“That is the task which we begin today: to inaugurate an age in which our will is equal to our hopes. I believe that our people are waiting, and are ready, for such an age. They are waiting for government to catch up with them.” – Gov. Wendell R. Anderson, Inaugural Address, January 6, 1971
Changing our tax code is a long-run project, and it’s controversial every step of the way. There’s a good reason for that: We negotiate and renegotiate our social contract through taxes. It’s where we sort out who pays and how much and for what. Everybody has a stake and everybody has an opinion. The tax changes coming in Minnesota’s next biennium are no exception.
First, what happened? In a nutshell, we, as a state, did five things:
1) we raised $1.1 billion by asking the top 2% to pay 2% more,
2) we closed over $400 million in corporate tax loopholes,
3) we raised another $400 million in tobacco taxes,
4) we raised taxes nearly $100 million on large inheritances, and
5) we did a mini-version of sales tax reform: taxing digital goods and a handful of business services while lowering other taxes.
These are significant changes, but none of them is unprecedented. From time to time we act to modernize our tax code. Gov. Anderson had it right: We are often waiting for our government to catch up with us.
This year was another in which we started to do just that.
1933 and 1971 are times when we enacted similar sorts of tax reforms. In each of these three years, our state increased taxes on the wealthiest, asked corporations to pay more, and reformed other taxes to catch up with changes in the lives of Minnesotans.
The context in 1933
For instance, in 1933 Floyd B. Olson entered his second term as governor. The state was entering the fourth year of the Great Depression. Unemployment was at historic highs. The farm economy was collapsing under a mix of low crop prices and a wave of property foreclosures. The union movement was just a year away from the explosive Teamsters strike in Minneapolis. The lives of Minnesotans were shifting, often painfully, from rural to urban, from agriculture to industry, from relying on family to risking in an impersonal marketplace.
The policy solutions offered around this time (i.e. unemployment insurance, foreclosure moratoriums, minimum standards at work, etc.) were designed to respond to Minnesotans’ problems. To finance these solutions, we raised income taxes, corporate taxes, and instituted a new, post-Prohibition alcohol tax. These tax changes lagged behind these dramatic changes in the lives of Minnesotans by years, if not decades.
In 1971, Wendell Anderson was entering his first term as governor. He was clear enough about the need to update the tax code that he not only called a special session, he vetoed the tax plan the Legislature then sent him. He realized that the state urgently needed to change itself to catch up to the lives of Minnesotans. Since the last major tax overhaul, the suburbs had grown. The children of the baby boom were flooding the schools. The promise of the New Deal was being delivered via a larger public sector.
In response, individual and corporate income taxes were increased. A new sales tax was implemented and property taxes were reformed to increase, equalize, and stabilize school financing in every part of the state, i.e. the Minnesota Miracle.
Current trends
In 2013, Minnesotans are facing changes (and challenges) that our tax code has yet to adapt to. Many jobs have shifted from manufacturing-based to service-based. Large banks and corporations have pushed a far-reaching “financialization” of the economy that (along with the tax changes of the 1980s and 1990s) has pushed wealth and income inequality to unsustainable extremes. Our tax plan for FY 2014-15 is just starting to respond to these trends that were themselves decades in the making.
The increase of 2 percent on the wealthiest 2 percent (and high-end inheritance taxes) will only begin to relieve income inequality. The tax loopholes being closed will only begin to dismantle the system of preferences that corporations have built into government. The tobacco tax will only begin to cover the accelerating health care costs of an aging population. An expansion of the sales tax to digital goods and certain services will only begin to modernize a tax code that is rooted in an economy that existed decades ago.
An overdue response to changes
Does the new tax plan overreach? Far from it; it’s an overdue response to changes that Minnesotans have known about and supported responding to for years. A tax on the wealthy and the closing of corporate tax loopholes is controversial in only one square mile of Minnesota. (Hint: It’s just to the north and west of downtown St. Paul.) Tax fairness, on the other hand, is popular in other 86,942 square miles where the rest of us live, work, and recreate.
As November 2014 gets closer, state legislators and Gov. Mark Dayton should not run away from this tax plan. They should run to catch up with the rest of Minnesota.
Chris Conry is TakeAction Minnesota’s Organizing a New Economy program manager.
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Spin
The spin put on these topics distorts the facts. Saying the top 2 % will pay 2% more is deceptive as it’s a 2% increase in tax rate, not 2% more. The actual rate of increase in that bracket is more like 26%. It would also be inaccurate to say that high income taxpayers will see a 26% tax increase. The fact is that it’s not 2% more, it may be 10 or 15% more. And that will likely result in less spending or less charitable giving from that bracket.
While the article says that raising taxes is only controversial in one square mile of the state, it was interesting that a Star Tribune poll from March showed that only 54% of respondents favored tax increases on the top 2%. This was much lower than I would have expected but likely speaks to either a conservative philosophy or a fear that there will be direct impacts on the economy to remove these funds and re-direct them to the states spending. I doubt the 46% that were not in favor all reside in the same square mile near downtown St. Paul.
Lastly what’s a loophole vs an incentive? The bill removes things like the R&D tax credit, an incentive for companies to locate high paying high skill jobs in Minnesota. It creates incentives for companies like 3M and Baxter to add high paying high skill jobs. the bill either removed loopholes and created new loopholes, or it removed one set of incentives and created new incentives. It’s dishonest to call the incentives of yesterday loopholes, but the ones of tomorrow job creators.
In general I think a lot of the negative feedback on this tax plan is the way it targets specific taxpayers, going narrow and deep to drive revenue up. It’s just not good tax policy to expect a few percentage of companies, or individuals, to be supporting so much of the states spending. It’s especially bad tax policy to pick on specific industries like warehousing which are low margin and easily transported to other states where there is no competitive disadvantage.
Is raising $2.1B in new taxes to close a shortfall less than a third that size overreach? In this fragile economy it feels like it.
Ginny
Taxes should be imposed on those who make more. Wealthy individuals pay a lower percentage of their taxes than most of the rest of us. Higher taxes actually lead to prosperity–and there is overwhelming evidence to show it. Tax someone who earns $250,000 a year an additional 2%. You think he will really do without anything? Nor do these people create jobs. If low taxes on the rich created jobs, we’d be swimming in jobs–more jobs than people to fill them.
The great inequality in our society is at least in part due to tax inequities. It is unsustainable and we are paying now; we will pay much more as this goes on.
Few incentives pay back the cost. Some cost more than if they were left alone. Some do nothing at all to provide jobs or higher profits for the company. We can look at that historically, too.
This economy is fragile because of the “antics” of a whole bunch of banks, financial institutions, mortgage companies, and the like. Felonies, actually, many of them. Sheer unrestrained greed in other cases.
Spin?
Converting a 2% tax hike into a 26% tax hike is “spin”. The fact is by the time the tax lawyers the wealthy employ are finished, we’re be lucky if we get the 2%.
It’s funny how the myth of trickle down is powerful for some people.
Let me help
Paul with the math.
7.85% was the top rate. It was raised by 200 basis points to 9.85%. The percent change is calculated by:
(New number less the old number) divided by the old number. Here is one of many Google references on how to perform the calculation.
http://www.csgnetwork.com/percentchangecalc.html
So, in this particular case:
(9.85% – 7.85%) / 7.85% = .254 x100 = 25.4%
Congratulations Mike. You got the math correct. It is a 25.4% increase in tax rates. Though I eagerly await Paul’s comments on this “spin”.
Math
Congratulations: you’re both right. Yes, it is an increase of 2%. And yes, it is a 25.4% increase over the previous rate.
With all that said and done though I hardly think the uber wealthy are going to lose any sleep by shelling out a couple thousand more per year in taxes. The two percent income bracket is well north of $180,000/year, which only amounts to $3600 more in taxes. That assumes, of course, that some of that income isn’t in tax-free shelters.
percent
But if I’m not mistaken that additional 2% only applies after the first $200,000 (I’m not sure of current number) has been reached and paid at the lower rate. It is not 2% of the entire income.
2%
It affects income over $250,000 for married couples and $150,000 for single people. Income below that level will still be taxed at the old rate. So that $3600 figure I quoted earlier? It’s too high. For a single person making $180,000 a year it would mean an additional $600 a year in taxes. A couple earning half a million a year would pay an extra $5000.
According to one article 54,400 people in the state will be affected by the new tax tier.
Old taxes vs new taxes. An example or two
Couple X has $201,000 in taxable income. Their current tax at 7.85% would be $15,778.50.
Under the new tax rates, their tax would be $15,798.50. They pay an additional 2% on the last $1,000, or $20 extra dollars. OMG, my hair is on fire!
Couple Y has $1,000,000 in taxable income. Their current tax would be $78,500.
Under the new rates, their tax would be $94,500. That’s a lot of money, but to put it in perspective, they still have $905,500 left over. Moving out of state would cost them a great deal more than the $16,000 incremental increase in their taxes.
I’m having a hard time recognizing the hardship here.
No you have the math wrong
That’s not how marginal tax rates work.
In your $201,000 example their taxes would be about $14,000. The first $34k or so is taxed at 5.35%, the next range up to $140,000 is about $7.05%, and then 7.85 up to $250k and then 9.85% above that.
So the $200,000 income earner would see no change.
The $1,000,000 income family example is closer – currently at about $76,000 would see an increase of 2% of the $750,000 between $250k and $1M, which is about another $15,000 to $92,000.
You’re right
I forgot about all of the marginal rates below $200k. The basic analysis is right, though, at the low reaches of the new tier, there is barely discernible difference between the old and new rates, and once your income is significantly above the margin, the difference is bigger, but still managable in the scheme of things.
Let me help…
I’ll help with the definition of “spin”, simply put, it’s to frame or re-frame something in a way that is most compatible with your argument or policy… hence describing a 2% tax increase as a 24% tax increase exaggerates the effect of the tax hike. Hence, converting a 2% tax hike into a 24% may be mathematically correct, but it’s spin that suggests the wealthy are getting gouged by the big govmint. They are not.
Summary
To sum it up, a 24% increase of nothing is still next to nothing. Would that be a tempest in a tea cup?
Let Us Not Forget
That our state will be better off without the types of wealthy people who would leave the state because of this small tax increase.
Such people tend to focus on themselves and their own well being to the exclusion of every other consideration. As such, they have a negative effect on the environment, their employees, their neighbors, and society in general. I’ve even known of some who had a very negative effect on the churches of which they were members.
If they get angry enough to leave our state, the overall effect will be positive.