Politicians in Washington, D.C., and St. Paul are spraying out new spending plans at an alarming rate. In D.C., the proposed Green New Deal is estimated to cost anywhere between $7 trillion and $93 trillion. In St. Paul, the governor's budget proposal would increase the general fund budget from $45.5 billion to $49.4 billion. The House budget proposal would raise it to $47.8 billion for the upcoming biennium, $416.9 million above the 2020-21 biennium's projected base budget, with new spending on education, health care, and public safety.
Who is going to pay for this? In St. Paul and D.C., a popular answer is "the rich." Two provisions in the House tax bill would raise Minnesota's capital gains tax rate, making it the second highest in the country, and its estate tax rate. In their testimony supporting these bills, their sponsors - Reps. Steve Sandell, DFL-Woodbury, and Aisha Gomez, DFL-Minneapolis - listed some of the things the revenues these taxes would generate might pay for, ranging from education to state parks.
But both representatives recommended their bills on the grounds that few people would be affected by them. Indeed, the Department of Revenue estimates that the capital gains hike would affect 2,700 full-year resident returns in tax year 2019. For 2017, they reported, approximately 700 estate tax returns have been filed to date with about 300 owing tax. Will taxes on such narrow bases really bring in a fresh haul of revenue?
Probably not. The Department of Revenue estimates that the proposed capital gains tax increase would bring in $207.5 million in 2020, falling to $159 million in 2023. The estate tax hike is estimated to raise an additional $1.7 million in 2021, rising to $2.4 million in 2023. In other words, these increases, together, would generate an extra 29 cents per Minnesotan in state government revenue in 2023.
How are such paltry sums going to fund vast improvements in education or state parks, let alone any of the other items on Reps. Gomez's and Sandell's long shopping list?
And these are generous estimates. They assume people will not legally avoid the tax, something which research shows does happen. If these politicians pushing these policies argue this won't happen because tax rates don't influence such decisions, why are they proposing an Angel Investor tax credit to attract investors?
You might think a state's tax code is about raising revenue to pay for government activities. But, at a recent hearing into a state Senate tax bill, one of those testifying said that our tax code "was a statement of who we are." This is an increasingly common view among policymakers. It sees taxes as less about raising revenue to fund government and more about "sending messages" and attempting to reorder society.
Shortly after claiming that higher taxes on "the tippie tops" of earners would pay for her Green New Deal, U.S. Rep. Alexandria Ocasio-Cortez tweeted this quote from economists Emmanuel Saez and Gabriel Zucman: "The root justification (for marginal tax rates) is not about collecting revenue. It is about regulating inequality and the market economy."
You have to wonder: If there are no rich people to pay for increased spending on education, health care, and public safety, who will?
The answer is you, if you're an average, middle-class American. Over the next four years, Minnesotans are looking at $12 billion in new taxes, and these will not hit "the rich." The tax bill includes $4 billion of hikes. There are a further $4 billion in the transportation bill. In 2023, the gas tax is estimated to bring in an extra $1.2 billion, the registration tax an extra $678 million, and the metro-area sales tax an extra $591 million. The provider tax will bring in another $2 billion, and paid family leave will require another $2 billion in taxes.
Additionally, Minnesota Department of Revenue analysis just out shows Gov. Walz's proposed tax hikes would hit low- and middle-income families hardest, with a 10 percent hike in the tax burden for Minnesotans making less than $45,000 annually.
As in D.C., politicians in St. Paul are desperate to spend more money. They say it will be someone else's money and that it will be spent on you. But beware. To borrow from political satirist P.J. O'Rourke, the good news is that the rich will pay for everything. The bad news is that you're rich.
John Phelan is an economist at the Center of the American Experiment (americanexperiment.org).