With a $1.2 Billion Deficit, American Experiment Budget Report Argues for GDP Growth, Not Tax Increases

Center of the American Experiment this week released their latest economic report titled Closing Minnesota’s Budget Deficit, providing a roadmap for Governor Walz and the legislature to follow while closing a $1.2 billion budget deficit for the next biennium. The report offers research, data and suggestions for how to deal with the budget deficit. The report concludes that growing Minnesota’s Gross Domestic Product (GDP) will have a much stronger impact on revenue growth than raising state tax rates.

“To solve the state’s $1.2 billion budget shortfall and increase revenue to the state, leaders should focus on growing the state economy rather than increasing tax rates,” said John Phelan, one of the authors of the report and an economist at Center of the American Experiment. “This report shows that growth is good, and tax increases stifle growth.”

When it comes to state spending, the report found that according to the Census Bureau, Minnesota’s welfare spending is the third highest in the country and nearly double the national average.

“If Minnesota legislators are looking for ways to slow the growth of state spending, they should start with the generosity of our welfare programs,” said Martha Njolomole, report co-author and economist with Center of the American Experiment. “Moving from top three to top six in the nation in per-person in poverty welfare spending would save the state billions and help balance the budget.”

“One of the key takeaways from our report is that states with already high tax rates (like Minnesota) can’t return to that well to close a budget gap of $1.2 billion,” added John Hinderaker, President of Center of the American Experiment. “Pro-growth policies, spending cuts and using the state’s rainy-day fund are all better options than raising tax rates.”

Key findings from the report include:

  • Minnesota has the fifth highest top rate of state personal income tax in the United States – 9.85 percent on income over $164,400 a year. Only Oregon, New Jersey, Hawaii, and California have higher top rates.
  • Minnesota doesn’t just tax ‘the rich’ heavily. Our state’s lowest personal income tax rate – 5.35 percent on the first dollar of taxable income – is higher than the highest rate in 25 states.
  • At 9.80 percent on the first dollar of taxable revenue, our state has the fourth highest state corporate income tax rate in the United States. Only Pennsylvania, New Jersey, and Iowa have higher rates.
  • Higher tax rates do not necessarily bring higher revenues. Minnesotans actually 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.
  • There is a much stronger relationship between state GDP and tax revenues than top tax rates and state revenues: for total state tax revenues as a share of state GDP, the mean average is 6.6 percent and the median is 6.7 percent: in other words, there is very little variation in these numbers.
  • This means that that if policymakers want more money to fund government services, they should look to increase the state’s GDP rather than its tax rates.
  • The overwhelming balance of academic literature shows that tax hikes negatively impact economic growth. Of 26 papers reviewed by the Tax Foundation, 23 – 88 percent – found a negative impact of higher tax rates on economic growth.
  • In total and per person, and in real inflation adjusted terms, Minnesota’s state government has never spent more money than it is right now: $4,088 per Minnesotan, up 26.6 percent since 2010.
  • Minnesota’s welfare spending per person in poverty – $30,479 in 2018 – is the third highest in the United States and nearly double the average – $17,127.
  • If Minnesota’s state government spent the national average amount of welfare per person in poverty in 2018, it would have spent $9.0 billion instead of $16.1 billion – a saving of $7.1 billion. If Minnesota closed its deficit by cutting welfare spending by $2.4 billion, the amount of welfare we spend per person in poverty would still rank us 6th highest in the United States.
  • If Minnesota closed its forecast budget deficit entirely with spending cuts, we would be re- turning spending in real, inflation adjusted, per capita terms, to the level of 2016/2017.

Read the Report.