Wieffering: Simple tax equation turns out to be complex

  • Article by: ERIC WIEFFERING , Star Tribune
  • Updated: May 20, 2011 - 8:26 PM

Perhaps the most emotionally persuasive argument against Gov. Mark Dayton's demand for a tax increase targeted at upper-income earners is that it is a job killer.

Too bad there's no definitive evidence that this is the case.

Minnesota's Republicans are hardly alone in believing this theory. It is an article of faith among congressional Republicans and many Democrats, including New York Gov. Andrew Cuomo, who said raising taxes on wealthier individuals would be counterproductive because, "I believe more people will leave the state and you'll have less revenue."

But what seems logical may not actually be true.

Jeff Thompson of the Political Economy Research Institute at the University of Massachusetts studied 18 years of migration data among New England states and found that higher taxes did not cause individuals to move to lower-tax states.

Another study, published in the June issue of the National Tax Journal, looked at the impact of New Jersey's so-called millionaire tax. It found no difference in the rate of out-migration between those earning below $400,000 and those earning above.

In a way, these findings are not terribly surprising. I've noted before how Minnesota's job growth actually fell well below the national average between 1999 and 2008, despite sharp reductions in personal tax rates. Before the tax cuts, Minnesota added jobs faster than the country as a whole, and that's saying a lot, given how strong the U.S. economy was during much of the 1990s.

I'm not suggesting that tax increases have no impact. Thompson's study, for example, found that higher taxes can make a state less attractive to potential new residents, but that states can offset and reverse this if they use the higher tax revenue to invest in schools, roads and other programs that can help increase jobs.

In other words, the jobs/taxes equation is far more complex than simple bromides might suggest, and it requires a deep analysis of the factors that can help attract or repel investment capital and risk-taking.

Too often, however, political and business leaders rely on ersatz rankings, such as the one released recently by the Small Business & Entrepreneurship Council. The SBE Council takes a dim view of taxes in general, describing them as "resources being drained from the private sector."

So it's hardly surprising that it would rank Minnesota as the worst state in terms of the cost of taxes on entrepreneurs and small businesses. The best? No-income-tax states such as South Dakota, Texas, Nevada, Wyoming, Florida, etc.

Contrast that with a new, in-depth study by Ernst & Young that looks at a range of issues that influence business location decisions and concludes that Minnesota is among the top 10 states in business tax competitiveness.

Dayton's starting point on tax increases was overly punitive. While he may deserve credit for trimming his proposed tax increase in half, to about $1.8 billion, I still believe that a modest tax increase on all but the least fortunate would better represent the spirit of shared sacrifice that Dayton and others have called for.

After all, it wasn't just the wealthy who had their taxes cut a decade ago.

•••

Minnesotans like to pat themselves on the back, and with the state unemployment rate 2.5 points better than the federal jobless rate, our arms have gotten pretty tired.

But maybe it's time to stop patting so hard.

The U.S. added 244,000 jobs in April, but Minnesota lost 5,200. Even the manufacturing sector, a bright spot for many months, shrank in April.

State labor experts are blaming April's drop on cold, wet weather, but the slowdown has been months in the making. Over the past year, the national rate of job growth has been 10 times Minnesota's.

Not good.

ericw@startribune.com • 612-673-1736

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