As reported by State Tax Today (subscription required), on Tuesday, Governor Tim Pawlenty vetoed HF 2037, which narrowly passed the House and Senate in Minnesota (71-63 in the House; and 34-33 in the Senate). The bill would have increased the state’s income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es on high-income earners to a rate of 9.1 percent on income over $200,000 for joint filers, over $113,110 for single taxpayers, and over $170,350 for heads of household in efforts to raise $435 million in an effort to balance the state budget. Minnesota’s current top rate stands at 7.85 percent on income over $74,780.
With HF 2037, the legislature followed the trend of temporary or conditional tax bills: the new income tax rate would have sunsetted in 2013 if the state budget forecast projects a surplus of at least $500 million.
Most notably, this bill would have added Minnesota to the ranks of California, Connecticut, Hawaii, Maryland, New Jersey, New York, Oregon, and Wisconsin – states that we have identified as already having a “millionaire’s tax” rate, targeted specifically at high-income earners.
In his veto message, Governor Pawlenty accurately noted, “Minnesota is already one of the most highly taxed states in the nation.” According to the Tax Foundation’s 2008 State and Local Tax Burden study (most recent), Minnesota did have the 12th highest state and local tax burden (estimated at 10.2 percent of income). The Governor was also correct in noting that the new top rate would have been one of the highest in the country. Hawaii, Oregon and California are the only states where every high earner pays at such a high rate.
This proposal came at the same time New Jersey Democrats were proposing an income tax surcharge of 1.78 percent on the approximately 16,000 individuals in the Garden State with taxable income of at least $1 million. The surcharge would reinstate the top rate of 10.75 percent that ex-Governor Corzine had pushed through, the third highest nationally behind Hawaii and Oregon’s 11 percent rates (and Oregon has no sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. ).
Echoing Governor Pawlenty, Governor Chris Christie stood by his pledge not to re-enact the tax plan of the man he defeated, “Let me be real clear on it,” he said. “They can call it whatever they want to call it. They can package it however they want to package it. They can send it to me with a bow on it. They can send it to me in a nice box, gift-wrapped. They can throw it over the transom and leave it there and hope nobody smells it. No matter how they send it to me, it is going back. It is going back with a veto on it. We are not raising taxes in the state of New Jersey this year.”
The Governors may have various motives for opposing these proposals. Overall we believe they’re helping their states’ economies in the long run. As the Tax Foundation has written in the past, it is bad tax policy to rely on targeted “millionaire’s tax” rates. The state’s citizens aren’t genuinely supporting expanded public services if they’re getting someone else to pay for them. When the money runs short, and it will since there are only so many millionaires (As outlined clearly in the case of New Jersey), the stomach won’t be there to save the new spending. State budgets that rely disproportionately on high-income earners are volatile ones, since such earners’ incomes are exaggeratedly good in good times and exaggeratedly bad in bad times. And last but definitely not least, enacting such taxes sends the signal that you’d rather penalize the entrepreneurs and job creators rather than force everyone to pay for the services they demand or cut them back. Such action ignores the fact that the location decisions of highly mobile entrepreneurs are sensitive to state income tax rates. To attract and keep good talent, create jobs and drive economic growth, state legislators must strive to be competitive with their neighboring states’ taxes rather than rely on targeted taxes that drive their entrepreneurs out.
More on Minnesota here.
More on New Jersey here.
More on millionaires & high-income earners taxes here.Share