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Minnesota Considers Nation's Highest Tax Rate

Higher tax rate will likely mean less revenue.

2:00 PM, Feb 16, 2011 • By MARK HEMINGWAY
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Minnesota, like a lot of states, is facing a major budget shortfall. In order to close the state's $6.2 billion gap, the Wall Street Journal reports that the state's new Democratic governor is considering jacking up the state's taxes on high income earners to unprecedented levels:

Mr. Dayton, a Democrat, on Tuesday proposed raising the top rate on couples earning more than $150,000 of taxable income to 10.95%, up from 7.85%. He also suggested adding a 3% surcharge on taxable income above $500,000 for the next two years. In addition, he wants to create a new, higher property-tax bracket for homes valued at more than $1 million.

Hawaii and Oregon currently have the highest state income-tax rates, both at 11%.

The proposals in Minnesota brought an angry response from business groups and face a major hurdle in the Republican-controlled state legislature, where leaders said they would propose their own budget balanced solely with spending cuts.

While raising taxes on the wealthy may seem like the most politically palatable solution to Minnesota's fiscal problems, we've seen this move played out before in other states with disastrous results.

In 2008, Maryland implemented a special millionaires' tax. Within a year, a third of the state's top income earners had vanished and state tax revenue actually fell.

Thanks largely to a savvy union-supported campaign, Oregon voters raised the tax rate on top earners to 11 percent to help deal with the state's budget issues. A year later, tax revenues fell from $180 million annually to $130 million.

In California, 93 percent of the state’s drop in tax revenue, from 2007-2008, can be attributed to the decline in revenue from top earners. Again, it's not coincidental that the Golden State has one of the highest tax rates in the country.

And after winning a close election, Illinois governor Pat Quinn and his fellow Democrats instituted a 67 percent personal income tax increase, and a 46 percent business tax hike. Note that two different states are within commuting distance of Chicago -- both have Republican governors and are aggressively urging Illinois businesses to move. Probably not coincidentally, elsewhere in the Journal today it is being reported that the population of Chicago has shrunk to what it was before 1920.

In the short term, taxing the rich may seem like the easy way out. However, it's likely just going make things worse in Minnesota. You can raise taxes all you like in one state, but labor and capital are mobile.

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