Minnesotans see tax cuts instead of tax hikes — for now
Late last year, with forecast budget deficits of $2.4 billion for the 2020-2021 biennium and $4.7 billion for the 2022-2023 biennium, we released our report ‘Closing Minnesota’s Budget Deficit: Why we should make spending cuts and not raise taxes.’
In it, we argued that there were four reasons for the budget deficits to be closed by spending cuts rather than tax hikes. First, Minnesotans are already some of the highest taxed people in the United States; second, hikes in tax rates do not appear to drive increases in tax revenues; third, tax hikes depress economic growth; and fourth, in total and per person, and in real terms, Minnesota’s state government has never spent more money than it is spending right now.
In the event, Minnesota’s state government finances held up better than expected. In December, the shortfall for the 2022-2023 biennium was revised down from a deficit of $4.7 billion to one of $1.3 billion, an amount which could have been covered by the state’s rainy day fund.
Nevertheless, when Gov. Walz unveiled his budget for the 2022-2023 biennium in January, he proposed a new fifth income tax rate of 10.85 percent and a hike in the corporate income tax rate to 11.25 percent.
The case for these tax hikes — weak at the time they were proposed — weakened still further as the state’s budget outlook improved. In February, Minnesota Management & Budget released a new forecast for the 2022-2023 biennium which saw the deficit of $1.3 billion switch to a surplus of $1.6 billion.
Gov. Walz scaled back his tax hikes in March. In April, the House Budget scaled these back even further. And, last Friday, MPR News reported: ‘Tax cuts prevail over tax hikes at Capitol:’
Democrats in the House squeaked through a bill this spring that would have imposed about $1 billion in new taxes on businesses and high earners; Republicans in the Senate comfortably passed a plan to slice taxes.
The final version of a tax bill blends provisions from both proposals but goes the tax-cut route as a whole.
The bulk of the relief comes from waived state taxes on federal assistance during COVID-19. It involves forgiven Payroll Protection Loans for businesses and extra unemployment aid received by idled workers.
We at Center of the American Experiment had lobbied for the exemption of PPP loans from taxation, so we are pleased to see this pass.
Minnesotans remain some of the most highly taxed citizens in the United States and the work to reduce this burden on them goes on. So, too, does the work to increase it.
John Phelan is an economist at the Center of the American Experiment.