On Wednesday the Governor vetoed House File 2037 – the legislative solution to the FY 2010-11 budget deficit – despite the fact that it adopted 85 percent of the cuts he imposed illegally using his unallotment authority. The reason for the veto was a 1.3 percent increase in the income tax rate on the portion of taxable income in excess of $200,000 (married joint filers). The Governor argued that the income tax increase was “nonsensical.”
Nobel laureate Joseph Stiglitz makes a compelling case that the tax increases on high-income households are the least damaging way to deal with a state budget deficit because these households tend to (1) spend a relatively small share of their income and (2) of the income they do spend, less is spent within the state and local economy. Thus, a tax increase on high-income households generates revenue to balance the state’s budget in a way that produces the least reduction in consumption, thereby doing the least amount of damage to the state’s economy.
The Governor’s alternative – cuts in direct government spending and higher taxes on low-income Minnesotans – is more detrimental to the state’s economy. Cuts in spending on public infrastructure and aids to local government means job losses for moderate-income households. The Governor’s proposed cuts to the renters’ property tax refund would increase taxes on low income households. Both of these changes would have the effect of reducing the purchasing power of those Minnesotans who spend a larger share of their income and who spend more within the Minnesota economy.
The bottom line: the job losses and tax increases that will occur among Minnesota’s low- and moderate-income households as a result of the Governor’s budget proposals will have a more devastating impact on economic activity and job creation in Minnesota than a tax increase on high income earners. It is the Governor’s rationale for blocking a modest income tax increase that is “nonsensical.”
Since 2002, Minnesota has cut taxes and other own-source revenue more than any other state in the nation. The result has been employment and income growth that has lagged behind the U.S. average, deteriorating roads, increasing class sizes, and eroding school funding. The Governor’s nonsensical “no new tax” policy has failed in the past and shows no sign of working in the future. Given the size of the state deficit, both spending cuts and tax increases should be on the table.