Minnesota’s Budget Deficit: The state already has some of the highest tax rates in the United States

Today, Minnesota Management and Budget forecast a surplus of $641 million for the FY 2020-21, which ends next June, but a deficit of $1.273 billion for FY 2022-23. This next biennium is the main job of the upcoming 2021 session. As we explained yesterday when we launched our new paper Minnesota’s Budget Deficit: Why we should make spending cuts and not raise taxes, the state constitution requires a balanced budget each biennium. Lawmakers in St. Paul must ask themselves the question: how will we close this deficit? They will have three options: higher tax rates, lower spending, or some combination of both.

Minnesota already has some of the highest tax rates in the United States

The first, and, by extension, the third, ought to be ruled out on the basis that Minnesota already has some of the highest tax rates in the United States.

As Figure 1 shows, Minnesota has the fifth highest top rate of state personal income tax in the United States – 9.85 percent on income over $164,400 a year: only Oregon, New Jersey, Hawaii, and California have higher top rates. But Minnesota doesn’t just tax ‘the rich’ heavily. Our state’s lowest personal income tax rate – 5.35 percent on the first dollar of taxable income – is higher than the highest rate in 25 states.

Figure 1: Top rates of state personal income tax and Minnesota’s lowest rate, 2020

Source: The Tax Foundation

It is a similar story with state corporate income tax rates, as Figure 2 shows. At 9.80 percent on the first dollar of taxable revenue, our state has the fourth highest state corporate income tax rate in the United States. Only Pennsylvania, New Jersey, and Iowa have higher rates.

Figure 2: Top rates of state corporate income tax, 2020

Source: The Tax Foundation

These facts alone should rule out any further increase in Minnesota’s tax rates. The economist Milton Friedman once said:

“I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible.”

If, with our state’s tax rates already some of the highest in the United States, some push for raising them even higher, we can only conclude that they are in favor of raising taxes under any circumstances and for any excuse, for any reason, whenever it’s possible.

John Phelan and Martha Njolomole are economists at the Center of the American Experiment.