How to cut Minnesota’s income taxes
Minnesota’s forecast budget surplus of $17.6 billion is a historic opportunity. As we have long noted, Minnesotans are some of the most heavily taxed citizens in the United States and evidence shows that these taxes slow economic growth and job creation, push residents out and deter others from coming here, and do not even produce the offsetting benefit of a higher quality of life. We should cut these harmful tax rates.
But how? We explain in our new Policy Briefing called simply “Cut Minnesota’s Income Taxes.”
How much can we cut by?
First we have to ask how much can we cut by? To be conservative, let us hold spending at its current forecast level and use only the surplus, not spending cuts, to fund the cuts. According to the November 2022 Budget and Economic Forecast, the ‘structural’ budget surplus is forecast to be $6.3 billion in the 2024-25 biennium and $8.4 billion in the 2026-27 biennium, or $3.2 billion and $4.2 billion annually. This is the amount of revenue that can be cut without cutting spending.
So how can we cut rates to leave all of that with the citizens it is forecast to come from?
A uniform cut across all rates
One way would be to cut all four income tax rates by the same percentage point amount.
A 1.4 percentage point cut in each rate, for example, would reduce income tax revenues by $3.0 billion annually. This would leave a surplus of $153 million in each of 2024 and 2025 and $1.2 billion in each of 2026 and 2027. In the latter biennium, then, tax rates could be cut even further, to 1.9 percentage points below the current rate in each bracket, and still leave a surplus of $130 million.
Concentrating cuts in the lowest rate
Another option is to concentrate the cut on the lowest income tax rate, 5.35 percent on income up to $20,525 annually if you are married and filing separately or $41,050 is you’re married and filing jointly.
If we cut this rate to 4.1 percent, revenues would fall by $3.1 billion, which would leave a surplus of $47.5 million in each of 2024 and 2025. If we then eliminated the bottom rate entirely in the 2026-2027 biennium, this would still leave a surplus of $149 million: indeed, we could also afford to cut the next rate up by 0.1 percentage points as well and still have a surplus of $74 million.
Minnesota’s high taxes are an impediment to its economic growth and standard of living. The forecast surplus represents an opportunity to cut them which should be seized.