Gov. Tim Walz Raised Taxes as Most Governors Cut Them

Most states have cut taxes at least once since 2021, with a renewed emphasis on 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. competition taking hold in red and blue states alike. Twenty-eight states have cut individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. rates, fifteen states have cut corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rates, and other states have cut 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. rates or focused on property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. relief. Under Gov. Tim Walz (DFL), Minnesota has been an outlier, one of the few states to raise taxes in recent years—despite the state posting large surpluses.

With her selection of Minnesota Gov. Walz as her running mate, Vice President Kamala Harris has chosen from a pool of prospective candidates—sitting governors—that seems obvious but has not historically been well-represented in the second slot on presidential tickets. Former President Donald Trump’s selection of Indiana Gov. Mike Pence and Sen. John McCain’s choice of Alaska Gov. Sarah Palin may suggest that governors are gaining ground as vice presidential nominees, but before that, stretching back a century, the only others are Spiro T. Agnew, Earl Warren, and John W. Bricker.

Governors bring executive experience. They also bring policy records that are more concrete than those of legislators, in the sense that a governor’s signature or veto makes (or prevents) law in a way that one vote in Congress rarely does. Observers will doubtless scrutinize Walz’s record as governor to get a sense of what policies he may favor at the federal level and what that may say about the Harris-Walz ticket.

Whereas other potential running mates charted moderate courses on state taxation, with Pennsylvania Gov. Josh Shapiro advocating for the acceleration of cuts to the Commonwealth’s high-rate corporate income tax and signing legislation improving its structure (specifically by better aligning treatment of net operating losses with national standards), and Kentucky Gov. Andy Beshear signed a bill authorizing an individual income tax rate cut (albeit after vetoing a larger prior-year package that set those rate cuts in motion), Walz has presided over several tax increases, focused on businesses and high earners.

This makes Walz an outlier among contemporary governors, though perhaps not an outlier in his own state, which has a tradition of progressive fiscal policy that runs from the early 20^th-century Progressive era through such progressive stalwarts as Eugene McCarthy, Walter Mondale, and Paul Wellstone.

Under Walz, Minnesota became the only state to impose a surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. on the long-term capital gain income and other net investment income of high earners (all other states tax long-term capital gains at ordinary income tax rates or even preferential rates). Walz also signed legislation partially phasing out the benefit of standard and itemized deductions for high earners, and later had to sign legislation fixing a drafting error that accidentally reduced the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. for all taxpayers in what would have been an unintended $350 million tax increase.

Walz also signed legislation expanding the scope of the corporate income tax to capture more international business income through global intangible low-taxed income (GILTI) taxation, something most states have eschewed, and which New Jersey largely eliminated from its tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. recently. New Jersey, which raised its corporate tax rate, is one of only three other states besides Minnesota (with California and New York) to raise the rate of a major tax since 2021. A further effort to tax international income, which would have seen Minnesota become the only state with worldwide combined reporting, failed in the legislature by a single vote.

These tax increases came against the backdrop of a $17.6 billion budget surplus, suggesting that they were driven less by perceived revenue needs than by their contribution to greater tax progressivity.

There are, however, two areas where Walz has reduced tax burdens: through the creation of a new child tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. and a tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. for most Social Security income. With the latter, Minnesota was brought into line with most other states’ treatment of Social Security income—a case of Minnesota policy converging on other states’ tax policy. In other tax areas, however, Minnesota has been a marked outlier.

The design of the state’s child tax credit is itself highly progressive. Its benefits begin to phase out at $29,500 in income for single filers and $35,000 in household income for joint filers. For a two-child household, the credit would phase out entirely by $67,083 in household income, well below Minnesota’s median household income.

In recent years, Minnesota has doubled down on its status as a high-tax state even as most states have moved in a different direction. That may go some way toward explaining the state’s lackluster economic performance of late: in the past year, employment only grew by 0.7 percent in Minnesota, ranking 42^nd nationwide. Net outmigration to other states is 6^th highest for households with $200,000 or more in income, and 8^th highest in terms of net outflow of income from all households.

Federal tax policy, of course, differs from state tax policy in many ways, and most policy decisions are driven by the president, not the vice president. But Gov. Walz’s tax policy record is notable because of how much it contrasts with broader national trends. In recent years, most governors have championed tax cuts. Walz, rare among his peers, chose tax increases.

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