New Report: Minnesota Governor Proposes Disappointing Tax Plan

February 13, 2013

A new package of tax changes recently proposed by Minnesota’s Governor Mark Dayton will likely do little to improve the state’s competitiveness while further cluttering the state’s tax code with unnecessary complexity, according to a new analysis by the Tax Foundation. A small nod to lowering taxes on businesses in the state is laudable, but would have benefitted from far bolder rate reductions.

Governor Dayton’s budget proposal misses out on the opportunity to provide significant support for new jobs and economic recovery in Minnesota. The plan has some superficial characteristics of pro-growth reform, but fails to make the connection between a state’s tax structure and its ability to attract business.

The Governor’s tax package would add a new top rate of 9.85 percent on single filers earning $150,000 or more – raising an estimated $1.1 billion over the next two years – while swapping this new revenue with a property tax rebate for homeowners costing $1.4 billion. This change shifts the state’s reliance away from property taxes revenues, generally a broad and stable source, to the top marginal rate on high-earners, a notoriously unreliable source.

In addition, economic evidence demonstrates that progressive income taxes negatively affect economic growth, ultimately producing a smaller economic pie for workers, employers, and investors alike. High marginal tax rates reduce the incentive to build human capital and undermine the factors that contribute most to economic growth: investment, risk-taking, and entrepreneurship.

The Dayton plan advances one strategy normally consistent with sound tax policy – a broadened sales tax base coupled with a lower rate – that is unfortunately undermined by the details. The sales tax expansion would expressly include business inputs and business-to-business services, distorting economic decision-making by effectively creating multiple layers of taxation for certain products.

The plan also increases the state’s cigarette tax by over 75 percent to $2.17 per pack, making it significantly higher than most of its neighbors and one of the highest in the country. Cigarette tax differentials across state lines have been shown to create lucrative business opportunities for smugglers who transport cigarettes from high-tax states to low-tax states, potentially inviting crime into Minnesota’s borders.

The Governor’s proposed cut in the corporate income tax, on the other hand, would represent a step in the right direction. The change would lower the rate from 9.8 percent to 8.4 percent, although it would actually increase revenue slightly by eliminating tax provisions for certain “foreign operating” companies. Lower corporate tax rates are associated with higher economic growth, although the effect is likely to be modest, as the state would still have the 12th highest top corporate income tax rate in the country.

Tax Foundation Fiscal Fact No. 359, “Minnesota Governor Proposes Poorly-Designed Tax ‘Reform’” by Elizabeth Malm is available here.

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