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MN2020 - Income Tax Increases Don’t Hurt Job Growth
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Income Tax Increases Don’t Hurt Job Growth

April 22, 2013 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

Anti-tax proponents are fond of saying that income tax rate increases are “job killers.” In reality, there is no indication that state income tax rate increases have had any negative impact on job creation in Minnesota over the last 63 years. In fact, income tax rate increases and the additional public investment associated with them are correlated with higher—not lower—employment growth.

Using data from the Revenue Department’s Minnesota Tax Handbook and on-line historical tax rate spreadsheet, Minnesota 2020 has divided the period from January 1950* to February 2013 into one of three categories:

  • “Periods following a Minnesota state income tax rate increase” are defined as periods within 24 months of a rate increase, unless another income tax rate change is enacted within 24 months; in that case, the period will end in the month that the new rate change is enacted. Since 1950, there have been eleven distinct income tax rate increase periods encompassing 216 months.
  • “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 within 24 months; in that case, the period will end in the month that the new rate change is enacted. Since 1950, there have been six distinct income tax rate decrease periods encompassing 108 months.
  • “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, there are six distinct periods of income tax rate stability encompassing 433 months.

The information available from the Minnesota Department of Revenue does not specify the month of the year in which income tax rate changes were enacted. For the purposes of this analysis, it was assumed that rate changes were enacted in May, which is the month that regular session legislative activity generally concludes and bills are signed into law.

Using monthly employment figures from the U.S. Bureau of Labor Statistics Current Employment Survey, Minnesota 2020 compared the average monthly rate of employment growth during each of these three periods. If income tax rate increases are destructive of job growth, average Minnesota monthly job growth should be lower during periods following a rate increase and—conversely—higher during periods following a rate decrease.

During periods of state income tax rate stability, Minnesota’s average monthly employment growth was 0.17 percent. During periods following a rate increase, average monthly employment growth actually jumped to 0.22 percent. Finally, employment growth was lowest—0.14 percent—following an income tax rate reduction. These patterns fly in the face of assertions that an income tax rate increase will undermine job growth.

Of course, trends in the national economy have much more to do with Minnesota employment growth than changes in state income tax rates. It is conceivable that the higher rate of employment growth following an income tax rate increase is the result of broader trends in the national economy. To control for the effects of trends in the national economy, the trend in Minnesota monthly employment was compared with the trend in national employment. If state income tax rate increases are destructive of job growth, Minnesota employment growth should fall below the national average following a state income tax rate increase and exceed the national average following a state income tax rate reduction.

  

Once again, the expectations of anti-tax proponents were disappointed. Minnesota employment growth actually improved relative to the national average following an income tax rate increase.

During periods of Minnesota state income tax rate stability, Minnesota average monthly job growth outperformed the national average by only 0.02 percent (0.17 percent versus 0.15 percent). During periods following a Minnesota rate increase, Minnesota outperformed the national average by a full 0.05 percent (0.22 percent versus 0.17 percent). The only period when job growth in Minnesota failed to outperform the national average was during the period following a state income tax rate reduction, when average monthly job growth was 0.14 percent both in Minnesota and nationally.

It should be noted that correlation does not equal causation. Simply because income tax rate increases are associated with stronger employment growth and rate decreases are associated with weaker employment growth does not prove definitively that income tax rate changes were the decisive factor. However, the fact that the trends are the exact opposite of what is predicted by income tax opponents gives strong reason to doubt the veracity of their claim that income tax increases are destructive of job creation.

Tomorrow’s Minnesota 2020 article will examine the impact of income tax increases on personal income growth over the last 63 years.

 

* January 1950 is the first month that Minnesota Current Employment Survey data from the U.S. Bureau of Labor Statistics (BLS) are available.

† The tax rate changes enacted in 1987 and 1988 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 Revenue Department staff, the 1987 to 1988 time frame is designated as a period of income tax rate stability.

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