Minnesota: Higher Income and Cigarette Tax Making It the Land of 10,000 Taxes?

July 3, 2013

Minnesota Governor Mark Dayton (DFL) recently signed legislation increasing income and cigarette taxes in the Gopher State. The legislature hopes to raise nearly $2.1 billion in revenue from the tax hikes in order to close the budget deficits and fund new spending projects. The average Minnesota taxpayer currently pays 10.79 percent of his income in state and local taxes. This tax burden makes Minnesota the 7th highest taxed state in the nation. With these new tax hikes signed into law, no relief is in sight.

The Land of 10,000 Lakes currently taxes top income earners at a rate of 7.85 percent. The increase creates a new bracket for single filers making over $150,000 and married couples making over $250,000. These taxpayers face a rate of 9.85 percent, making Minnesota’s income tax the fourth-highest state income tax rate in the nation. Progressive taxes, like Minnesota’s, discourage investment and diminish other factors that lead to economic growth. Higher progressive tax rates further distorts the economy and discourages income producing activity.

State cigarette taxes also increase $1.60 a pack under the new legislation, bringing Minnesota’s cigarette tax to a total of $2.83 per pack. The tax, which took effect on July 1, is expected to drive tobacco sales to surrounding states. Minnesota’s neighbors have comparatively lower cigarette taxes: North Dakota’s is 44 cents per pack, South Dakota’s is $1.53 per pack, and Iowa’s is $1.36 a pack.

The cigarette taxes will harm small businesses and fail to generate the expected revenue. As consumers cross state lines where tobacco prices are cheaper, local Minnesotan businesses will lose customers and the state will lose out on tax revenue. Higher cigarette taxes also increase illicit activity, such as tobacco smuggling, as explained here. Furthermore, cigarette taxes tend to be regressive. The brunt of the $400 million revenue increase will largely be felt by lower income taxpayers.

Other tax increases are currently being phased in: higher gift taxes, taxes on audio and video internet downloads, and a “wheelage” tax, which charges people for each vehicle they have.

What will all the revenue be spent on? Policymakers intend to close Minnesota’s budget deficit and then use further revenue to fund early-education programs and other economic development projects. Such projects include plans to build a new football stadium for the Minnesota Vikings and an expansion to the Mayo Clinic.

Minnesota’s tax burden is one of the highest in the nation. These tax increases will only further burden Minnesotans and discourage productive behavior.

More on cigarette taxes here.

More on Minnesota here.

More on income taxes here.

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