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"It is a paradoxical truth that tax rates are too high and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now."
-- President John F. Kennedy, 1962.
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Over the past few decades Minnesotans have seen their political leaders unveil a myriad of "plans" purportedly designed to propel the state forward. First there was Gov. Wendell Anderson's "Minnesota Miracle," then Gov. Jesse Ventura's "Big Plan." And now that the DFL controls the statehouse, Gov. Mark Dayton is sure to revive his really big tax and spend plan.
All these solutions share one major flaw: more state spending. Whether designed to buy down property levies, aid school districts or just plain redistribute income, they inevitably wind up diverting precious resources and taxing Minnesotans more. And that discourages business investment in the state.
Minnesota faces a serious private-sector jobs drain. Just a few decades ago, 3M, Honeywell and Control Data were our largest employers; now it's state government, with more than 55,000 employees. In fact, there are more workers in Minnesota on the government's payroll than in all of industrial manufacturing. One reason is certainly Minnesota's combined federal and state corporate tax of over 40 percent. We have the third-highest corporate income tax rate in the country and rank eighth on the top personal income tax bracket. The latter is especially hard on Minnesota's small and midsize businesses.
The former CEO of 3M, George Buckley, put it succinctly in a candid moment a few years ago: "If I have a chance to invest in a factory in Ireland at zero [corporate taxes], or a factory in [South] Korea at 15 percent, or a factory in Singapore at zero, or a factory in Germany at 25, why would I want to invest in Minnesota or the United States?"
You wouldn't. That's why the states with the biggest budget problems often have the highest income tax rates. And Minnesota has become overly dependent on the state's personal and corporate income taxes. As the graph at right illustrates, personal income tax receipts tend to be much less stable than consumption taxes -- leading to boom-and-bust budget cycles.
So here's an idea for the start of the legislative session next month -- we'll call it the 5 percent plan. By reducing the non-business-to-business sales tax exemptions the state has granted to select industries, we could easily lower our personal and corporate income tax rates to a flat rate of 5 percent.
According to House Research, the state of Minnesota "loses" $3.39 billion each year by exempting food, clothing and a myriad of services (from body piercing to legal fees) from sales tax collections. It hardly seems "fair" that the hardware store on the corner has to collect the state's bounty, but other businesses do not. Lowering the personal and corporate income tax rate, on the other hand, "costs" the state just $2.16 billion in lost revenues. That means that by broadening the sales tax base and adopting a flat 5 percent income tax, state government could actually realize a surplus of $1.2 billion. However, I would use that surplus to lower the sales tax rate to 5 percent as well.
The net result would be a deficit of about $1.1 billion, easily offset with a modicum of spending restraint, such as freezing the budget for one biennium. Of course, this is a static analysis that assumes changing the incentives for work and investment will have no effect on individual behavior. More likely, state government would experience a substantial uptick in revenue due to the growth in our economy that would surely occur under a more favorable business climate.
The well-to-do will still pay much more, though no doubt a few tax-exempt groups (funny how they want everyone else to pay higher taxes) will complain that the rich won't be paying enough as a percentage of their income under the plan. But as long as the wealthy are funding the government, who cares what their take-home pay is? Class warfare may win elections, but it's not very good for growth.
Right now the top 50 percent of Minnesota earners -- starting at just $42,000 per year -- pay an astonishing 96.5 percent of the income-tax burden. Those opposed to income tax reductions should explain why a married couple earning just over $34,000 per year shouldn't see the tax on their next dollar earned drop from 7.05 percent to 5 percent!
To be sure, removing sales tax exemptions will give everybody some skin in the game, albeit at a lower rate. But why not? If a given program is worth funding, then everyone should help pay for it -- even those who use it. Besides, when taking into account government subsidies, lower income earners will still receive a far greater benefit as a percentage of their contribution than will those at the top. That is hardly regressive.
Indeed, a flat 5 percent tax on income and sales is eminently fair. Those who consume will pay a little more and those who work will pay less. Under the plan everyone enjoys a cut in their tax rates and an increase in their take home pay.
More important, if we're serious about ending Minnesota's malaise when it comes to business investment in our state, then the path is clear: Let's encourage work, savings and investment. The 5 percent plan would be a good start.
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Jason Lewis is a nationally syndicated talk show host based in Minneapolis-St. Paul and the author of "Power Divided Is Power Checked: The Argument for States' Rights" from Bascom Hill Publishing. He can be heard locally from 5 to 8 p.m. on NewsTalk (1130 AM) and on jasonlewisshow.com.