"We use the tax code to either incentivize or disincentivize behaviors, and that's nothing surprising."
— Gov. Tim Walz, news conference, Jan. 26.
Gov. Tim Walz is a man of many words. He invested a hefty surplus of verbiage last week while touting his new budget proposal to emphasize that "if you're not a millionaire or a billionaire, your taxes aren't going up at all."
Walz's dozen or so separate tax hike proposals were, he said, aimed at requiring the wealthiest Minnesotans and most profitable corporations to pay their "fair share" — the better to ease the pain of the less affluent who have suffered most in the pandemic-induced economic crisis.
Such tax-the-rich rhetoric is certainly "nothing surprising" from a DFL politician. What was a bit unusual at the governor's presentation was when, just moments after Walz proclaimed that only millionaires and billionaires faced tax rises, an uncooperative reporter dared to ask about Walz's proposal for a whopping $1-a-pack tax hike on cigarettes.
Aren't such taxes included in his plan, despite being among the most "regressive" levies of all — hitting the poor much harder than the rich?
Well, yes.
"I don't deny that," Walz said. And yet, having just finished pretty much denying it, the governor was, shall we say, "incentivized" to bring out some heavy verbal artillery for further clarification.
Tobacco and vaping taxes are all about "public health," Walz explained — about "behaviors" the government uses the tax code to "disincentivize."
Once again, it's nothing surprising. In 1776 America was born with the revolutionary demand for "no taxation without representation."
In today's America, there is almost no taxation without misrepresentation.
Nonetheless, the governor has given Minnesotans a useful formulation here with which to break through the oversimplifications that invariably surround debates about taxes and who bears the burden of them.
Just remember: Whether deliberately or not, every provision in the tax code "incentivizes" or "disincentivizes" some behavior.
In less highfalutin language, increasing taxes on an activity leads to less of it; cutting taxes on an activity leads to more of it. Nothing surprising about it.
This is why what economists call the "incidence" of a tax (who actually and ultimately bears the cost of the tax) is different from the "initial impact" of that tax (who writes a check to the government, having passed some of the actual tax bill on to others).
Taxes incentivize people to change their behaviors, to the extent they can, so that somebody else pays.
All this is particularly important when evaluating Walz's proposed big tax hike on corporate profits, domestic and foreign, which would put Minnesota's already high business taxes near the very top among states. The idea, of course, is that if you're not a millionaire or a billionaire, why would you worry about taxes on corporations?
It may be because hiking taxes on doing business, creating jobs and earning profits in Minnesota will disincentivize that behavior — stunting the state's economy and/or indirectly hiking everybody's taxes, especially those with lower incomes.
The Minnesota Department of Revenue's biennial Tax Incidence Study is a remarkable piece of ongoing state research that painstakingly documents tax policy realities like these. State policymakers should read it sometime, given their often avowed enthusiasm for science.
Above all, in edition after edition, decade after decade, these studies have explained that:
"[T]axes on businesses are regressive … While the initial impact of these taxes is on business, they are partially shifted forward to consumers in higher prices or backward to labor in lower wages."
The latest Tax Incidence Study, from 2019 (a new one is due this spring), reports that lower-income Minnesotans indirectly "pay" well more than twice as much of their incomes through business taxes than the top 1% of income earners do. (Individual taxes are far more progressive, hitting the rich harder.)
It works this way because businesses don't pay taxes, people do. And the owners and stockholders of businesses, who technically are people, don't personally foot any more of the tax bill through lower profits than they have to.
The burden on workers and customers gets even worse, the study explains, when state taxes rise compared with those in other states — disincentivizing, you might say, investment in Minnesota.
"Capital moves to where it earns the highest return," the state's study says. "If a tax on capital in a single state … reduces the after-tax rate of return, investors will move their capital to lower-tax locations. … As production falls, prices will rise or … [wages] will fall until the … rate of return is again equal to the … return elsewhere."
Minnesota, of course, remains a prosperous place despite its comparatively high taxes. But that may be especially true for the already prosperous, who are able to react to the incentives and disincentives of tax policy more readily than your average custodian or factory hand can. It could be those who are least able to move their capital, or move themselves, to lower-tax locations who indirectly pay the price of Minnesota government's generosity to itself.
This kind of shift may even partly frustrate the aim of Minnesota's lofty individual income tax rates on the rich. It's true that the "millionaires and billionaires" on whom Walz wants to impose a new fifth income tax bracket are a small and weirdly wealthy group whose behavior and impact is hard to evaluate. But Minnesota's tradition of high tax rates on a broader population of people with exceptional skills and high earnings may end up imposing costs on someone else altogether.
The idea would be that high state income tax rates "disincentivize" talented executives or surgeons or lawyers, etc., from coming to Minnesota, or staying here. But they don't necessarily go elsewhere. They just get a raise — a level of pay higher than it would otherwise need to be, to make up for the tax disincentive.
If so, who pays for that? Stockholders? CEOs? Or maybe it squeezes the pay of clerical and production employees who don't have offers coming in twice a month from Seattle and Miami and Phoenix?
Taxes are necessary and important to fund necessary and important government programs. But let's not be overconfident about controlling who or what we disincentivize in the process.
D.J. Tice is at Doug.Tice@startribune.com.