Read coverage of the issue.

• Wondering if tax ride goes too easy on the rich
• Look close at dimensions of tax-cutting argument
• Sales tax on clothing is nothing to be scared of
• Plan would raise top income tax, cut corporate rate
• Tax fairness calls for more from state's wealthy

Background research.

The key document for understanding taxes in Minnesota is the Department of Revenue's Tax Incidence Study, completed every two years. Our project used the 2005 report. The link here is to the 2005 and most recent 2007 reports.

During the 2007 legislative session, we heard claims that high taxes were driving away Minnesota businesses and high income individuals. This opinion piece summarized research to the contrary, including our own Tax Migration Study done in 2005. [NEED CITE]

Overview

[This article, by Growth & Justice founder and former executive director Joel Kramer, originally appeared in the Citizens League's March 2005 Minnesota Journal.]

Higher individual income taxes in exchange for lower taxes on business. Should Minnesota make that trade? Growth & Justice, a progressive think tank focused on Minnesota’s economic issues, is proposing that we should because it would make our tax system fairer for families and better for economic growth.

To understand why, start with the state Department of Revenue’s 2005 Minnesota Tax
Incidence Study, recently published on its web- site without fanfare. Few would choose it over a good mystery for bedtime reading, but it’s full of fascinating stuff.

Two conclusions stand out:

▲ Minnesota’s state and local tax system is significantly regressive at the very top. The department projects that in 2007, the one per- cent of households with the highest incomes, more than $407,000 annually, will pay 8.5 per- cent of their income in state and local taxes, while the average Minnesotan pays 11.1 percent, and the group earning around $50,000 pays 11.8 percent. Families earning more than
$2 million pay an average of 7.6 percent of their income in taxes annually. (This does not include fees which are regressive and growing twice as fast as taxes.)

▲ When a tax is imposed on a business, the business shifts the tax, if possible, to either consumers (as higher prices) or workers (as lower compensation), and only as a last resort to owners of capital (as lower profits).The revenue department calculates that the effect of this shifting makes business taxes highly regressive. Citing its 1993 analysis, the revenue department estimates that if Minnesota changes a tax on business, about 90 percent of the impact falls on Minnesota workers and consumers.

These two points form the basis of Growth & Justice’s tax reform strategy for Minnesota: swap higher income taxes on high earners for lower taxes on business across the board. This reform would make Minnesota’s system more equitable and simultaneously give the state a strong positive message to offer businesses deciding where to locate or expand. It could be either revenue neutral or used to raise additional revenue. It would give us a much better outcome than the current skirmishing at the Capitol, with supporters of the governor looking for revenue that doesn’t raise state taxes, and opponents happy with any state tax increase that the public will support.

To make this change, conservatives and liberals would each have to give up a cherished assumption which is not supported by the evidence.

Tax conservatives, especially business groups, believe that high marginal rates on the income tax dampen economic growth, and their arguments have carried the day in recent years, both in St. Paul and Washington. But from 1980 to 1998, states with high income taxes (including Minnesota) increased personal income faster than states with low or no income taxes, and ended the period with higher per capita incomes. Econometric studies on high marginal tax rates have been mixed, and generally inconclusive.

Many tax liberals favor higher taxes on business, and believe such a strategy is progressive. But as we have seen, Minnesota’s revenue department concludes they are strongly regressive, and other analysts generally agree. Raising the income tax at the high end would make our tax system fairer.

Fair is a subjective word, of course. In Growth & Justice roundtable discussions held around the state, we found some support for the position that “fair means progressive.” In other words, the wealthiest should pay the highest share of their income in taxes. Others said, “Fair means proportional.” Each income group should pay the same share of its income, like tithing or a flat tax system. Growth & Justice adopted proportionality as a goal that a vast majority of Minnesotans could support. Only a few people said “regressive can be fair.”

Since we’ve been out in public with our tax strategy proposal, we’ve heard this last argument more often. It generally sounds like this: The wealthy pay by far most of the tax dollars. And they do not get most of the benefit back from the government services those tax dollars provide. A rich person does not use the library any more than a middle-class person.

In response to a similar question from the House Tax Committee on whether the rich already pay enough, I said it’s impossible to quantify, but those with the most wealth may well benefit the most from the courts, police and prisons that government runs, and also from the investments in infrastructure and people that help businesses prosper.

Growth & Justice’s focus on proportionality leads us to target our income tax increase at the high end—households earning more than $150,000 a year. At lower income levels, Minnesotans already pay their fair share, and they will be hit harder by other new revenue sources, such as fees and regressive taxes. Business taxes should be lowered across the board—by reducing sales taxes on business purchases, for example—not through negotiating with individual firms or legislating exemptions based on zip codes or line of business, like JobZ or biotech zones.

In fact, Minnesota already has relatively low taxes on businesses as a percentage of business activity, ranking 35th in the United States in an Ernst and Young study. Many of the states with no income tax, like Florida, tax business more. So our state’s message could be: Minnesota has low taxes on business, getting lower, and we offer you a level playing field to do business.

In addition to this swap of higher income taxes on high earners for lower business taxes, we propose, as Governor Ventura did, broadening the base of the consumer sales tax and lowering the rate. This would make it a fairer and more stable source of revenue. We also urge that local governments be given an option to use an income tax surtax to reduce their reliance on the regressive property tax and the local sales tax option. And when a regressive tax like the cigarette tax is raised, a portion should be used to lower taxes on all low-income families.

Tax reform isn’t easy. But a system that is fairer for Minnesota families and better for business growth is worth fighting for.