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The Atlanta Fed’s GDPNow tracker downgraded its forecast for Q3 GDP growth again: it has now dropped from 6 percent at the end of July to 1.3 percent now. Then came the…
Tomorrow, Gov. Walz will unveil his budget for the coming biennium. At present, Minnesota Management and Budget forecasts a deficit of $1.3 billion for that period. With a balanced budget a constitutional requirement, much of the action at the state capitol this session will center around how to close that gap.
As I have written previously, and as we explain at length in our recent report ‘Closing Minnesota’s Budget Deficit: Why we should make spending cuts and not raise taxes‘, tax increases should be a non-starter. There are four main reasons for this: first, Minnesota’s top rate of state income tax is already the fifth highest in the United States; second, the evidence from our state’s fiscal history shows that hikes in tax rates do not appear to drive increases in tax revenues; third, tax hikes have been shown to depress economic growth; and finally, in total and per person, and in real terms, Minnesota’s state government has never spent more money than it is right now. Whatever problems our state government may face, a shortage of cash is not one of them.
Indications are, however, that Gov. Walz disagrees. This weekend, the Star Tribune reported:
But Walz hinted that tax increases on wealthy Minnesotans will also be part of his equation.
“Families, especially those making $1 million or more, the numbers are pretty staggering how much better they did during the pandemic,” Walz said.
Gov. Walz can take some credit for how much better the wealthy have done relative to others in the last year: if you close small businesses but leave big businesses open, this is likely to happen. But while it is easy for Gov. Walz to say that he is entitled to a greater share of Minnesotans earnings, what does he mean by a ‘fair share’?
Before 2013, the ‘fair share’ was deemed to be 7.85% of income over $79,730 ($88,939 in 2020 dollars). That year, it was felt that this was actually an unfair share, and the top rate of income tax in Minnesota was raised to 9.85% on income over $152,540 ($170,159 in 2020 dollars). Now, again, that share, once deemed ‘fair’, is now, apparently, ‘unfair’ and needs to be higher, according to Gov. Walz. Does what is ‘fair’ change so much over time?
How do we define what is ‘fair’? Does it mean that everybody pays the same? That would leave us with a millionaire paying the same as someone on minimum wage. Does it mean that every pays the same proportional amount? That would be a flat tax as opposed to the progressive tax we have at present, where the share you pay increases with income.
Figure 1 shows what that means in Minnesota. The bottom 30% of Minnesota households earn 6% of the state’s total income but pay 0% of its individual income taxes (technically -0.5%, they receive $56 million in tax credits). Households in the top 10% of incomes, however, those earning over $156,101, earn 43% of all the state’s income but pay 59% of its total individual income taxes. They earn a disproportionate share of state income but pay an amount of state income tax which is more disproportionate even than that.
Figure 1: Share of state’s income earned and share of state’s individual income taxes paid by income decile, 2016
Source: Minnesota Department of Revenue
Is this ‘fair’? That is a normative question which goes beyond the realm of economic analysis. But if it is not, and if you think it is too low, you have a duty to explain a) exactly what amount you think is fair and b) why that amount, as opposed to some other, is the ‘fair’ one.
John Phelan is an economist at the Center of the American Experiment.