Minnesota Gov. Mark Dayton has proposed a new top marginal tax rate for high-income-earners several times. The proposals are designed to target a group Dayton says is not paying its fair share of taxes. Several states, including Hawaii, Maryland, and New York, have implemented taxes on high-income-earners in recent years.
In his 2011 general fund budget plan, Dayton proposed a new top marginal rate of 10.95 percent for those making more than $85,000 in annual income. The proposal, which failed to pass, included a temporary three-year surcharge of 3 percent on income over $500,000. Now, with the state facing a $1.1 billion budget deficit, Dayton is calling for significant tax reforms including a new high-income tax bracket.
According to the Tax Foundation’s State and Local Tax Burden Rankings, Minnesota had the seventh-highest tax burden among U.S. states and ranked in the top ten of highest individual income taxes. The report also found Minnesota’s current rate for its highest tax bracket, 7.85 percent on individual income over $77,730 or $137,430 for couples, is already higher than most other top tax brackets in the country.
The revenue-generating results of millionaire taxes have been mixed; many states that increased taxes on the upper brackets, including New York and New Jersey, have allowed their tax hikes to expire. In a Research & Commentary, Heartland Institute Director of Government Relations John Nothdurft outlined four reasons why millionaire taxes backfire on state governments:
1. High taxes encourage the wealthy to move to lower-taxed states, bringing much of their income, capital, and tax revenues with them.
2. High taxes discourage capital from flowing into a state, thereby reducing job-creation.
3. High taxes make it more difficult to attract high-income people.
4. Relying on a small number of taxpayers for a large portion of tax revenue can lead to larger budget deficits than with broader and flatter tax systems.
Instead of increasing taxes on higher earners, a source of revenue that fluctuates greatly with the changing economy, Minnesota lawmakers should develop spending and tax policies that cut both spending and tax rates. Minnesota’s tax rates are already higher rates than most states’; increasing them any further risks greater harm to the state’s economic competitiveness.
The documents cited below examine millionaire taxes and their poor record in shoring up state budgets and increasing revenue.
Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
Taxing the Rich Will Bankrupt Your State
http://heartland.org/policy-documents/research-commentary-taxing-rich-will-bankrupt-your-state
John Nothdurft of The Heartland Institute explains the disadvantages and negative consequences of “millionaire” taxes and overtaxing the top income brackets.
Should We Raise Taxes on the Rich?
http://spectator.org/archives/2012/11/14/should-we-raise-taxes-on-the-r
Peter Ferrara, senior fellow for entitlement and budget policy at The Heartland Institute, writes in the American Spectator about “taxing the rich” and explains why such policies make no fiscal sense.
Minnesota Income Tax Increase Modification Could Encourage Tax Avoidance and Promote Poor Investment Decisions
http://heartland.org/policy-documents/minnesota-income-tax-increase-modification-could-encourage-tax-avoidance-and-promot
David Logan of the Tax Foundation discusses Dayton’s 2011 budget and income tax hike proposal.
Why Not Raise Minnesota’s Income Taxes?
http://heartland.org/policy-documents/why-not-raise-minnesotas-income-taxes
The Coalition of Minnesota Businesses outlines several reasons not to support increases in Minnesota’s income tax, arguing instead for cutting taxes and lowering spending.
Dayton Aims to Overhaul Minnesota’s Tax System
http://www.startribune.com/politics/statelocal/181698041.html?refer=y
Baird Helgeson of the Minneapolis Star Tribune discusses Dayton’s plans for tax reform in Minnesota, speaking with several supporters and opponents of the governor’s plan.
Long-run Macroeconomic Impact of Increasing Tax Rates on High-Income Taxpayers in 2013
http://heartland.org/policy-documents/long-run-macroeconomic-impact-increasing-tax-rates-high-income-taxpayers-2013
This report from Ernst & Young conducted on behalf of the Independent Community Bankers of America, the National Federation of Independent Business, the S Corporation Association, and the United States Chamber of Commerce examines the long-term impact of an increase in top income tax rates.
The U.S. Tax System: Who Really Pays?
http://heartland.org/policy-documents/us-tax-system-who-really-pays
Writing for the Manhattan Institute, Steven Moore examines popular conceptions and misconceptions about the impact of tax rates on economic productivity and fairness, addressing these statements and debunking attendant myths. He provides useful information on how the rich are taxed and how much they contribute.
Rich States, Poor States
http://heartland.org/policy-documents/rich-states-poor-states-alec-laffer-state-economic-competitive-index
The fifth edition of the American Legislative Exchange Council’s annual report offers both individual-state and comparative accounts of the negative effects of income taxes.
Seven Myths About Taxing the Rich
http://heartland.org/policy-documents/seven-myths-about-taxing-rich
Curtis S. Dubay of The Heritage Foundation considers seven commonly cited myths about policies to tax the rich. Dubay argues raising taxes on the rich would increase the progressivity of an already highly progressive tax code. It also would damage economic growth by stifling job creation, further slowing already stagnant wage growth. Although some see raising taxes on the rich as a silver bullet for fiscal woes, it actually badly damages the economy, he writes.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the FIRE Policy News Web site at http://news.heartland.org/insurance-and-finance, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or [email protected].
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
