Economy
Written by John Phelan | November 20, 2017

Eliminating deductions will hit high-tax Minnesota

This op-ed appeared November 3, 2017 in the Rochester Post Bulletin.

The Republicans claim their proposed tax reform will lower tax rates and make the tax code simpler and fairer. Whether it achieves these aims or not, it will raise taxes further in high tax states like Minnesota. That might not be a bad thing.

The GOP plan proposes eliminating the state and local tax (SALT) deduction. This lets filers deduct the taxes they pay to state and local governments from the total of their income calculated for federal tax purposes. Someone earning $1 million and facing a 39.6 percent federal income tax rate can reduce their federally assessed income by the $100,000 of tax paid to the state. Their federal tax liability is $40,000 less than it would have been if state and local taxes were not deducted.

The deduction is popular with those earning high incomes in places with high state and local income or property taxes. Minnesota has the third highest rate of income tax in the country and is in the top third of states for percentage of filers claiming a SALT deduction. Thirty-two percent of the state’s filers claim some deduction, well above the national average. According to the National Association of Counties, Minnesotans deduct an average of $11,600. In Hennepin County, which has the second highest per capita incomes in the state, half of all households claim it, netting an average deduction of $17,600. By contrast, in neighboring South Dakota, which has no state income tax, just 17 percent of filers claim, receiving an average deduction of $5,800.

The deduction essentially works as a subsidy from Washington DC to state governments. The Tax Policy Center estimates that “Federal tax subsidies through the SALT deduction and the federal tax exemption for state and local bond interest provided an additional $135 billion (annually) in implicit federal support for state and local governments.” By subsidizing local and state governments, the SALT deduction insulates voters in high tax states like Minnesota from the full fiscal consequences of their decisions. By passing some of the burden onto the Federal treasury, lawmakers in St. Paul can get $1 in state income-tax revenue at a real cost to their taxpayers of less than $1.

So why are politicians who have pushed for higher taxes up in arms about this? They passed these high state tax rates into law. They told us high taxes are a good thing. They have repeatedly said that tax rates don’t affect decisions about location, employment, and investment. If they really believe that, why are they worried? Surely people will be grateful to ‘contribute’ more money in taxation and will carry on paying regardless.

They might. The Tax Policy Center calculates that Minnesotan tax filers who claim the deduction would see an average increase of $2,261 in their federal tax bill if the SALT deduction were removed. Deduction-happy Hennepin County voted 64 percent for Hillary Clinton last November. Thanks to this proposal, its residents will now have the chance to pay the higher taxes they voted for.

The fuss about SALT shows what these politicians really think. Talking about yanking up tax rates on the rich is one thing. Actually paying them is another. Actions speak louder than words, and in their defense of SALT these people are saying loud and clear “No new tax”

John Phelan is an economist at the Center of the American Experiment.

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