The conclusion is clear. If policymakers want to generate larger tax revenues to fund even higher government spending in Minnesota, raising taxes is the last thing they ought to do. Instead, they should think about what will boost our state’s economic growth.
John Phelan of St. Paul is an economist at the Center of the American Experiment (AmericanExperiment.org), a conservative public-policy think tank based in Golden Valley, Minnesota. He wrote this for the News Tribune.