Whenever a new half-baked state tax idea springs up, those familiar with such matters can usually guess the state responsible within two guesses. For years, New York and California have been the mad scientist laboratories of harmful tax and regulatory ideas, from “convenience of the employer” rules to automobile regulations to tax rates that make their own residents flee for safety. But while the sheer size of these two states makes it hard for any new state to join their ranks, Minnesota appears to be doing all it can to become a junior partner.
The $72 billion budget just passed by the Minnesota legislature has enough issues as it is. The omnibus bill includes a new 1 percent net investment income tax on high-income individuals. That may not sound like a lot, but when tacked on to existing taxes on investment returns at the state and federal levels they are an added impediment to economic growth.
Minnesota also passed into law a new 50-cent delivery fee on retail delivery transactions. “Delivery fees,” apart from being an underhanded way to impose new taxes on consumers for services they are already taxed for in other ways (via gas taxes, sales taxes, etc.), create all kinds of headaches for retailers who often have difficulty incorporating such fees into their tax compliance systems.
Additionally, the state’s budget takes a surplus and spends it rather than focusing on returning it to taxpayers or investing in long-term fiscal health. While some of the state’s surplus was returned to taxpayers through refunds and an expanded child tax credit, the state will have to borrow to fund all the various progressive priorities packed into the package.
Meanwhile, responsible fiscal planning was neglected. Smart uses of a surplus would be to use it to fill the gap in the state’s unfunded pension liabilities or replenish the drained unemployment trust fund in the wake of the pandemic. Instead, Minnesota legislators chose to take on more water.
As problematic as the new budget is, it was almost even worse. Earlier drafts contained a new top income tax bracket of 10.85 percent for married filers with over a million dollars in income.
Minnesota, like many other states, continues to learn the wrong lessons from an accelerating trend of outmigration. Minnesota lost the tenth-most taxpayer income to tax migration as of the last IRS data release, losing over $1.5 billion to other states in 2020 alone. Trying to make up for those losses by taxing remaining residents even more will only accelerate the death spiral.
Perhaps in response to this trend, Minnesota almost went forward with a novel corporate income tax system that would have mandated “worldwide combined reporting,” or the reporting of corporate income from affiliates based abroad with no presence in Minnesota.
This system would have made doing business in Minnesota far more complicated, as Minnesota would have demanded scrutiny of all of a business’s activity, not just those taking place in Minnesota. But while it would have created more complexity, it would not necessarily have resulted in more tax revenue.
Fortunately, neither this nor a similar proposal to impose corporate income taxes on entirely out-of-state businesses made it into the final draft, but that does not mean that Minnesota has accepted defeat on them. Taxpayers should be aware that Minnesota is trending very much in the wrong direction.
The last thing the country needs is another California/New York mini-me. Unfortunately, that does appear to be where Minnesota is currently headed.
