The tax plan released this week by Minnesota Gov. Tim Walz was portrayed as hiking taxes on the wealthy and well-off in order to ease the burdens of the COVID-19 recession that fell more heavily on lower-income residents.
Or as the Walz administration characterized it in materials it put out during the Tuesday announcement of the plan, the proposal asks “large and profitable corporations and the wealthiest Minnesotans to pay their fair share so our students, working families and small businesses have a fair shot.”
And to a large degree, it does: Walz’s plan would create a fifth income-tax tier for married couples earning more than $1 million, a designation that would affect less than 1 percent of taxpayers, according to the state department of revenue.
It would also create a higher tax rate on capital gains — profits from the sale of assets like stocks or property: 1 percent if profits on the sale was between $500,000 and $1 million; 4 percent if more than $1 million. And it would increase the state’s corporate income tax, known as the corporation franchise tax, for profitable corporations.
Taken together, the three measures would raise $1.3 billion of the $1.66 billion total tax hike proposed by Walz, and the governor’s plan has been praised by DFL lawmakers and constituency groups, many of whom have been calling on corporations and the wealthy to pay more even before the pandemic.
But the burden from at least one of those taxes doesn’t just fall on the well-off or profitable corporations. Minnesota’s corporation franchise tax is borne by owners and shareholders — but also by workers and customers. Up to half of that tax is paid by residents who probably don’t count themselves as being among the “wealthiest Minnesotans.”
Shifting the tax burden
The argument against the state’s corporation franchise tax is often touted by the usual sources: the Minnesota Chamber of Commerce, the Center of the American Experiment and Americans for Prosperity Minnesota — conservative organizations and business groups that have long advocated for lower taxes and all of which came out against Walz’s plan.
But the less-than-obvious effects of the corporate franchise tax have also been identified by another Minnesota organization: the Minnesota Department of Revenue.
Every other year, the state agency prepares a report that attempts to determine who ultimately pays taxes rather than just who — or what — writes checks to the state. And in 2019 , the Minnesota Tax Incidence Study was prepared by the agency to assess “the burden of state and local taxes across income groups.” Or as then-Revenue Commissioner Cynthia Bauerly put it: Who pays Minnesota’s taxes?
In discussing taxes on business property, purchases and corporate income, the study concludes that most of the tax burden is “partially shifted to consumers and workers.”
“The amount of tax shifting varies by tax and by business sector, depending on the scope of the product market (local or national) and the magnitude of Minnesota’s tax rates compared to those in other states,” the report stated. “To shift a tax, the individual or business legally liable to pay the tax must alter its economic behavior because of the tax. For example, a property tax paid by a business firm may lead the firm to raise its prices, lower its pay to employees, or the business owner may experience reduced profits.”
The analysis estimated that, in 2016, 57 percent of the burden from the state’s corporate income tax was borne by Minnesotans, with the rest paid by entities outside the state. Of the amount carried by Minnesotans. 76 percent was borne by consumers and 8 percent by company workers.
On Thursday, after the Senate Taxes Committee had current Revenue Commissioner Robert Doty in to go through Walz’s proposal, Committee Chair Carla Nelson, R-Rochester, responded by citing the 2019 tax study.
“This sounds like déja vù,” Nelson said. “What does the tax incidence study say about who is actually going to pay these taxes?”
Of the tax assessments on corporate profits, Nelson said, “those costs are passed onto the consumers, the consumers who are struggling.”
Doty responded by saying, “Larger corporations and the wealthiest Minnesotans definitely would pay an additional tax. They would bear a part of that.”
Plan also includes regressive taxes
The other sizable tax increase proposed by Walz don’t appear to allow as much shifting. The capital gains assessment and the fifth bracket for high earners are not taxes that can easily be shifted to customers or workers. But there were complaints Thursday by some members of the Senate Taxes Committee that the capital gains surcharge could hit farmers and small business owners when they sell in order to retire.
“I do take issue with the statement that this is only for high-income people,” said Sen. Bill Weber, R-Luverne. “For many, their business or their farm is their retirement plan. “When they sell that farm they are going to exceed that million-dollar threshold for that 4 percent surcharge.”
In his response, Doty returned to a message he repeated several times. “The governor is asking those who can do and who can pay more to do that for the greater good of our recovery and bringing the recovery back stronger.”
But it wasn’t just Republicans who raised questions about the tax plan. Sen. Ann Rest, a DFLer from New Hope and the ranking minority member of the committee, said she shares Weber’s concern about the capital gains surcharge. She also said she expects the February forecast will increase expected revenues from current tax rates and asked whether Walz would use that money to reduce his tax plan or increase new spending.
“I certainly hope that it’s going to be fewer taxes,” Rest said.
Walz’s plan also taps two other sources that are considered highly regressive, in that they hit lower-income people proportionately harder than wealthier taxpayers. Those proposed hikes — a new charge on vaping devices and a cigarette tax increase from $3.04 a pack to $4.04 a pack — would together raise $152 million over two years.
“The two most regressive taxes … are lawful gambling and the cigarette and tobacco taxes,” stated the 2019 tax incidence report.
Walz acknowledged that those taxes would fall more heavily on lower-income people, but he also said they are designed to incentivize behavior. “That’s no surprise,” he said.
Thursday, Doty told the Senate Taxes Committee that the sin tax hikes would increase costs and could reduce usage, especially among young people, who he said are particularly sensitive to increased costs.
Doty also tied the vaping and cigarette tax hikes to COVID-19, saying African Americans and Native Americans are targets of cigarette marketing and that smokers have worse outcomes if they become infected with the novel coronavirus.
Live by the incidence study, die by the incidence study
Much of the criticism of the tax plan, especially the corporate income tax and the sin taxes, are based on the tax incidence studies done by the state. Though a master study is done every two years, more specific studies are done on actual tax proposals made by governors and legislators. The report on Walz’s new plan isn’t expected until April.
But two years ago, a study of Walz’s first tax bill highlighted its regressivity and empowered opponents to claim it would hurt poor people. That was a much-different tax proposal than the current plan, in that it included both a large gasoline tax hike and a renewal of the health care provider tax. But the reaction did show that government studies, once a common tool of liberals, had become one favored by conservatives.
“For years, the tax incidence findings have been an invaluable political asset for progressive interests,” Mark Haveman, the executive director of the business-leaning Minnesota Center for Fiscal Excellence, wrote after that damaging 2019 study was released, in an article titled: “Tax Incidence Karma.”
“The breakdown of effective tax rates demonstrated that lower-income households paid proportionately more of their income in taxes than higher-income households – allowing Minnesota’s tax system to be deemed ‘unfair,’” Haveman wrote.
“But now things have changed,” he continued. “The problem is that the media and the public have now long been conditioned to treat these incidence-derived tax burdens as the last and only word on ‘fairness.’ Meanwhile, having been bludgeoned by reporting on tax incidence for years, conservatives are absolutely relishing in the ability to give their political opponents a taste of their own medicine.”