Abolishing state income tax could be a costly mistake

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The main event of Minnesota politics in 2022 is finally in full swing. It’s Walz versus Jensen, fighting inflation, abortion, crime, COVID, taxes.

Taxes?

Admittedly, DFL Governor Tim Walz and Republican candidate Scott Jensen haven’t exactly burned the airwaves to illuminate their tax policy differences. The issue may have escaped notice, even by that state’s notoriously picky voters.

But the tax differences in the race for governor are significant. Jensen proposes phasing out state income tax. This is not the case with Walz.

It is something major. Jensen’s plan would destroy something that has been fundamental to the government, as Minnesotans have known and practiced it for nearly 90 years. This risks significantly disrupting and harming the public services that people value most, not to mention shifting the national and local tax burden to those with less ability to pay.

I make these assertions as a student of two outstanding professors of fiscal policy. One was the late Governor Elmer Andersen, who explained the subject as we collaborated on two books between 1998 and 2004.

Anderson was a Republican. But he was a great admirer of an achievement of farm labor Gov. Floyd B. Olson: the enactment in 1933 of the state’s first income tax. It came, as Andersen always described it, “in the depths of the Depression,” when many jurisdictions struggled to collect property taxes and some public schools were in danger of closing because they couldn’t pay. teachers.

Other states then imposed sales taxes. Elmer, like Olson, preferred taxation based on ability to pay. “That way, if you didn’t make any money that year, you didn’t owe taxes,” he always said.

At Olson’s urging, the legislature established a state income tax and earmarked it for education. This was the beginning of a series of mid-twentieth century measures aimed at placing the state and its robust income tax in the driving seat of education, guiding Minnesota through the second half of the twentieth century toward a healthy economy based on on well-trained workers.

A quality education “has become the hallmark of this state’s culture,” we write in Andersen’s autobiography, “A Man’s Reach” (University of Minnesota Press, 2000).

My other teacher is still with us, thankfully. For almost the same 40-year period that I spent in the Capitol basement, Joel Michael was the principal fiscal policy analyst for House Research, a highly respected nonpartisan brain trust. Michael now shares his wisdom via his blog, SALT Talk. (SALT refers to “state and local taxes.” He didn’t become a retired foodie.)

I have long considered Michael an unbiased and clear tax explainer. His assessment of Jensen’s income tax phase-out proposal: it’s “impractical and misguided.”

Income tax generates more than half of state government revenue, about $16 billion in the current fiscal year. Replacing so much money in the state budget would require huge spending cuts, increases in other taxes, or both.

My bet is that it would indeed be “both,” even though Jensen and his allies say they would only use spending cuts to balance the state budget. That’s because the legislature’s go-to solution when money is tight is to cut cities, counties and colleges. History shows that such reductions lead directly to higher property taxes and tuition fees.

“Let’s assume that 40% of income tax revenue comes from cutting state aid to schools, cities, and counties,” Michael wrote. “Under this assumption, property taxes would increase by more than 50%.”

State aid cuts would also reduce police and other municipal services, especially in places with less land wealth. They would add to the difficulty for schools to hire teachers. And they would shift the burden of paying for government services to those who can least afford them. This is because income tax is the only tax in state and local government portfolios that increases with taxpayer income.

So who would be the losers of an income tax waiver? The same residents of greater Minnesota who recently voted Republican.

“That’s the irony,” Michael said. “It’s Republican voters who would be disadvantaged by their policy proposals.”

Calls for all taxes to be cut may sound good to people unhappy with rising costs and stagnating incomes. Complaints about Minnesota’s top tier income tax (at 9.8%, it’s the seventh highest in the nation) may trick people into thinking it’s a competitive drag on the state’s economy.

Voters need to know this: This maximum rate is only paid by the people who earn the most. It comes into play for the portion of married co-filers’ income that exceeds $285,000.

“For middle-income people, Minnesota income tax is slightly above average, if that,” Michael said. When state and local taxes are considered together – as they should be, since the two are intertwined – the burden on Minnesotans ranked 11th among the states.

It has long been a Republican article of faith that income taxes hurt the economy by siphoning off capital that could otherwise be invested in growth-generating businesses.

But Michael told me there was little evidence that Minnesota’s economy today suffers from a lack of financial capital. On the contrary, he said, the state could really use an increase in human capital. It is a labor shortage, not high taxes, that is expected to hold back business over the next decade.

Minnesota could use a full-throated gubernatorial campaign debate on tax policy. Even better would be a campaign that presents serious proposals for attracting and retaining young talent in Minnesota. Who pays state and local taxes – and what those taxes pay – should figure into these strategies. But they shouldn’t be the whole story.

Lori Sturdevant is a retired Star Tribune columnist. She is at [email protected]

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