A recent North Star article touted the success of the 2013 tax act in reducing tax regressivity, providing targeted tax relief, reducing the state and local taxes paid by most middle-income households, funding important public investments, and helping to put the state budget on a sound fiscal footing. However, no retrospective of the 2013 tax act would be complete without noting conservative criticisms of the act.
Chief among these is the claim that the 2013 tax act produced unbridled growth in taxation and government spending. It is certainly true that real per capita state general fund revenues and expenditures are projected to increase significantly from FY 2013 to FY 2016.
However, a forthcoming North Star report will demonstrate that even after the revenue increases in the 2013 tax act, real (i.e., inflation-adjusted)* per capita general fund revenues and expenditures will remain significantly below the FY 2003 levels. (FY 2003 is a milestone year in state finances, as it is the first year of the state takeover of general education costs.) For example, FY 2016 real per capita general fund revenues are projected to be approximately 1.5 percent less than they were in FY 2003 even if none of the current budget surplus is used to reduce taxes. Furthermore, real per capita general fund expenditures are projected to be over ten percent less than in FY 2003.
Furthermore, even with passage of the 2013 tax act, Minnesota’s “Price of Government” (i.e., total state and local government revenue as a percentage of statewide personal income) is projected to decline for the foreseeable future. By FY 2019, the Price of Government (PoG) is projected to drop to 14.8 percent, which is not only less than in the year prior to implementation of the 2013 tax act, but less than at any other point in the history of the PoG report with the exception of 2009 during the depths of the Great Recession when tax revenues plummeted. The downhill trend in the PoG is a clear indication that tax revenues are not outpacing growth in Minnesota’s economy.
The conservative allegation that “each and every Minnesotan” would experience a tax increase as a result of the 2013 tax act is demonstrably false. In fact—based on careful study of a Minnesota Department of Revenue (MDOR) incidence analysis of the 2013 tax act—combined state and local taxes probably declined as a result of the act for the majority of middle-income households.†” Furthermore, additional examination of an MDOR incidence analysis of the two tax acts passed during the 2014 session indicate that the combined effects of all three bills enacted during the 88th legislative session (chapters 143, 150, and 308) likely produced a reduction in taxes for the majority of all Minnesota taxpayers.‡
The 2013 tax act produced tax reductions for most middle-income Minnesotans and still generated a net increase in total state revenue by focusing tax increases among the highest income households where wealth is most heavily concentrated and effective tax rates (i.e., state and local taxes as a percent of personal income) are the lowest. As noted in a recent North Star article, the highest income households still have a lower state and local effective tax rate than any other income group in the state even after passage of the 2013 tax act.
Perhaps the most common conservative complaint about the 2013 tax act is that it was a “job killer.” However, the aggregate statistics do not support this conclusion. Since passage of the tax act in May 2013, the rate of job growth in Minnesota has exceeded the average for other Midwestern states (3.8 percent versus 3.4 percent) and Minnesota’s current unemployment rate is a full percentage point below the Midwest average. Nonetheless, the lack of evidence in support of the claim that the 2013 tax act was a “job killer” has not diminished the frequency and ferocity with which it is made.
Given the complexity of the economy, it is difficult to prove with certainty that any one particular act of the legislature has produced a net increase or decrease in jobs. However, the 2013 tax act is consistent with a public investment policy that is credited with producing above average growth in Minnesota’s economy over the last fifty years. Before leaving his post as state economist, Tom Stinson observed that:
Minnesota’s economic record over the last half-century is one most states envy. The reason that occurred was because far-sighted public and private sector leaders figured out they were going to invest in the education of the baby boom generation. Now it seems like an obvious decision to have made, but if it was, other states would have done it too and we wouldn’t have done as well.
The investments made possible by the 2013 tax act—with their heavy emphasis on K-12 and higher education and workforce development—are part of a long-term investment strategy that served Minnesota well in the past and there is every reason to belief that it will continue to serve us well in the future. In any account, there is no durable evidence that this strategy has led to a loss of jobs.
In summary, the criticisms of the 2013 tax act fall flat. That act significantly reduced the regressivity of Minnesota’s state and local tax system, provided tax relief targeted to households with the least ability to pay, reduced total state and local taxes paid by the majority of middle-income Minnesotans, produced the first statewide reduction in property taxes in over a decade, made a number of less notable but still significant improvements in tax policy, funded critical public investments that will serve Minnesota well in the future, and helped to end the perennial cycle of budget deficits and unallotments.
To tout the accomplishments of the 2013 tax act is not to say that a portion of the projected budget surplus should not be used to provide tax relief, but that relief should be targeted in a way that will further reduce tax regressivity in Minnesota, as was done in 2013. Beyond providing tax relief, a portion of the surplus should be used to fund smart long-term investments that will enhance Minnesota’s economy and quality of life in future years.
*Inflation adjustments in this article are based on the Implicit Price Deflator for State & Local Government Purchases.
†For purposes of this analysis, middle-income households are defined as households with annual incomes from $26,400 to $101,600.
‡The MDOR incidence analyses referenced here report average effective tax rates within specific income ranges, not the impact on specific households, so based on these analyses it is not possible to identify with precision the precise number households that experienced a tax increase or decrease as a result of the 2013 and 2014 tax acts. However, based on a careful reading of these analyses, it is likely that a majority of middle-income taxpayers experienced a tax reduction as a result of the 2013 tax act and that a majority of all taxpayers experienced a tax reduction as a result of the combined impact of the 2013 and 2014 tax acts. One thing that the MDOR incidence analyses establish with certainty is that the claim that “each and every Minnesotan” experienced a tax increase is false.