High tax rates ≠ high revenues
Lower tax rates incentivize economic activity and therefore expand the tax base. High tax rates do the opposite
On Jan. 26, Gov. Tim Walz introduced his tax and spending plan. Among other things, the plan proposes a raise in both the corporate and income tax rate. This is intended for increased spending, mostly geared towards individuals and businesses that have been affected by the coronavirus.
To the idea of helping individuals, Walz has proposed a one-time payment of $750 to low-income individuals. The payments will come through the Minnesota Family Investment Program (MFIP), which oversees Minnesota’s cash payment program. This is very much in line with an earlier proposal to give cash payments to welfare recipients. While the proposal is noble and well-intentioned, there are a couple of things to keep in mind.
As outlined in our report, Minnesota is an exceptionally generous state when it comes to welfare. In 2018, for instance, Minnesota spent about $30,000 per person in poverty — the third-highest in the nation. In the same year, the national average spent per person in poverty was only $17,000.
Quite understandably, welfare does include some high-cost services like healthcare, which partially contribute to such high expenditure. However, upon further inspection, it does not explain why we spend much higher compared to other states. In fact, on healthcare services included in welfare, like Medicaid, Minnesota generally spends on average among the top ten highest per person enrolled.
The story is the same with cash welfare payments. In addition to having high payments, Minnesota also has lax eligibility standards. In 2018, for instance, the income cutoff to be eligible for cash payments here was the highest in the nation. Additionally, Minnesota’s monthly cash payments are significantly higher than the national average.
Figure 1: Maximum Monthly Earnings for Initial TANF eligibility for a Family of three (2018)
Source: Urban Institute
Not surprisingly, spending on welfare takes up a big chunk of our budget. For example, from 2010 and 2018, spending on welfare has made up at least 30 percent of the Minnesota budget every year. In 2018, welfare spending was 37.10 percent of general fund expenditure.
Source: US Census Bureau
Not only that, but welfare expenditure between 2010 and 2018 has grown by 30 percent. Welfare has been the fastest-growing expenditure in our budget, accounting for a little over 50 percent of growth in general fund spending.
So, setting aside the fact that most welfare recipients saw no disruption in cash payments, there are a number of reasons that make expanding welfare, due to the pandemic, illogical. For one, Minnesota is an extremely generous state when it comes to welfare spending. Additionally, welfare takes up a big and increasing chunk of our budget.
This pandemic should be no excuse to overwhelm our budget with increased spending on assistance programs.