Missed opportunities for real tax reform

This op-ed appeared May 13, 2018 in the Pioneer Press

The passage of the federal Tax Cuts and Jobs Act in December, the biggest overhaul of the tax code in more than three decades, offered Minnesota an opportunity to look again at its taxes. It was an opportunity sorely needed. Sadly, it looks as though all too little will come of it.

As we wrote in our recent report, “The State of Minnesota’s Economy: 2017,” Minnesotans are some of the most heavily taxed people in America. It is one of the 43 states to have its own income tax, but the top rate — 9.85 percent on incomes over $156,911 — is higher than anywhere else apart from California, Maine and Oregon. And it isn’t just “the rich” who are taxed heavily in our state. Minnesota’s lowest income tax rate of 5.35 percent is higher than the highest tax rate in 23 other states.

There is evidence that this tax burden is pushing people out of Minnesota and deterring people from coming here. According to IRS data, between 2011 and 2016, Minnesota suffered domestic out-migration of 24,697 residents. And it is not just “snow birds” we are talking about. Over this period, Minnesota lost residents in every age group. Those less than 26 years old saw the third-largest loss. People aged 45 to 54 — those in the prime of their working lives — were the second largest. And, again, it is not just “the rich” who are leaving. Between 2011 and 2016, Minnesota saw a net outflow of people in every income category above a modest $25,000 annually.

Minnesota also taxes its businesses heavily. Our top corporate income tax rate is 9.8 percent, which is the third-highest in the U.S. Academic evidence shows that corporate income tax rates are a big influence in investment decisions, and we see some of this in Minnesota. In 2015, the average American worker had $391 of venture capital behind him or her. In Minnesota, the figure was just $108. Our share of new and young businesses lags the national rate by 34 percent to 30 percent.

All of this helps to explain why our economy is growing at a slower rate than the national average. Since 2000, GDP growth in Minnesota has lagged the nation generally. And, according to recent preliminary figures from the Bureau of Economic Analysis, while the U.S. economy grew by 2.1 percent in 2017, Minnesota’s grew by 1.9 percent.

But Minnesota’s legislators are largely missing this opportunity. The House tax bill reduces the corporate income tax rate from 9.8 percent to 9.1 percent, which is still higher than in 47 other states, by 2020. It also reduces the 7.05 percent individual income tax rate that applies to earners making more than $25,890 to 6.75 percent by 2020. The bill also increases the state standard deduction amount to $7,000 for single filers and $14,000 for married joint filers.

The Senate bill incorporates a proposal to reduce the individual and corporate income tax rates by one percentage point through revenue triggers, and automatically reduces the bottom income tax rate from 5.35 to 5.1 percent, which would still be higher than the top income tax rate in 22 states. It also retains several deductions that were eliminated in the federal bill. The Senate bill also increases the estate tax exemption level to $5 million.This is a welcome step. But, as with the proposed reductions in income and corporate tax rates, it is a small step.

Minnesota is a wonderful place with great people. It has many advantages, not the least of which is its hard-working, highly educated workforce. But we cannot take our relatively high standard of living for granted. It is the result of choices made in the past. And our future prosperity will depend on choices we make in the here and now. If we want Minnesota to remain a great place to live, we need to be bolder in pursuit of the policies that will foster a culture of prosperity.

John Phelan is an economist at the Center of the American Experiment, a conservative think tank in Golden Valley.