Tax increase on Minnesota's highest earners renews fair share debate

Gov. Tim Walz's proposal to raise taxes on the wealthiest has reinvigorated a debate in Minnesota: Do top earners pay their fair share, or will his plan hamper a fragile economic recovery?

The centerpiece is a new fifth-tier income tax bracket on couples making more than $1 million each year, a jump from the fourth tier income tax enacted eight years ago by his predecessor, former Gov. Mark Dayton. The Walz administration says the COVID-19 pandemic hasn't hit those earners as hard as it has lower-income Minnesotans, who would benefit in Walz's plan through direct aid and tax relief.

"It really was about compassion and it's about neighbors helping neighbors," said Department of Revenue Commissioner Robert Doty. "If we're going to get out of this pandemic, not just get out of it but come out of it stronger, there needs to be some investment to make that happen."

The plan also imposes new taxes on capital gains, estates and foreign income. It would give Minnesota the nation's second highest corporate tax rate, one the state's own Department of Revenue has found hits consumers and employees, too. Senate Tax Chair Carla Nelson, R-Rochester, said the proposal would make Minnesota a high "tax island," and business groups are pushing back.

"Businesses look at these proposal and they start to run the numbers," said Laura Bordelon, head of advocacy with the Minnesota Chamber of Commerce. "There's lots of strategies to get back on our feet, but really burdening employers with very high taxes is not a strategy for great economic recovery."

Bordelon said she felt déjà vu when Walz rolled out his two-year budget last month. In 2013, Dayton signed into law a 9.85% tax on single filers who make more than $150,000 each year and couples making more than $250,000. He campaigned on the change after nearly a decade of budget deficits, and it also made Minnesota the state with the fifth highest income taxes in the country.

Walz's plan would move Minnesota to the No. 3 ranking by creating that fifth-tier bracket that hits single filers making more than $500,000 and married joint filers making more than $1 million with a tax rate of 10.85%. The Department of Revenue estimates it would affect the top 0.7% of all filers, or 21,000 households, who would see an average tax increase of $8,072.

But that proposal raises only a fraction — $403 million — of the governor's $1.6 billion tax increase plan for corporations and higher earners. To come up with the rest, Walz wants a new tax on capital gains — when someone sells stocks, a home or business assets — of 1.5% for profits between $500,000 and $1 million and 4% for transactions over $1 million.

He's pitching to lower the estate tax exclusion from $3 million to $2.7 million, while small businesses and farms would still have access to a $5 million exemption. Under his plan, the state would tax foreign income when it is repatriated to the United States and the corporate franchise tax would increase from 9.8 to 11.25%, hitting about 34,000 corporations.

Progressive groups like the DFL-aligned Alliance for a Better Minnesota celebrated the move, framing it as "asking hugely profitable corporations and the wealthiest Minnesotans to pay their fair share." But business groups like the chamber say these proposals together create a powerful disincentive for businesses and individuals to stay in or relocate to Minnesota. The pandemic has forced many workplaces to switch to remote, flexibility that makes it even harder to persuade a business to relocate here, said Beth Kadoun, the head of tax and fiscal policy with the chamber.

"Minnesota relies greatly on the individual income tax on wealthier individuals," she said. "When you drive them out of state with the tax rates and the estate tax and the new capital gains tax, the end result is you're going to undermine our state budget that relies so greatly on those individuals."

She noted that the Department of Revenue's own tax incidence study, which analyzes who ends up paying for taxes, found that corporate tax increases have fallen, in part, on consumers through higher prices and some workers through lower wages and lost employment.

Doty said they are specifically targeting corporations that were profitable through the pandemic, and many corporations will still have a lower effective tax rate due to other "generous" deductions and credits.

He pushed back on the idea that higher taxes on the wealthiest makes them flee the state. State data didn't show a great migration after Dayton's fourth tier income tax was implemented, he said. "There are a lot of reasons why people might make a choice to leave Minnesota," he said. "It's a little challenging to just simply say, you raise taxes, people leave the state, and that's the reason they left."

Income taxes are among the most volatile, raising concerns from both sides on the wisdom of tapping such a source for ongoing spending. But Nan Madden, director of the Minnesota Budget Project, pointed out that the fourth tier was passed in a budget that ended nearly a decade of budget deficits, while pumping funding into schools. "If we didn't have it we would have a bigger deficit problem then we have right now," she said.

But these proposals face long odds at the Capitol, where Senate Republicans have drawn a line on tax increases this year. Dimming the plan's prospects even further, the state announced last week it collected $296 million more in revenue in January than predicted.

Republicans said that signals Minnesota is already collecting enough taxes.

Briana Bierschbach • 651-925-5042