High tax rates ≠ high revenues
Lower tax rates incentivize economic activity and therefore expand the tax base. High tax rates do the opposite
This oped originally appeared in the Faribault Daily News on November 11th, 2020
On Monday, the Faribault Daily News and Owatonna People’s Press carried an oped by Laura Mortenson of the Minnesota Budget Project arguing that ‘To help the neediest, we may have to raise taxes on the wealthiest Minnesotans.’ Helping the “neediest” is a worthy goal, but with a looming $2.4 billion budget deficit, here are four reasons raising taxes on the wealthiest will miss the mark.
The first is the fact that Minnesota’s top rate of state income tax – 9.85 percent on taxable income over $164,400 a year – is already the fifth highest in the United States. Only Oregon, New Jersey, Hawaii and California have higher top rates.
Secondly, hikes in tax rates do not appear to drive increases in tax revenues. Minnesotans handed over a larger share of their incomes to the government in the 1990s (with top income tax rates of 8.50 percent) than they did in the 1970s (with rates of 17.0 percent). Indeed, tax revenues are a consistent 6.6 percent of Minnesota’s GDP even as tax rates fluctuate. The dollar amount of tax revenue is much more a function of the size of the state’s economy than of how high its tax rates are. This suggests that those looking to boost state government revenues should be looking to increase state economic growth.
Third, tax hikes have been shown to depress economic growth. The consensus from empirical studies is that taxes on corporate and personal income are particularly harmful to economic growth, with consumption and property taxes less so. This is because economic growth ultimately comes from production, innovation, and risk-taking. If increased growth is necessary for increased revenues, higher rates will lead to lower revenues.
Finally, in total and per person, and in real terms, Minnesota’s state government has never spent more money than it is right now. The 2019 figure of $4,088 per Minnesotan is 26.6 percent higher in real terms than it was in 2010. In welfare alone, Minnesota’s state government spent $30,479 per person in poverty in 2018, the third highest in the United States and nearly double the average level of $17,127.
So if the goal is helping the neediest during a global pandemic, raising taxes is the last thing Minnesota legislators should try when they convene in January.
John Phelan of St. Paul is an economist at the Center of the American Experiment, a conservative think tank based in Golden Valley.