Income Tax Hikes Have Not Stifled Job, Income Growth

Conservatives frequently argue that tax increases stifle job growth. In reality, data from 1950 to the present show no indication that Minnesota income tax increases have had any adverse impact on job creation or income growth. In fact, Minnesota’s rate of job and income growth has tended be greatest following state income tax increases and least during periods following income tax cuts.

The U.S. Bureau of Labor Statistics (BLS) tracks monthly employment in Minnesota back to January 1950.* Using data from the Minnesota Tax Handbook and historical income tax rate tables, both produced by the Minnesota Department of Revenue (DOR), it was possible to categorize each month since January 1950 as either a period following a rate increase, a period following a rate decrease, or a period of individual income tax rate stability.† DOR sources do not specify the month in which income tax rate increases or decreases were enacted; for purposes of this analysis, it was assumed that rate increases were enacted in May, which is generally the month in which regular legislative session activity concludes and tax bills are enacted.

During the entire period from January 1950 to June 2018, the average monthly rate of employment growth in Minnesota has been 0.18%. Contrary to the expectations of conservatives, monthly job growth was highest in periods following an individual income tax rate hike (0.21%) and lowest during periods following and a rate decrease (0.14%). Average monthly employment growth was 0.17% during periods of income tax rate stability.

The single most important factor influencing job growth in any single state is generally the overall health of the U.S. economy. To control for the effects of national economic trends, we compare overall job growth in Minnesota to the U.S. average. If state income tax hikes discourage job growth, we would expect Minnesota employment growth to fall behind the national average during periods following a state income tax rate increase; conversely, we would expect Minnesota to surpass the national average following a state income tax rate reduction.


In fact, we observe the exact opposite. Since 1950, the average rate of monthly job growth in Minnesota exceeded the national average by 0.04% during periods following a Minnesota income tax rate increase. Minnesota average monthly job growth also surpassed the national average during periods of rate stability, but by a much smaller margin (0.02%). The only period during which average monthly job growth in Minnesota did not exceed the national average was during periods following a Minnesota income tax rate reduction. These trends are the exact opposite of what we would expect if income tax rate increases were destructive of job growth.

A similar analysis of quarterly personal income growth can be conducted using data from the U.S. Bureau of Economic Analysis (BEA). The average rate of quarterly personal income growth in Minnesota from the first quarter of 1950 to the first quarter of 2018 was 0.75%—identical to the national average. However, both in an absolute sense and relative to the U.S. average, personal income growth in Minnesota was strongest following a state income tax increase and weakest following a state income tax reduction.

The simplistic conservative narrative that more jobs and greater prosperity necessarily follow on the heels of a tax cut is not supported by nearly seven decades of Minnesota data. In fact, it is conceivable that increases in state revenue contribute to adequately funded public services and infrastructure, which in turn contributes to more rapid job and income growth.

 

*Specifically, we examine total non-farm employment from BLS Current Employment Statistics.

More specifically, “periods following a Minnesota state income tax rate increase” are defined as periods within 24 months of enactment of a rate increase, unless another income tax rate change is enacted during that period; in that case, the period will end in the month that the new rate change is enacted. Since 1950, 240 months fall into this category. “Periods following a Minnesota state income tax rate decrease” are defined as periods within 24 months of a rate decrease, unless another income tax rate change is enacted during that period; in that case, the period will end in the month that the new rate change is enacted. Since 1950, 108 months fall into this category. “Periods of Minnesota state income tax rate stability” consists of those months that are not included in a tax rate increase or decrease period. Since 1950, 473 months fall into this category. The tax rate changes enacted in 1987 were associated with the elimination of federal deductibility; it is difficult to determine if the combined effect of these changes resulted in a net income tax increase or decrease. Upon recommendation of DOR staff, the 24 months following these changes (June 1987 to May 1989) are designated a period of income tax rate stability. (An alternative approach would be to exclude these 24 months from the analysis; exclusion of these months does not substantively alter the findings of this research.)