It’s Our Surplus: Give It Back!
In December, Minnesota Management & Budget (MMB) announced a forecast budget surplus of $7.7 billion for the FY 2022-23 biennium, the largest surplus in state history. These are only forecasts and significant downside risks remain, but MMB notes that “the improved outlook carries into FY 2024-25 planning estimates.” Indeed, planning estimates for the General Fund budget show a surplus of forecast revenues over projected spending of $4.0 billion in FY 2022-23 and $5.9 billion in FY 2024-25.1 The question of what to do with this money will dominate the forthcoming legislative session in Saint Paul.
We believe that this money should be given back to – or more accurately, left with – the people who earned it: ordinary, hardworking Minnesotans. We believe this should be done in the form of permanent tax cuts. And we believe that this surplus represents an opportunity to move our state’s taxes in a decisively pro-growth direction.
There are a number of reasons for this. First, Minnesota’s state government is already spending near-record amounts, adjusted for inflation and in per capita terms. This should rule out using the surplus to fund even higher government spending. Second, Minnesotans are some of the most heavily taxed citizens in the United States. Third, needless complexities in Minnesota’s tax system increase its burden. Fourth, this heavy tax burden slows economic growth in our state. Fifth, it leads to losses of residents to other states. For these reasons, the surplus should be taken as an opportunity to cut and simplify taxes on Minnesotans.
Minnesota Management & Budget (MMB) forecasts a budget surplus of $7.7 billion for the FY 2022-23 biennium, the largest surplus in state history. Planning estimates for the General Fund budget show a surplus of forecast revenues over projected spending of $4.0 billion in FY 2022-23 and $5.9 billion in FY 2024-25.
For a number of reasons, we believe that this money should be given back to – or, more accurately, left with – the people who earned it: ordinary, hardworking Minnesotans. And we believe this should be done in the form of permanent tax cuts.
Minnesota’s state government is already spending at historically high levels. In 2020, Minnesota’s state government spent $4,348.20 for every state resident. This was the highest amount on record and was 5.9 percent higher than in 2016.
Minnesota’s state government spending is high compared to other states. In 2019, Minnesota ranked 14th in the United States in terms of direct state and local government expenditure per capita, 6.1 percent above the United States’ average.
These high levels of state government spending have not alleviated our social ills and spending more won’t change that. There should be no surplus-funded increase in spending.
Minnesota has some of the highest tax rates in the United States. Legislators should cut them.
Minnesota has the sixth-highest rate of state personal income tax in the United States. And, while the top rates for the District of Columbia (seventh highest), New Jersey, and California all kick in with incomes of $1 million annually and New York’s at $25 million, Minnesota’s starts at the relatively modest level of $166,040
Minnesota doesn’t just tax “the rich” heavily. Our lowest personal income tax rate is higher than the top rate of 24 states.
Our state ties for the third-highest corporate income tax rate in the United States. While Minnesota’s rate applies to the first dollar of taxable revenue, Iowa’s rate, which also ranks third, only kicks in at taxable income over $250,000 annually.
Minnesota is one of only twelve states and the District of Columbia to impose an estate tax.
Our state’s tax burden – state and local sales, property, and individual income tax rates as a share of Personal Income – ranked 6th highest in the United States in 2019.
Minnesota’s taxes are also needlessly complex. We are one of thirteen jurisdictions that don’t fully conform to the federal depletion schedule, one of only six to impose an Alternative Minimum Tax (AMT) on corporations, one of just five to impose an AMT for individuals, and one of fifteen to have a “marriage tax penalty” written into our tax code.
Research finds that high taxes, such as Minnesota’s, restrain economic growth. This partly accounts for our state’s below-average economic performance in recent years.
Studies also find that our state’s high taxes push residents out of Minnesota and deter others from moving here.
The surplus represents an opportunity to align taxes with economic growth.
Minnesota should act to reduce the complexity of its tax system. This can be done with little cost of revenue.
Our state should also reduce its corporate income tax rate. A one percentage point cut would move Minnesota from third to seventh highest in the United States.
Minnesota should also cut its personal income tax rates. A one percentage point cut in each tax bracket would move us from the sixth to seventh highest top rate in the United States with the lowest rate higher than the highest rate in thirteen states, as opposed to 24 currently. This would cost $2.1 billion in each of 2022 and 2023, accounting for the surplus.
A two percentage point cut in each rate would move us from the sixth to tenth highest top rate in the United States with the lowest rate higher than the highest rate in eleven states, as opposed to 24 currently. This measure would cost $4.2 billion in each of 2022 and 2023, more than double the forecast surplus. Even so, if spending was cut as an offset, then General Fund spending would still be, in nominal terms, higher than in any year prior to 2019: in real terms, spending would be higher in 2022 and 2023 than in any year prior to 2024.
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