Two states permanently exempted groceries from their respective sales tax bases.
Five states suspended their tax on gasoline.
Eleven states chose to return surplus revenue to eligible taxpayers through direct tax rebates.
Whether exempting groceries from the sales tax is a good idea is something up for debate. A good tax policy usually needs a broad base. This ensures that the burden does not disproportionately fall on one group over another. A broad base is also less distortionary and allows for more revenue to be collected at a lower rate. Exempting groceries narrows the sales tax base, leading to inefficient taxation.
And when it comes to the gasoline tax, Minnesota’s rate isn’t as high as other states. Moreover, as American Experiment has already shown, revenue from the gas tax has fallen due to cars becoming more efficient. So, suspending the gas tax is probably not the best idea for Minnesota to emulate.
Minnesota should prioritize income tax reform
American Experiment’s concern with Minnesota’s taxes has been mostly about income taxes. And here, there are lots of good examples to learn from.
According to Tax Foundation, 10 states in total have reduced individual income taxes in one way or another, and 6 states have reduced corporate income taxes. And amazingly enough, all of the 10 states that reduced individual income taxes already had lower taxes compared to Minnesota.
Beginning January 2024, for example,
Georgia will transition from a graduated individual income tax with a top rate of 5.75 percent to a flat tax structure with a rate of 5.49 percent
Before the tax reform, Georgia’s top rate of 5.75 percent was 70 percent lower than Minnesota’s top rate. So this reform will set these two states apart even more.
Another good example,
Idaho reduced its top individual income tax rate from 6.5 to 6 percent and reduced its second rate from 3.1 to 3.0 percent for tax year 2022. It also consolidated the five individual income tax brackets into four by eliminating the second-highest bracket.
Out of the six states that have lowered their corporate income taxes, only Pennsylvania has a higher rate than Minnesota. Iowa had the same rate as Minnesota. This is about to change, however.
Beginning next year, Iowa will gradually cut its rate to as low as 5.5 percent. Pennsylvania will lower its corporate rate to 8.99 percent beginning January next year. This means that Minnesota will have the second highest top corporate income tax rate, only behind New Jersey which has a tax rate of 11.5 percent.
Minnesota is falling behind
Minnesota is already a high-tax state. But with low-tax states enacting significant reform, our state is about to become even less competitive.