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Income Growth Unharmed by Tax Hikes

April 23, 2013 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

Opponents of the state income tax rate increases proposed by Governor Dayton and House and Senate leadership claim that these policies will undermine Minnesota employment and income growth. The hard numbers based on trends over the last 63 years say otherwise.

Yesterday’s Minnesota 2020 article demonstrated that—contrary to assertions from anti-tax proponents—state income tax rate increases are not associated with slower job growth and rate decreases are not associated with more rapid job growth. In fact, the exact opposite appears to be the case.

Today we turn our attention to the relationship between income tax rate increases and the rate of growth in Minnesota personal income. As with yesterday’s analysis of the relationship between income tax rate increases and employment growth, today’s analysis divides the period from 1950 to the present into three categories:

  • Periods following a Minnesota income tax rate increase
  • Periods following a Minnesota income tax rate decrease
  • Periods of Minnesota income tax rate stability.

Each of these three periods along with other methods used in this analysis are described more thoroughly in yesterdays article.

Using personal income data from the U.S. Bureau of Economic Analysis,* Minnesota 2020 determined the average quarterly rate of personal income growth during each of the three periods described above. If a state income tax rate increase inhibits growth in Minnesota personal income, the average rate of income growth should be relatively low during periods following a state income tax rate increase and relatively high following a rate decrease.

During periods of state income tax rate stability, Minnesota’s average quarterly personal income growth was 0.73 percent. During periods following a rate increase, average quarterly personal income growth actually increased to 0.99 percent. Average income growth was lowest—just 0.48 percent—following an income tax rate reduction. These findings flatly contradict assertions made by opponents of a state income tax rate increase.

It is conceivable that the higher growth in personal income following a state income tax rate increase and the lower growth following a rate decrease is a product of trends in the national economy. To control for the impact of national trends, Minnesota quarterly personal income growth was compared to national growth during each of the three periods described above. If state income tax rate increases lead to lower personal income growth, Minnesota income growth should fall below the national average following a state income tax rate increase and surpass the national average following a state income tax rate reduction.

Once again, the expectations of state income tax increase opponents were not borne out by the data. Minnesota personal income growth exceeded the national average following a state income tax rate increase and fell below the national average following an income tax rate reduction.

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During periods of Minnesota income tax rate stability, Minnesota’s average quarterly personal income growth of 0.73 percent was modestly below the national average of 0.77 percent.† During periods following a Minnesota tax rate increase, Minnesota outperformed the national average by a margin of 0.99 percent to 0.88 percent. The period during which Minnesota personal income growth underperformed the national average by the greatest margin was during intervals following a state income tax rate reduction, when Minnesota’s quarterly average income grew by just 0.48 percent, compared to a national growth rate of 0.54 percent.

One possible explanation for the positive correlation between state income tax rate increases and above average personal income and job growth is that an increase in state income taxes allows for additional public investment in workforce development, infrastructure, and education—all factors that can contribute to income and employment growth. At a minimum, an income tax increase can help to minimize job and income losses in the public and private sectors resulting from cuts in direct state government spending.

Another advantage of an income tax rate increase is that it will reduce the tax gap between high and middle-income households. The wealthiest two percent of Minnesota households (the only taxpayers affected by Governor Dayton’s proposed income tax increase) are paying about 20 percent less of each dollar of income in state and local taxes than are middle-income families. An income tax rate increase along the lines of what is being proposed by Dayton and considered by House and Senate leadership will reduce this disparity.

The analysis presented in yesterday’s and today’s articles show that there is no reason to fear job and income losses as a result of a state income tax increase. This fact—combined with the added benefit of adequate funding for K-12 education, higher education, transportation infrastructure, and property tax relief, the promise of a balanced state budget without shifts or gimmicks, and a more fair tax system that is better aligned with the ability to pay—provide a powerful rationale for enacting a progressive income tax increase during the 2013 legislative session.

 

*For purposes of this analysis, personal income numbers were converted to constant dollar amounts using the Consumer Price Index.

†This analysis focuses on total personal income, instead of personal income per capita, because total personal income is available on a quarterly basis, while personal income per capita is not. (Personal income per capita from the U.S. Bureau of Economic Analysis is only available on an annual basis.) Use of quarterly data allows this analysis to define periods that more closely align with the date of enactment of income tax rate changes, which generally occur toward the middle of the calendar year. A supplemental analysis shows that from 1950 to 2012, average annual personal income per capita growth in Minnesota exceeded the national average during all three periods examined in this analysis (i.e., periods following a state income tax rate increase, periods following a rate decrease, and periods of rate stability). However, average annual personal income growth per capita in Minnesota was highest—both in an absolute sense and relative to the national average—during periods following a state income tax rate increase.

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