Minnesota Budget Deal Includes $2 Billion Tax Hike

May 15, 2013

In a press conference this weekend, Minnesota lawmakers announced an overview of their budget agreement. Though some details remain unspecified, the major tax provisions are disappointing.

Here’s what we do know. The overall plan includes $2 billion in additional tax revenues over the next biennium—specifically a hike on taxes paid by higher-income taxpayers and smokers. Governor Mark Dayton’s (D) original budget, introduced earlier this year, contained both of these provisions. The tax increases are a way to fill a projected budget deficit of $627 million and fund additional spending.

The budget adds another income tax bracket on single filers earning $150,000 or more annually. The state’s top rate will now be 9.85 percent, making it the fourth highest top rate in the country. Politicians are spinning this as only affecting the “top 2 percent,” but that misses the point.

Pushing more of the tax burden onto a smaller, wealthier group is poor policy, not because I care about rich people more (an absurd and inaccurate, but unfortunately common, assertion), but because those incomes are volatile. Income tax revenues that derive a large share of receipts from the wealthiest are unstable, and there’s a lot of research to back that up (a few examples can be found here and here). This point is exacerbated by the fact that lawmakers might also throw in an additional temporary income tax surcharge on those earning $500,000 or more.

Tobacco taxes will also rise, but the exact magnitude of the tax increase is yet to be determined. This is another bad policy move. I find it concerning that lawmakers want to push more of the tax burden onto a group of shrinking, politically unpopular people. Research shows that cigarette taxes do in fact decrease consumption. As the pool of tobacco-users shrinks over time, that revenue source will dry up, leaving the state right back where it started. Cigarette tax hikes are also counter to many progressive goals—that is, they tend to hit the poor hardest.

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