(The Center Square) – When Gov. Tim Walz announced $1.63 billion in tax hikes to fuel his $52.4 billion proposed budget, he characterized the plan as taxing the rich to help the poor.
The proposal asks “large” corporations and the wealthiest Minnesotans to pay their “fair share” to help working families and small businesses. But John Phelan, an economist at the conservative American Experiment, warned that the tax incidence could fall on all Minnesotans.
Walz proposed a fifth-tier income tax rate for household incomes above $1 million or a single earner bringing in $500,000 or more, which would shift Minnesota from the fifth-highest income tax — 9.85% on taxable income over $164,400 a year — to the third-highest.
Walz aims to increase the corporate tax rate for profitable companies from 9.8% to 11.25% starting in 2021 to reap $424 million, which would bump Minnesota to the second-highest corporate rate in the nation behind New Jersey at 11.5%.
About 34,400 C-corporations file corporate franchise tax returns annually in the state.
It seeks a higher tax rate on capital gains: 1.5% on sales profits between $500,000 and $1 million, and 4% if more than $1 million.
“We use the tax code to either incentivize or disincentivize behaviors, and that’s nothing surprising,” Walz said in the press conference announcing the budget.
“If your family is making less than $20,000 per year, this isn’t going to hit you,” he said of the increased personal income tax. But another tax hike aims to collect $151 million through a tobacco and nicotine tax — which people with low-incomes disproportionately pay.
The plan calls to raise the cigarette tax from $3.04 per pack to $4.04 and tax 35% of the gross retail receipts on nicotine devices and tax electronic delivery devices at 95% of the wholesale sales price.
Phelan argued corporate tax hikes are bad policies for which the incidence — who actually bears the burden — either fall on consumers through higher prices, workers through lower wages, or shareholders through lower dividends.
“Empirical studies suggest that labor bears between 50% and 100% of the burden, with 70% or higher the most likely outcome,” Phelan said. “Gov. Walz’s own Department of Revenue estimates that 46% of the burden of corporate tax hikes falls on Minnesota’s consumers and 27% falls on our state’s workers: None of the burden falls on shareholders. In short, this is equivalent to another income tax hike.”
Tax rate hikes don’t appear to drive increases in tax revenues, Phelan said, since tax revenues remained at 6.6% of state Gross Domestic Product (GDP) from 1974 to 2019, although the income tax rate fluctuated between a top income-tax rate of 8.5% in the 1990s and the 1970s when rates were 17%.
“There is an important policy lesson here: The dollar amount of tax revenue is much more a function of the size of the state’s economy — its GDP — than of how high its tax rates are,” Phelan said. “Those looking to boost state government revenues should be looking to increase state economic growth.”
Phelan also argued that tax hikes on corporate and personal income depress economic growth — another reason the state should fill the projected $1.3 billion budget deficit with the roughly $2.4 billion rainy day fund.
”If the goal of policymakers is to generate larger tax revenues to fund even higher government spending in Minnesota, raising taxes is the last thing they ought to do,” Phelan said. “These proposed hikes are terrible policy.”