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Are High Taxes Hurting Minnesota?

David Callahan

Republican lawmakers in Minnesota have forced a government shutdown in that state by refusing to agree to any revenue increases at all to help close the state's $5 billion budget deficit. Governor Mark Dayton, in contrast, has offered a mix of steep spending cuts and a modest tax hike on high earners.

The Republican's hardline stance is justified by a familiar logic: high taxes are already hurting Minnesota's economy and higher taxes still will mean even worse economic performance, chasing "jobs out of the state" as the chairman of the state's GOP, Tony Sutton, said today

But is any of this true?

Well, it is true that Minnesota has long had relatively high taxes compared to other states. It has consistently been among the top fifteen states with the heaviest tax burdens since 1977. But during the same period Minnesota has generally exceeded the rest of the U.S. in terms of economic growth -- as measured by GDP, job creation, per capita income, and other indexes. 

One period in which Minnesota did worse than the U.S. was during the early 2000s, when the state tax burden hit its lowest point in three decades. During this period -- particularly between 2004 and 2007 -- Minnesota's rate of GDP growth was half the U.S. average, and the state also lagged the nation in per capita income growth and job creation.

This historic record suggests that the conservative story about taxes is disconnected from economic reality. In fact, Minnesota has done quite well economically with comparatively high tax rates since the 1970s. And when taxes did decrease by about 10 percent during the early 2000s the economy actually lagged -- which is to say that cutting taxes doesn't necessarily provide the big boost that many conservatives suggest.

Conservatives imagine that tax burdens are some all-important factor in determining economic growth. But there's a large body of evidence -- historically in the U.S. and also cross-nationally as I have written here before -- that shows that the correlation between tax rates and growth is not so clear.

Mark Dayton needs to tell this story as he fights for higher taxes, reminding Minnesotans of their own economic history. In the meantime, though, Dayton has offered a crystal clear articulation of the budget choices facing policymakers, both in Minnesota and nationally. Here's what Dayton said last night after the negotiations failed:

I cannot accept a Minnesota where people with disabilities lose part of the time they are cared for by personal care attendants, so that millionaires do not have to pay one dollar more in taxes.

I cannot accept a Minnesota where young people cannot afford the rising tuitions at the University of Minnesota or a MnSCU campus, so that millionaires do not have to pay one dollar more in taxes.

I cannot accept a Minnesota where elderly widows are denied the at-home services that permit them to remain healthy and able to live in their own homes, or a Minnesota where local governments have to further slash their firefighters and police forces, or a Minnesota where special education is being cut, so that millionaires do not have to pay one dollar more in taxes.

Dayton might have added a few other points on top of these. Like the fact that Minnesota's tax burden -- when you account for state, local, and sales taxes -- has actually grown more regressive since 1990, with the rich picking up an ever smaller share of the tab of sustaining the public structures that make wealth creation possible. As an analysis by Sharon Schmickle found last year:

As a whole, those top earners have a lower effective tax rate than households making less than $9,782 for the year. And the bulk of the taxes in the state were paid by middle-income households, earning between $23,000 and $86,000 a year. Look higher up the income ladder, and you see a wider gap. The effective rate for the top 5 percent of households, those earning $175,704 and higher, was 9.7 percent — compared with 12.4 percent for a family earning between $31,000 and $40,000. For the top 1 percent, those earning $447,889 a year, the rate fell to 8.9 percent.

Mark Dayton is in for a tough fight in Minnesota. Let's hope that his case for higher taxes hits the full range of chords: pulling on the heart strings, yes, but also helping to discredit the economic theory behind the anti-tax extremism that is so powerful in his state and elsewhere in the country.