Minnesota House budget proposal represents triumph of hope over experience

We’re getting there.

Last month, Gov. Walz released his revised budget proposal for the 2022-2023 biennium. It was an improvement on his January effort, ditching a proposed estate tax hike and a hike in cigarette taxes that was certainly regressive and unlikely to have any great impact on smoking. Less good was the reduction in the proposed hike in Minnesota’s corporate tax rate – already the third highest in the United States at 9.80% – from January’s 11.25% to 10.8%. And plain bad was the retention of the proposed new, fifth, highest tier of state income tax of 10.85%, which would bump our top rate up from the fourth highest in the United States to third highest. So baby steps, but in the right direction.

Yesterday the Minnesota House DFL released its proposed budget. It proposes a lot of new spending, but such is par for the course. The previous biennial budget signed into law by Gov. Walz was $48 billion. In January, he proposed to spend $52.4 billion in 2022-2023. The Senate, where the Republicans are in charge, proposed a budget of $51.9 billion. The House budget proposal tops them all at $52.5 billion.

Its primary features on the revenue side are a proposal prevent “multinational corporations from sheltering profits in offshore tax havens like Bermuda and the Cayman Islands” (good luck with that) and a new fifth tier of income tax at a rate of 11.15% on income above $1 million (or $500,000 for single filers).

 The creation of a fifth tier of income tax is something of an obsession for the DFL. Both the Governor and the House propose it, with the House proposing a slightly higher rate. They claim this is fair, but that depends on your definition of ‘fair’: such normative discussions are best saved for the pub.

But they also claim that it will bring in a load of new tax revenue. Happily, whether this is true or not is a positive question to which we can look for an answer in empirical literature.

As much as these policymakers don’t like to hear it, the evidence suggests that high tax rates tend to push people out of the jurisdictions imposing them. A paper for the National Bureau of Economic Research (NBER) titled ‘Taxation and Migration: Evidence and Policy Implications‘ by economists Henrik Kleven, Camille Landais, Mathilde Muñoz, and Stefanie Stantcheva, in which they “review a growing empirical literature on the effects of personal taxation on the geographic mobility of people and discuss its policy implications,” found:

There is growing evidence that taxes can affect the geographic location of people both within and across countries. This migration channel creates another efficiency cost of taxation that policy makers need to contend with when setting tax policy.

There is also the evidence of Minnesota’s last attempt to make the rich pay their ‘fair share’, the imposition, in 2013, of a new fourth tier of income tax at a rate of 9.85%. In 2012, before the hike went into effect, the top 10% of Minnesota households by income earned 44% of the state’s total income and paid 58% of its total income taxes. In 2018, these numbers were little changed: 43% and 59% respectively. It is the same for the super douper rich, the top 1% of Minnesota households by income. In 2012, they earned 17% of the state’s total income and paid 26% of its total income taxes. In 2018, the numbers were 16% and 27% respectively. In short, hiking the top rate of income tax didn’t increase the share of income tax paid by ‘the rich’. 

And it should have. As I’ve written before:

The other tax rates remain unchanged. Gov. Dayton’s tax hike applied only to those Minnesotans earning over $152,540 in 2014. If the tax hike did bring in more revenue from the top earners as promised, the only way we can square that with the constant share of income tax revenue they pay is if the amount of income tax paid by all the lower earning households went up proportionally.

If it is true that politicians can wring more cash out of ‘the rich’ simply by raising tax rates on them, we should see, in these numbers, some increase in the share of state income tax paid by ‘the rich’ following Gov. Dayton’s tax hike. We don’t. This suggests that the results of hiking top tax rates, as Gov. Walz now proposes, will be a disappointment to those expecting a bundle of new cash for Minnesota’s politicians to spend.

As far as I can tell, the House budget ditches Gov. Walz’ bad idea for a corporate income tax hike and the capital gains tax hike, both of which are welcome acknowledgments of fiscal reality, and more baby steps in the right direction. But the idea that yet another top tier of income tax will accomplish what the last one failed to do is the triumph of hope over experience.

John Phelan is an economist at the Center of the American Experiment.