Gov. Walz’s budget proposals are terrible

Today, Gov. Walz unveiled his budget for the 2022-2023 biennium. In it, he proposes a new fifth income tax rate of 10.85 percent and a hike in the corporate income tax rate to 11.25 percent.

These are terrible ideas. We explained why in our recent report “Closing Minnesota’s Budget Deficit: Why we should make spending cuts and not raise taxes“:

Minnesota has the fifth highest top rate of state personal income tax in the United States — 9.85 percent on income over $164,400 a year. Only Oregon, New Jersey, Hawaii, and California have higher top rates.

Minnesota doesn’t just tax “the rich” heavily. Our state’s lowest personal income tax rate — 5.35 percent on the first dollar of taxable income — is higher than the highest rate in 25 states.

At 9.80 percent on the first dollar of taxable revenue, our state has the fourth highest state corporate income tax rate in the United States. Only Pennsylvania, New Jersey, and Iowa have higher rates.

Higher tax rates do not necessarily bring higher revenues. Minnesotans actually handed over a larger share of their incomes to the government in the 1990s with top income tax rates of 8.50 percent than they did in the 1970s with rates of 17.0 percent.

There is a much stronger relationship between state GDP and tax revenues than top tax rates and state revenues: for total state tax revenues as a share of state GDP, the mean average is 6.6 percent and the median is 6.7 percent. In other words, there is very little variation in these numbers.

This means that if policymakers want more money to fund government services, they should look to increase the state’s GDP rather than its tax rates.

The overwhelming balance of academic literature shows that tax hikes negatively impact economic growth. Of 26 papers reviewed by the Tax Foundation, 23 — 88 percent — found a negative impact of higher tax rates on economic growth.

In total and per person, and in real inflation adjusted terms, Minnesota’s state government has never spent more money than it is right now: $4,088 per Minnesotan, up 26.6 percent since 2010.

Minnesota’s welfare spending per person in poverty — $30,479 in 2018 — is the third highest in the United States and nearly double the national average ($17,127).

If Minnesota’s state government spent the national average amount of welfare per person in poverty in 2018, it would have spent $9.0 billion instead of $16.1 billion — a savings of $7.1 billion. If Minnesota closed its deficit by cutting welfare spending by $1.3 billion, the amount of welfare we spend per person in poverty would still rank us fourth highest in the United States.

If Minnesota closed its forecast budget deficit entirely with spending cuts, we would be returning spending in real, inflation adjusted, per capita terms to the level of 2016-2017.

John Phelan and Martha Njolomole are economists at the Center of the American Experiment.