How indifference about the whopping budget surplus could permanently anchor Minnesota as a second-rate state.
Read John Hinderaker’s introduction to this article here.
Minnesota used to be the poster child for “Blue State” big government policies of high taxes and government spending.
In 2015, President Obama went to Wisconsin to attack the tax cuts and deregulatory policies of Gov. Scott Walker. He contrasted the Badger and Gopher states: “In Minnesota, they asked the top two percent to pay a little bit more. They invested in things that help everybody succeed, like all-day kindergarten and financial aid for college students. They took action to raise their minimum wage and they passed an equal pay law. They protected workers’ rights. They expanded Medicaid to cover more people.” Nearly 40 years after the iconic TIME magazine cover lauding the state and Gov. Wendell Anderson, Minnesota was still “the state that works.”
American Experiment has become increasingly skeptical of this long-held belief. While leftists were holding Minnesota as an example of “Big Government” policies working, the Center was actually looking at the data and it told a very different story: people leaving the state, avoiding it, below average economic growth and job creation. It could be ignored then but it can’t now. It must be confronted.
In 2016, American Experiment produced the report “Minnesotans on the Move to Lower Tax States” showing Minnesota was not only losing residents to other states, but failing to attract them from other states, as well. The Center’s annual report on Minnesota’s economy that year called the state’s performance “lackluster,” noting, among other things, below average GDP growth.
Minnesota’s disappointing economic performance continues. As noted in the Center’s most recent annual economy report published in 2020, Minnesota’s per capita GDP growth has failed to keep pace with that of the United States generally since 2014. Our state’s urban areas have also been relative laggards: three of Minnesota’s five urban areas have recorded economic growth rates below the average for the United States since 2001. In particular, the Twin Cities metro area has recorded a lower growth rate than 10 out of 12 peer metro areas since 2001. While it is true that levels of GDP and Personal Income per capita are above average in Minnesota, per worker levels are below average because we are a low productivity economy; we also fall behind the United States average in GDP per hour worked. The increases in per capita Personal Income in our state since 2000 have come less from labor and capital income, where we fall below the average of the United States, and more from an increase in transfer income, where we rank ninth in the United States. While Minnesota performs well in generating new ideas as measured by patents per capita, we do badly at turning these into new businesses and sources of new income. And as a share of all businesses in our state, new and young businesses are well below the United States’ average.
These facts have been hard to accept in Minnesota, where people take great pride in the state’s high quality of life. But skepticism that it remains “the state that works” is now much more widely shared.
In March 2021, Minnesota’s Department of Employment and Economic Development Commissioner Steve Grove tweeted in celebration of our state being ranked the second best to live in by U.S. News and World Report. He was promptly roasted by progressives highlighting Minnesota’s racial disparities and he was forced to issue a groveling apology. In May, the Star Tribune embraced a report from the Minnesota Chamber of Commerce that highlighted, among other things, our state’s below average GDP growth and “lack of in-migration from other states” — sound familiar? And a recent Thinking Minnesota Poll found that, while 45 percent of Minnesotans think our state is on the right track, 48 percent believe it is on the wrong track; this is up from 38 percent in March 2019 and 26 percent in March 2018.
A new consensus is emerging as progressives join conservatives in perceiving that all is not well in the state of Minnesota. In these circumstances, Minnesota’s forecast budget surplus represents a golden opportunity for the state to get back on the right track.
There are many proposals to spend the vast majority of the surplus on various government programs. Gov. Tim Walz wants to spend 90 percent of the surplus, reserving just 10 percent — mere crumbs — to give to the hard pressed Minnesotans he is forecast to take it from, sending each of them a check for $500 stamped with his name.
But this has been tried before, and it has failed. In American Experiment’s new report, “It’s Our Surplus; Give it Back,” Minnesota’s state government is already spending at historically high levels. In 2020, the state government spent $4,348.20 for every resident. This was the highest amount on record. It was 5.9 percent higher, in inflation adjusted terms, than in 2016, and also high compared to other states. In 2019, Minnesota ranked 14th in the United States in terms of direct state and local government expenditure per capita, 6.1 percent above the United States’ average.
Every problem pointed to by conservatives or progressives in Minnesota has either arisen under the “Blue State,” big government policies of high taxes and high government spending — the same ones once praised by President Obama — or has proven resistant to remedy by such policies. There is no reason to assume that giving in to more spending will fix these problems. There should be no surplus-funded increase in spending.
Instead, the surplus should be left with the ordinary, hardworking Minnesotans who paid for it. And this should be done with permanent cuts in tax rates.
Minnesotans are some of the most heavily taxed citizens in the United States. The state has the sixth highest rate of state personal income tax in the United States. And, while the top rates for the District of Columbia, New Jersey, and California all go into effect with incomes of $1 million annually and New York’s $25 million, Minnesota’s starts at the relatively modest level of $166,040. But Minnesota doesn’t just tax “the rich” — if one can honestly call it that. Our lowest personal income tax rate is higher than the top rate of 24 states.
Minnesota is also one of only 12 states and the District of Columbia to impose an estate tax. On top of that, our estate tax burden is also one of the heaviest: of the 13 jurisdictions imposing one, Minnesota’s $3 million exemption is lower than that of only eight states, and at 13 percent, only Vermont has a higher minimum estate tax rate.
American Experiment’s report “Taxes and Migration: Minnesotans on the Move to Lower Tax States,” illustrates how these taxes push residents out of Minnesota and deters others from moving here. This contributes to a persistent net loss of domestic residents to other states.
Minnesota’s businesses are hurt by burdensome taxes, too. The state ties for the third-highest corporate income tax rate in the United States. While Minnesota’s rate applies to the first dollar of taxable revenue, Iowa’s rate, which also ranks third, starts to take effect on taxable income over $250,000 annually. Research finds that this is one reason for Minnesota’s below average business formation and job growth.
Besides the high rates, Minnesota’s taxes are also needlessly complex. On the corporate tax side, the state is one of 13 jurisdictions that don’t fully conform to the federal depletion schedule and one of only six to impose an Alternative Minimum Tax (AMT) on corporations. For individual income taxes, Minnesota is one of just five jurisdictions to impose an AMT for individuals and one of 15 to have a so-called marriage penalty tax written into our tax code.
Overall, Minnesota’s tax burden – state and local sales, property, and individual income tax rates as a share of Personal Income – ranked sixth highest in the United States in 2019. Research finds that high taxes such as Minnesota’s restrain economic growth, partly accounting for our state’s below-average economic performance in recent years. The 2022 surplus represents an historic opportunity to align taxes with economic growth, creating broad-based prosperity.
Minnesota should act to reduce the complexity of its tax system by conforming to the federal depletion schedule, abolishing the AMT on corporations and individuals, and eliminating the marriage penalty tax. All this can be done with little loss of revenue.
Minnesota is at a crossroads. The state needs to send a signal to the rest of the country that it is changing direction. As the former poster child for “Blue State” big government policies of high taxes and government spending, there is an opportunity to take a new road, to think big and take bold steps toward prosperity, and to rebuke the sense of economic malaise permeating the state. This is why we need permanent, significant cuts to tax rates, starting with the corporate income tax rate. Estimates from the Department of Revenue based on the November forecast say that just a one percentage point cut to 6.80 percent on the first dollar of taxable income would reduce state government revenues by $154 million in each of 2022 and 2023. This is far from an extreme measure: Minnesota would still have the seventh highest top rate of corporate income tax in the United States.
Minnesota should also cut its personal income tax rates. A one percentage point cut in each tax bracket would reduce state government revenues by $2.1 billion in each of 2022 and 2023, according to Department of Revenue estimates. Again, if this sounds drastic, consider that it would only move our state from the sixth to seventh highest top rate of state personal income tax in the United States with the lowest rate still higher than the highest rate in 13 states, as opposed to the current 24th place.
Putting Minnesota back on the right economic track is a solid first step to return to the high standards of living for which the state should be known. But the state legislature and the Walz Administration want to throw the budget surplus at more failing government programs and mediocre investments instead of returning it to the hard working citizens who earned it. If they spend the surplus and don’t cut taxes, Minnesota will continue on this downward economic spiral. The state hasn’t yet hit bottom, but it’s doubtful anyone wants to find out how far down it can go. Minnesota faces a crossroads; it’s time for choosing a new path forward.