Who’s going to pay for all this? The ‘rich’? Think again

This op ed appeared in the Pioneer Press on April 18th, 2019

At both national and state levels, politicians are throwing out new spending plans at an incredible rate. In Washington D.C., some are pushing for the federal government to adopt a “Green New Deal” estimated to cost anywhere between $7 trillion and $93 trillion. At the state level, the governor’s budget calls for the general fund budget to increase from $45.5 billion to $49.4 billion. The Minnesota House budget proposal would raise spending to $47.8 billion for the upcoming biennium, $416.9 million over the 2020-21 biennium’s projected base budget, with new spending on “education, health care and public safety.”

Who is going to pay for all this? In St. Paul, as in D.C., a common answer is “the rich.” Two provisions in the House tax bill aim to hike Minnesota’s capital gains tax rate and its estate tax rate. In their testimony in support of these bills, their sponsors, DFL Reps. Steve Sandell and Aisha Gomez, listed some of the things the revenue brought in by these taxes might pay for, ranging from education to state parks.

Alarm bells started ringing when both representatives defended their bills on the grounds that hardly anyone would be affected by them. The Department of Revenue estimates that the capital gains hike will affect 2,700 full-year resident returns in tax year 2019. For 2017, they reported, approximately 700 estate tax returns have been filed to date, with about 300 owing tax.

So might these proposals not be such money spinners after all? The Department of Revenue estimates that the proposed hike in the capital gains tax will bring in $207.5 million in 2020, falling to $159 million in 2023. The estate-tax hike is estimated to raise an additional $1.7 million in 2021, rising to $2.4 million in 2023. In other words, together, these hikes would generate an extra 29 cents per Minnesotan in state government revenue in 2023. It is hard to imagine how such paltry sums could pay for much in the way of improved education or state parks, let alone any of the other items on Reps. Gomez and Sandell’s long shopping list.

And these are generous estimates which assume that people will not avoid the tax, by leaving the state or by other measures, which research shows does happen. If these policymakers think this won’t happen because tax rates don’t inform decisions like this, why are they proposing an Angel Investor tax credit to attract investors?

You might think that a state’s tax code is about raising the revenue to pay for government activities. But, at a recent hearing into a state Senate bill to eliminate Minnesota’s estate tax, one of those testifying against the bill said that our tax code “was a statement of who we are.” This is an increasingly common view among American lawmakers; taxes are less about raising revenue to pay for things than about “sending messages” and trying to reorder society. In January, shortly after claiming that higher taxes on “the tippie tops” earners would pay for her “Green New Deal,” Rep. Alexandria Ocasio-Cortez tweeted the following quote from economists Emmanuel Saez and Gabriel Zucman: “The root justification (for marginal tax rates) is not about collecting revenue. It is about regulating inequality and the market economy.”

But if there are no rich people to pay for all this stuff, who will?

The answer is “you,” if you’re an average, middle-class American. Over the next four years Minnesotans are looking at $12 billion in new taxes, and these would not hit “the rich.” The tax bill includes $4 billion of hikes. There are a further $4 billion in the transportation bill. In 2023, the gas tax is estimated to bring in an extra $1.2 billion, the registration tax an extra $678 million, and the metro area sales tax an extra $591 million. The provider tax will bring in another $2 billion, and paid family leave will require another $2 billion in taxes.

Lawmakers in St. Paul are itching to spend more money. They claim it will be someone else’s money spent on you. But beware. To borrow from P. J. O’Rourke, the good news is that the rich will pay for everything. The bad news is that you’re rich.

John Phelan is an economist at the Center of the American Experiment, a non-profit public policy organization based in Golden Valley that advocates for free enterprise, limited government, personal responsibility and government accountability.