Minnesota Gov. Mark Dayton recently proposed as part of his state budget a $2.1 billion tax hike package that includes higher income tax rates on high-income earners, an expansion of the sales tax base, a hike in cigarette taxes, and a small reduction of the state’s corporate income tax. The initial budget forecasts projecting a deficit of $1.1 billion for fiscal years 2014–15 were revised and lowered in February; the forecast now projects a budget deficit of $627 million, making these massive tax increases clearly unnecessary.
The proposal would add a new top rate of 9.85 percent on single filers earning $150,000 or more and swap this revenue with a property tax rebate. Millionaire taxes, in addition to being an infamously unreliable source of revenue, encourage the wealthy to move to lower-taxed states, bringing much of their income, capital, and ultimately tax revenues with them.
Dayton’s tax hike plan also would expand the state’s sales tax base while reducing the rate by 20 percent (from 6.875 to 5.5 percent). The sales tax changes are estimated to raise around $2.1 billion. Broadening the base and lowering rates is sound tax policy, but Dayton’s plan makes the mistake of extending the tax to production in addition to consumption. Elizabeth Malm of the Tax Foundation points out Dayton’s sales tax base expansion includes taxation of business inputs and business-to-business services, which distorts economic decision-making by creating multiple layers of taxation for certain products and thus favoring products with shorter production chains.
The plan also would increase the state’s cigarette tax by more than 75 percent, to $2.17 per pack. That would make it significantly higher than in most states in the region and one of the highest in the nation. Tobacco taxes are a notoriously unreliable and shrinking source of revenue due to the decreasing number of smokers. Cigarette taxes are also highly regressive, with 95.8 percent of tobacco expenditures being made by consumers earning less than $150,000 a year.
One positive in the governor’s tax reform plan is the proposed cut in the corporate income tax from 9.8 percent to 8.4 percent. Unfortunately, the new top corporate tax rate would still be the 12th highest in the country.
Instead of increasing taxes, many of which will place an undue added burden on businesses and consumers, Minnesota lawmakers should focus on spending and tax policy that decreases both spending and tax rates. Minnesota’s tax rates are already higher than those in most states, and increasing them any further risks additional damage to Minnesota’s economic competitiveness. That will not fix the state’s budget shortfall.
The following documents examine tax hikes such as those proposed by Gov. Dayton and indicate the undue added burden they place on businesses and consumers.
Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
Minnesota Governor Proposes Poorly-Designed Tax “Reform”
http://taxfoundation.org/article/minnesota-governor-proposes-poorly-designed-tax-reform
In this Fiscal Fact piece from the Tax Foundation, Elizabeth Malm examines Minnesota Gov. Mark Dayton’s tax proposal in his 2014–2015 biennial budget, which includes $2.1 billion in revenue increases. “Included are increased income taxes on high-income earners, a poorly designed expansion of the sales tax base, and a steep hike in cigarette excise taxes,” Malm notes.
An Open Letter to Minnesota Legislators: Oppose Gov. Dayton’s Dangerous Tax Plan
http://www.ntu.org/in-your-state/minnesota/2-25-13_mn_tax_plan.html
In an open letter, the National Taxpayers Union calls for legislators to oppose Dayton’s budget proposal. The letter argues the new taxes would unfairly burden Minnesotans with $2.1 billion in new taxes. “While the $1.1 billion deficit poses a serious challenge, the effects of this tax scheme could be catastrophic for the state, especially as health care costs skyrocket and Americans are forced to pay higher federal taxes,” the letter states.
First Impressions on Governor Dayton’s Budget Proposal
http://www.americanexperiment.org/publications/commentaries/first-impressions-on-governor-daytons-budget-proposal
Peter Nelson, director of public policy at the Center of the American Experiment, examines Dayton’s proposal and identifies several problems.
Taxing the Rich Will Bankrupt Your State
http://heartland.org/policy-documents/research-commentary-taxing-rich-will-bankrupt-your-state
John Nothdurft of The Heartland Institute explains the disadvantages and negative consequences of “millionaire” taxes and overtaxing the top income brackets.
Minnesota Income Tax Increase Modification Could Encourage Tax Avoidance and Promote Poor Investment Decisions
http://heartland.org/policy-documents/minnesota-income-tax-increase-modification-could-encourage-tax-avoidance-and-promot
David Logan of the Tax Foundation discusses Dayton’s 2011 budget and income tax hike proposal in this Tax Foundation Fiscal Fact piece.
Research & Commentary: Top Ten Reasons Not to Raise Tobacco Taxes
http://heartland.org/policy-documents/research-commentary-top-ten-reasons-not-raise-tobacco-taxes
John Nothdurft notes the use of targeted tax increases serves only to push sound fiscal policies and real budget reforms to the public policy back burner. Legislators concerned about the public health effects of tobacco should encourage the use of readily available smoking cessation products and services, instead of supporting bad tax policy.
Why Not Raise Minnesota’s Income Taxes?
http://heartland.org/policy-documents/why-not-raise-minnesotas-income-taxes
The Coalition of Minnesota Businesses outlines several reasons to oppose increases in Minnesota’s income tax, arguing instead for tax rate cuts and lower spending.
Rich States, Poor States
http://heartland.org/policy-documents/rich-states-poor-states-alec-laffer-state-economic-competitive-index
The fifth edition of this publication from the American Legislative Exchange Council and authors Laffer, Moore, and Williams offers both individual-state and comparative accounts of the damaging effects of high income taxes.
Seven Myths About Taxing the Rich
http://heartland.org/policy-documents/seven-myths-about-taxing-rich
Curtis S. Dubay of The Heritage Foundation debunks seven commonly cited arguments for tax-the-rich policies. He notes raising taxes on the rich increases the progressivity of an already highly progressive tax code, damages economic growth by stifling job creation, and further slows the growth of already stagnant wages. Whereas some see raising taxes on the rich as a silver bullet for ending fiscal problems, such policies badly damage the economy, he observes.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News Web site at https://heartland.org/publications-resources/newsletters/budget-tax-news, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or [email protected].
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
