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Generic Rants About Taxation Don't Help

April 15, 2010 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis
April 15--the deadline for filing state and local income taxes--has also become the day to protest the perceived pernicious impact of taxes. A core belief of the anti-tax movement is that "high taxes" are bad for the economy.  This is a premise that does hold up under close scrutiny.

Of course, what constitutes "high taxes" is a matter of opinion.  U.S. and Minnesota taxes are low in comparison to most other industrialized countries.  If we restrict our analysis to the 50 states, total state, local and federal taxes in Minnesota are fairly high.  According to the "Tax Freedom Day" (TFD) report from the conservative Tax Foundation, Minnesota's 2010 tax freedom day is April 13, the eighth latest date among the 50 states.

Before we gophers start feeling sorry for ourselves, remember that Minnesota has the 14th highest after-tax income based on data from a previous TFD study.  (The 2010 TFD study does not contain the income data needed to recreate the after-tax income calculation.)  In fact, states with late tax freedom days (i.e., high tax states) generally have higher after-tax income per capita than states with early tax freedom days.

How do we explain the higher level of after-tax income in high tax states?  One plausible explanation is that high tax states have invested more in the public goods that promote long-term prosperity, such as education and transportation infrastructure.  State economist Tom Stinson makes a powerful case that smart investments made by previous generations have contributed to Minnesota's subsequent prosperity.

Of course, income is not the only measure of economic performance.  However, other indicators denote no advantage for low tax states over high tax states.  If we compare the 25 states with the highest taxes to the 25 states with the lowest taxes, we find that:

  • The average unemployment rate is identical
  • Average poverty rates are modestly lower in the high tax states
  • Health insurance coverage rates are slightly higher in high tax states
  • Average homeownership rates are higher in the low tax states, but the difference is slight (69.1% in low tax states versus 68.5% in high tax states).

Another thing for Minnesota tax protesters to keep in mind is that Minnesota's 8th highest TFD ranking is based largely on federal taxes over which state policymakers have no control.  The 2010 TFD report does not contain the data needed to determine Minnesota tax freedom day rank based on state and local taxes only; however, based on the most current data from the U.S. Census Bureau, Minnesota rank based exclusively on state and local taxes would be 16th.  According to a Minnesota Revenue Department analysis, taxes in Minnesota are "just about average." Furthermore, if we were to rank states based on all state and local revenue--not just taxes--Minnesota would fall to 32nd.

Since 2002, Minnesota's rank relative to other states in terms of state and local government taxes, total revenue and total spending has dropped steadily, as demonstrated in a recent Minnesota 2020 report.  The same report demonstrated that at the same time that these ranks were falling, Minnesota's economic performance relative to other states deteriorated.  Since 2002, Minnesota has cut taxes, charges, special assessments, and other own-source revenue more than any other state in the nation, yet the prosperity promised by "no new tax" proponents never materialized.

With the state facing a $7.8 billion deficit in the next biennium, spending cuts must be explored.  The efforts of "small government" proponents are most productive when they are focused on identifying and eliminating specific public expenditures that are inefficient, rather than on making exaggerated claims about taxation and public spending that do not jibe with the facts.

Proponents of less government and lower taxes are not going to go away--nor should they.  In a pluralistic democracy, they function as a useful counterbalance that helps to weed out unnecessary spending and control growth in the public sector.  However, generic rants about the evils of taxation are not only unproductive but also destructive for the common good.  This April 15 tax protesters would be well advised to focus on constructive ideas rather than unsupported anti-tax assertions.

 

 

photo credit: Fibonacci Blue, creative commons
 
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