Why the proposal to create a fifth-tier income tax bracket of 12.45% in Minnesota is a bad idea
Today, the Minnesota House of Representatives held a hearing session for a tax bill proposing to create a fifth-tier individual income tax rate of 12.45% in Minnesota. In my testimony regarding this bill, I provided the following reasons why it is a bad proposal:
Firstly, Minnesota is already a high-tax state. Our top marginal individual income at a rate of 9.85% is currently the fifth highest in the nation. Creating a fifth-tier income tax bracket of 12.45% will give Minnesota the second-highest top marginal individual income tax rate, second only to California.
Not only that but incomes between $250,000 and $1 million for single filers in Minnesota will face the country’s top highest marginal individual income tax rate. This is because incomes in that range are taxed at much lower rates in California and all the other states than what this bill proposes. California`s top rate of 13.3 percent kicks in only to incomes over $1,000,000 for single filers and $1,198,000 for joint filers.
Like it or not, Minnesota needs to compete with other states for workers, capital, and investment. And IRS data shows that Between 2011 and 2018 Minnesota has seen a net significant outflow of individuals earning $$50,000 or more, with losses significant among individuals earning $100,000 or higher. With even higher taxes, we will likely see an accelerated trend of outflow migration of our high income, high skilled workers
With increased remote work, fewer obstacles exist for individuals willing to move out of Minnesota. About two weeks ago, Target announced it was downsizing its downtown office due to less need for space. This should especially tell us how much easier it will be post-COVID for workers and businesses to move or work remotely. So, if workers can stay in other low-cost, low-tax states and still be able to earn income from Minnesota, why will they need to stay here with high taxes?
And if we are losing more of our highly-skilled, high-income individuals, we have reduced investment and lower productivity which means reduced income growth. And think of all the high skilled workers that will be discouraged from Moving to Minnesota to contribute to our economy because of our high taxes.
Arguments have been made that the rich in Minnesota pay less in taxes in proportion to their income. This is is simply not true. In fact, the Minnesota Department of Revenue data showed that in 2016 while the top 10% earned 43% of Minnesota`s income, they paid 59% of the state’s total income tax revenue.
Secondly, research clearly shows that high taxes are bad for economic growth, with income taxes more so. Income taxes are distortionary; high marginal tax rates discourage work and investment. Research also specifically shows that raising taxes when they are already high has a more dramatic effect on income growth. Additionally, progressive taxes, tax hikes used to fund general expenditure or transfer payments as well as higher marginal tax rates are associated with negative economic growth.
Lastly, and more importantly, higher tax rates are not associated with higher tax revenues. Tax revenues are a more direct function of the state`s economy–GDP– than its tax rates. We can see by looking at the tax hikes of 2013 that in the years that followed, the proportion of income taxes paid by the rich did not go up. In fact, historically, Minnesota’s tax revenue as a proportion of GDP has remained constant in times of either high or low-income tax rates. The fact of the matter is, as far as the research goes, we will not raise more revenue by taxing the rich. We will only stifle Minnesota’s economy.