Governor Dayton's Spend & Tax Plan

By Julianne Ortman

The State of Minnesota has a budget deficit of $5 billion for the 2012-2013 budget biennium.  We currently have $34.2 billion available to us in projected revenues – and no obvious way to make up the difference between our State’s income and our expected spending level of $39.02 billion.  Governor Dayton proposes to raise income taxes to make up about half of the deficit (i.e., raise $2.67 billion in new taxes to pay for a 22% increase in general fund spending). 

Specifically, Governor Dayton proposes an increase in income taxes by creating a 4th tier income tax at 10.95% for individuals with incomes greater than $85,000, or for married couples with incomes greater than $150,000.  This would be a 39% increase at the top level.  He claims this new tax will raise $2.04 billion in new revenues - to pay for permanent increases in state spending. 

There are at least 3 very good reasons to reject the Governor’s proposal:

1.  Minnesotans already pay too much in income tax; we already rank 5th in the nation in collections per capita. 

According to the 2011 Minnesota Tax Incidence Study, the top 5% of income earners in the state already pay 43% of all income tax collections.  If we add this new 4th tier, Minnesota will have the 2nd highest rate in the nation, and will start collecting at lower levels of income.  Hawaii and Oregon are at 11% for their top tier, but they apply only to incomes beginning at $400,000 and $500,000 incomes for married couples, respectively. 

We will be a “high tax island” in Minnesota if the 4th tier 10.95% tax rate is approved; other states are heading in the opposite direction to attract innovators, entrepreneurs, and business expansion.  If our goal is to attract new jobs, then we should recognize that 92% of Minnesota business owners their business income through their personal income tax returns and are not subject to corporate taxes.  We should understand that high personal income tax rates interfere with small business’ ability to hire, expand, and invest. 

Minnesota businesses compete in a global economy; we need a tax structure that will support and encourage business investment in Minnesota.  We currently rank 43rd worst among states for our business climate according to the Tax Foundation 2011 State Business Tax Climate.  If we are committed to new jobs and new businesses, we have to accept the fact that raising taxes will only make matters worse. We cannot tax our way out of a recession; in fact, raising taxes would be counter-productive for our state’s economic future. 

2.      The proposed 4th tier will never raise the amount of income projected.

Income earners at this level can easily and will most certainly make choices to avoid the high tax liability: they can defer income and compensation, delay asset/capital transactions, invest their income in tax-exempt transactions (like federal treasury bonds) to avoid paying taxes at this level.  They have the means to hire lawyers and accountants to advise them; they also may choose to reside in states with lower rates (like Arizona) or no individual income tax at all (South Dakota, Florida, etc.). 

The Pew Center on the States and the Rockefeller Institute recently found that in 2009, states overestimated their revenues by more than $50 billion, due largely to the decline in personal income taxes.  Because of the volatility of taxes in this income range, the States that previously relied most heavily on “wealth taxes” (New York, New Jersey, California, Connecticut and Maryland) have been the most impacted by the recession, and now face the largest deficits.  Many of their Governors and Legislatures are working together to reverse these failed policies.

Similarly, economists testifying in the Minnesota Senate Tax Committeethe Governor’s tax may raise significantly less than the projected income.  To rely on 100% of these revenues, as the Governor does, will only risk further deficits in the future.  Instead, we should be making cuts to spending, because the current-law increases are unsustainable. 

3.      The Minnesota Senate will propose a reasonable alternative – a budget that does not raise taxes to balance the deficit. 

We have before us three budget options at the capitol.  The Senate DFL’s $39.02 billion indiscriminate 2010 spending plan has no source of funds for $ 5 billion of the planned spending. The Governor’s budget would spend $37 billion, but rely on $2.67 billion in new taxes: $2.04 billion in new income taxes in the new 4th tier (which is unreliable), plus $370 million in corporate taxes (which are passed on directly to consumers and labor) and other various tax increases.  The most reasonable and responsible approach is the Senate GOP budget, which will limit state spending to $34.2 billion for 2012-13, will not rely on one-time federal stimulus money for backfill spending, and will not include new taxes. We have promised a budget with real reform, and the most fundamental reform of all is to live within our means.