Abolishing state income taxes could be a costly mistake

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The main event in 2022 Minnesota politics is finally in full swing. It's Walz vs. Jensen, pounding each other on inflation, abortion, crime, COVID, taxes.

Taxes?

True, DFL Gov. Tim Walz and Republican nominee Scott Jensen haven't exactly been burning up the airwaves illuminating their tax policy differences. The issue may have escaped notice, even by this state's famously fastidious voters.

But the tax differences in the governor's race are big. Jensen proposes to phase out the state income tax. Walz doesn't.

That's major stuff. Jensen's plan would gut something that's been fundamental to government as Minnesotans have known and practiced it for nearly 90 years. It risks significant disruption and damage to the public services people value most, not to mention a shift in the state and local tax burden onto those with less ability to pay.

I make those claims as a student of two exceptional tax-policy teachers. One was the late Gov. Elmer Andersen, who expounded on the topic as we collaborated on two books between 1998 and 2004.

Andersen was a Republican. But he was a great admirer of one achievement of Farmer-Labor Gov. Floyd B. Olson: the 1933 enactment of the first state income tax. It came, as Andersen always described it, "in the depths of the Depression," when many jurisdictions had trouble collecting property taxes and some public schools were at risk of closing because they couldn't pay teachers.

Other states were imposing sales taxes then. Elmer, like Olson, preferred taxation based on ability to pay. "That way, if you didn't make any money that year, you didn't owe a tax," he'd always say.

At Olson's urging, the Legislature established a state income tax and dedicated it to education. It was the start of a series of mid-20th century moves to put the state and its robust income tax in the educational driver's seat, steering Minnesota by the second half of the 20th century to a healthy economy reliant on well-educated workers.

Quality education "became the hallmark of the culture of this state," we wrote in Andersen's autobiography, "A Man's Reach" (University of Minnesota Press, 2000).

My other teacher is still with us, thankfully. During nearly the same 40-year span I spent in the Capitol basement, Joel Michael was the leading tax policy analyst for House Research, a nonpartisan and much-respected brain trust. Michael now shares his wisdom via his blog, SALT Speak. (SALT refers to "state and local taxes." He hasn't become a foodie in retirement.)

I've long valued Michael as a fair-minded, plain-spoken tax explainer. His assessment of Jensen's income tax phaseout proposal: It's "impractical and ill-advised."

The income tax generates more than half of state government revenue — about $16 billion in the current fiscal year. Replacing that much money in the state budget would require enormous spending cuts, increases in other taxes, or both.

My bet is that it would indeed be "both," even if Jensen and his allies say they'd use only spending cuts to balance the state budget. That's because the Legislature's go-to fix whenever money gets tight is cuts to cities, counties and colleges. History shows that such cuts lead directly to increases in property taxes and college tuition.

"Let's assume that 40% of income tax revenues are made up by cutting state aid to schools, cities and counties," Michael wrote. "Under that assumption, property taxes would increase by more than 50%."

State aid cuts would also shrink police and other municipal services, especially in places with less property wealth. They would add to schools' trouble hiring teachers. And they would shift the burden of paying for government services to those less able to afford it. That's because the income tax is the one tax in state and local governments' portfolios that rises with taxpayers' incomes.

So who would be losers in a shift away from the income tax? The very people in greater Minnesota who lately have been voting Republican.

"That's the irony," Michael said. "It's Republican voters who would be disadvantaged by their policy proposals."

Calls for reducing any tax can sound good to people who are unhappy with rising costs and stagnant incomes. Complaints about Minnesota's top-tier income tax rate (at 9.8%, it's the nation's seventh-highest) can make people think it's a competitive drag on the state's economy.

Voters should know this: That top rate is only paid by top earners. It kicks in for that portion of married-joint-filer incomes that exceed $285,000.

"For average income folks, Minnesota's income tax is modestly above average, if that," Michael said. When state and local taxes are considered together — as they should be, since the two are intertwined — Minnesotans' burden ranks 11th-highest among the states.

It's long been an article of Republican faith that income taxes hurt the economy by siphoning off capital that might otherwise be invested in growth-generating enterprises.

But Michael told me there's little evidence that Minnesota's economy suffers today from a lack of financial capital. Rather, he said, the state could really use a surge in human capital. It's a labor shortage, not high taxes, that is forecast to hold enterprises back in the next decade.

Minnesota could use a full-throated gubernatorial campaign debate on tax policy. Even better would be a campaign that brings forth serious proposals for attracting and keeping young talent in Minnesota. Who pays state and local taxes — and what those taxes pay for — ought to figure in those strategies. But they ought not be the whole story.

Lori Sturdevant is a retired Star Tribune editorial writer. She is at lsturdevant@startribune.com.