High tax rates ≠ high revenues
Lower tax rates incentivize economic activity and therefore expand the tax base. High tax rates do the opposite
On Tuesday, Gov. Walz unveiled his budget for the 2022-2023 biennium. One of the proposals it contained was a hike in the corporate income tax rate to 11.25%.
As we noted in our recent report ‘Closing Minnesota’s Budget Deficit: Why we should make spending cuts and not raise taxes‘, at 9.80% 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. This hike would push us up to second, as Figure 1 shows. And, as I noted yesterday, this is not a tax on ‘the rich’: Gov. Walz’ own Department of Revenue found that 46% of the burden of this increase would fall on Minnesota’s consumers in the form of higher prices and 27% would fall on our state’s workers in the form of lower wages and employment opportunities. None of the burden would fall on capital in the form of lower dividends.
Figure 1: Top rates of state corporate income tax, 2020, and Gov. Walz’ proposed rate
Source: The Tax Foundation
So, Minnesota taxes corporations heavily relative to other states. This is a fact. If it isn’t, if you think the numbers in Figure 1 are wrong, please, drop me a line. I would be happy to correct any errors.
But there are errors and then there are errors. In a tweet on Tuesday, Commissioner Steve Grove, who is in charge of Minnesota’s Department of Employment and Economic Development, said:
If that was gymnastics, I'd call it a basic somersault on an open grass field.
— Steve Grove (@grove) January 26, 2021
Quite how this figure – Business Taxes as a Percent of State GDP – is calculated is somewhat unclear. What is even more unclear is how dividing business taxes – however measured – by state GDP gives you any useful idea of the tax burden facing business in Minnesota. If you are a business owner or manager contemplating an investment or employment decision in this state, you calculate what the return will be after expenses. These include the tax you will pay which is given by the tax rate found in Figure 1. What no sensible business owner or manager would do is base their decision on some calculation of state business taxes however measured divided by the total income of the state (GDP). The figure you’d get bears no relation whatsoever to calculating the return to the business of that decision, which is the relevant factor.
I’ve noted before how few people there are in state government with any for-profit, private sector experience, so it is little surprise that somebody there tweeted something so ignorant of basic business practice. But Commissioner Grove does not have that excuse: prior to taking up his current role he was an executive at Google for 12 years. One can only imagine how embarrassed he was when he hit send.
The late Daniel Patrick Moynihan once said: “Everyone is entitled to his own opinion, but not his own facts.” Journalist Matt Taibbi, one of the most astute observers or contemporary American political culture, said back in 2008:
…increasingly, we’re not really a nation of citizens that have a commonly accepted group of facts that we’re debating. Instead we’re retreating into these insoluble pockets that have their own versions of reality.
So, if you support high taxes, fine, argue in their favor. But be honest about what it is you are proposing. Don’t cook up bizarre irrelevancies intended to cloud the reality. That will get us nowhere.
John Phelan is an economist at the Center of the American Experiment