Even with a forecast budget surplus of $1.6 billion for the 2022-2023 biennium and $4.6 billion coming from the federal government in the latest round of COVID-19 relief money, some legislators in Saint Paul want to raise taxes. Last week, the House passed a bill on a 68-66 vote — two Democrats joined all the Republicans in opposition — which would impose a new, higher top tier of income tax of 11.25 percent — Minnesota’s fifth — on top earners. This is being done in the name of “fairness.” When we are proposing to take a greater share of someone’s income from them, it might be worth asking what we mean by “fair.”
Some, few, would argue that it means everybody pays the same. That would leave us with a millionaire paying the same as someone on minimum wage. Some, more, would argue that it means everybody pays the same share, which would be a flat tax.
The most common notion of fairness is probably that embodied in a progressive system such as Minnesota has, where the share you pay increases with the amount of income you earn. The most recent Tax Incidence Study, released by the Minnesota Department of Revenue last month, tells us the results of this.
On net, the bottom 30 percent of Minnesota households by income pay nothing in state income tax (in fact, once various credits are factored in they are net beneficiaries of the state’s tax system). By contrast, the top 10 percent of Minnesota households by income earn 43 percent of all income earned in the state but pay 59 percent of all income tax paid here. The same is true for the super-rich, the fabled “1%.” In 2018, they earned 16 percent of all income earned in Minnesota but paid 27 percent of the state’s total income tax revenues. Does that count as a “fair share”?
These numbers change little over time, even when tax rates change. In 2012, back before Gov. Mark Dayton imposed a fourth, top tier of income tax of 9.85 percent, the top 10 percent of Minnesota households by income earned 44 percent of the total income earned in the state, a percentage point more than in 2018. That same year, these households paid 58 percent of all state income tax paid in Minnesota, a percentage point less than in 2018 (the story is the same if you look at the top 1 percent of households by income). In short, hiking the top rate of income tax didn’t increase the share of income tax paid by “the rich.”
Economics often differentiates between positive questions (such as “What will happen to revenues if we raise this tax?”) and normative questions (such as “Should we raise this tax?”). Whether this new top rate of income tax — which would be the second highest in the United States — is “fair” is a normative question which I can only leave you to decide. The question of whether or not it will yield substantial new revenues for our politicians to spend is, however, a positive one. The answer is not encouraging for its supporters.
John Phelan
John Phelan is an economist at Center of the American Experiment.
