If you can work from home, you can work from another – lower tax – state
If workers do become more sensitive to state taxes as a result of Covid-19, it should give state policymakers pause for thought before hiking taxes further.
Recently, I wrote about how Minnesota had slipped a place, to 46th, on the Tax Foundation’s 2021 State Business Tax Climate Index. This was largely driven by our state’s high corporate tax rates – where we rank 6th highest in the United States – and our individual taxes, where we rank 5th highest in the United States. To make serious progress up these rankings, we need to see these rates come down.
But there are other things dragging Minnesota down on these rankings which would help us climb them if remedied. They are not huge changes such as cutting our corporate and income tax rates would be, but every little helps, as they say.
Yesterday, I wrote about measures Minnesota could take to improve its corporate tax base. But our state could also take a couple of measures to improve its individual income tax base.
One of these measures would be to abolish the state’s alternative minimum tax (AMT) for individuals. Minnesota is one of just five states that imposes an individual AMT. According to the Tax Foundation:
At the federal level, the Alternative Minimum Tax (AMT) was created in 1969 to ensure that all taxpayers paid some minimum level of taxes every year. Unfortunately, it does so by creating a parallel tax system to the standard individual income tax code. AMTs are an inefficient way to prevent tax deductions and credits from totally eliminating tax liability. As such, states that have mimicked the federal AMT put themselves at a competitive disadvantage through needless tax complexity.
A second measure would be to eliminate Minnesota’s marriage tax penalty. Minnesota is one of twenty-three states and the District of Columbia to have these penalties built into their tax codes. As the Tax Foundation explains:
A marriage penalty exists when a state’s standard deduction and tax brackets for married taxpayers filing jointly are not double those for single filers. As a result, two singles (if combined) can have a lower tax bill than a married couple filing jointly with the same income. This is discriminatory and has serious business ramifications. The top-earning 20 percent of taxpayers is dominated (85 percent) by married couples. This same 20 percent also has the highest concentration of business owners of all income groups (Hodge 2003A, Hodge 2003B). Because of these concentrations, marriage penalties have the potential to affect a significant share of pass-through businesses.
As with our proposals to reform Minnesota’s corporate tax base, these two measures – abolishing the AMT for individuals and eliminating the marriage tax penalty – wouldn’t send Minnesota rocketing up the rankings. But, again, they would be baby steps in the right direction.
John Phelan is an economist at the Center of the American Experiment.