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Wayne Cox: Why taxing top incomes is not folly

Date Published: 05/01/2009

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Wayne Cox: Why taxing top incomes is not folly

President Obama's promise to lower taxes on middle-income working families has become law. This week the president fulfilled a second campaign promise by proposing to let the Bush tax cuts for those with income above $250,000 a year expire as scheduled in 2010. Should Minnesota follow Obama's example and withdraw its decadelong state income tax cuts for high-income households?

The public certainly seems to think so. Requiring those with high income to give up their tax cuts in order to prevent deep cuts in key services is approved of in polls by very high margins.

Pat Anderson, president of the Minnesota Free Market Institute, argued against this idea in a recent commentary. She is wrong. These tax cuts cost the state hundreds of millions of dollars in lost revenue a year. Over the years, the state has been forced into crowding classrooms, closing bridges and turning women away from domestic abuse centers to make up for this lost revenue.

Gov. Tim Pawlenty's proposed budget shows the price the state will pay for failing to restore revenues. The chief justice of the Minnesota Supreme Court has said the state cannot maintain an adequate system of justice at the spending levels sought by the governor. Colleges and universities -- the pipeline for Minnesota's ingenuity and productivity -- would be forced to retrench further. More students would be priced out of higher education. Property taxes would have to be raised. Some 85,000 Minnesotans would lose access to affordable health care.

Anderson, before she was defeated for reelection as state auditor, infamously argued that "libraries are nonessential." She was wrong then. She is wrong now.

Pawlenty's solution will deepen the recession by piling public sector job loss onto private sector job loss. Taking paychecks from teachers, nurses, road maintenance workers, police officers and firefighters will take customers from Main Street businesses across the state. What Obama giveth, Pawlenty taketh away.

This year the Legislature should be vigilant in seeking cost-effective solutions. Retaining these tax cuts at the top is not one of them. A new study by Moody's shows the cost of doing business in Minnesota is about average compared with other states. Changing tax rates at the top would not change that position.

Economist Howard Chernick, who studies state tax systems, said states, including those with higher individual income tax rates than Minnesota's, are not at a disadvantage. He found the benefits of those revenues (less congestion, greater education investment) helped states' economies more than the increased tax price hurt them.

Anderson, using only income tax figures from a Minnesota Department of Revenue report, argued Minnesota has a "progressive system." That would be news to the Department of Revenue, because the same report says that while the state's income taxes are progressive, its overall tax system is regressive.

The relatively small percentage of Minnesota households with the highest incomes do make a much-appreciated, crucial contribution to helping the state meets its needs. While they provide an important portion of the state's individual income tax, they actually contribute a smaller portion of their income in total state and local taxes than do those with much less income and much tighter budgets.

Anderson's assertion that there's an overburden for those with top incomes evaporates when one looks not just at the income tax, but also at the two-thirds of Minnesota taxes she leaves out -- the taxes on property, business and sales.

Minnesotans earning $191,000 a year and greater receive 30 percent of total state household income. They pay 8.8 percent of that income in combined state and local taxes on income, property and sales. Those earning $69,500 a year or less receive a similar 30 percent of the state's household income. They pay 12.3 percent of that income in these same combined state and local taxes.

Warren Buffet recently asked: Why should he be taxed at a lower rate than his secretary? Good question. Restoring the economy and the fiscal health of Minnesota and the nation will not be easy. But it will be much harder without asking those with most means to increase their stake in the solution.

Is restoring income tax rates at the top a perfect solution? No. But it helps. The alternative is carrying out an even riskier plan that trims muscle, not fat.

Wayne Cox is executive director of Minnesota Citizens for Tax Justice.


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