DFL proposals will give Minnesota the highest top rate of tax in the United States

Even with a forecast budget surplus of $17.6 billion, Gov. Walz’ “One Minnesota” budget seeks to raise taxes. One of these increases is a 1.5% surcharge on capital gains and dividends of individuals, trusts, and estates over $500,000 and 4% for that income if it exceeds $1 million. Gov. Walz estimates that this would generate $661 million over the next two years. That is highly unlikely.

Minnesota already taxes capital gains

What is a “capital gain” and how is it taxed? The Center on Budget and Policy Priorities explains:

While the value of an asset can increase in each year that it is owned, the capital gain is taxed only when the asset is sold. For example, consider a taxpayer who bought 100 shares of stock for $10 each (total cost of $1,000) and sold them for $15 each (total value of $1,500). The increase in value of $500 is the amount of capital gains income “realized” by the taxpayer. If the sale occurs within a year of the purchase, these are considered short-term capital gains for tax purposes; if more than a year after purchase, they are considered long-term gains. Under current state and federal law, these capital gains are reported and taxed as income in the year that they are realized.

In Minnesota, then, capital gains are already taxed at the top rate of state income tax. This is the case in all states. This top rate of income tax is 9.85% in Minnesota at present, but the DFL is currently proposing to increase this to 12.5%. This would be the second highest rate in the United States after California.

Gov. Walz is proposing a capital gains tax hike in addition to this. So, with capital gains in Minnesota taxed as income at 12.5% and with a further tax of up to 4% as a “surcharge,” Minnesota would have, under the DFL proposals, a top rate of income tax of 16.5%, comfortably the highest in the United States.

So what? They’re rich

Of course, this rate will only apply to the highest earners in Minnesota — surely they can afford it?

Perhaps they can. But they might choose not to. Research finds that taxes are a driver of migration decisions and that those with higher incomes are more responsive to tax rates. This could be a problem for Minnesota given that our state relies on disproportionately large income tax revenues from higher earners. As shown in Figure 1, the Department of Revenue’s 2021 Tax Incidence Study found that the top 10% of Minnesota households by income earned 43.0% of all income earned in the state but paid 59.4% of all state income taxes. If these people decide to leave the state will know about it.

Figure 1: Share of state’s income earned and income taxes paid by the top 10% of Minnesota households by income

Source: Minnesota Department of Revenue

Gov. Walz has said that he wants to halt or reverse the exodus of residents from Minnesota to other states. Why, then, is he not only copying but trying to top the policies of states like California and Illinois, which have also been hemorrhaging residents to places like Florida and Texas?