U of M economist on how state tax rates affect jobs

Some of the opponents of Gov. Dayton's tax plan argue that raising taxes on the rich will drive jobs out of Minnesota.

Economist Laura Kalambokidis discussed the issue with All Things Considered's Tom Crann on Wednesday.

Kalambokidis is an associate professor of Applied Economics at the University of Minnesota.

Tom Crann: First, can we get a baseline on Minnesota's tax climate? Where do we rank among states, when it comes to tax burden?

Laura Kalambokidis: Well, if you look at per capita tax revenue, we rank around 12th among states. If you look at total state and local taxes as a percentage of income however, which is a little more meaningful measure because Minnesota is a fairly high income state, then we rank in the middle, about 25.

Crann: What about the state's business tax climate, and how important is that to the issue of losing jobs versus gaining jobs and companies?

Kalambokidis: Well, business taxes are one of many considerations that businesses make when they're deciding whether to start up in Minnesota, locate in Minnesota, expand in Minnesota, and so business taxes are part of that business process and they can matter.

Crann: And also income taxes, are they part of that process, and can they matter?

Kalambokidis: The income taxes can matter in a couple of ways because a business that is thinking of locating in Minnesota or is thinking of expanding in Minnesota wants to be able to attract high quality employees and so the business wants to be located in a state where people want to live and work. And the income tax is one of the considerations people make when they're deciding where they want to live and work.

Another reason income taxes can matter is that income taxes are levied on business income if you have a business that is a non-corporate business, a partnership, or a sole proprietorship, then you're paying taxes on your business income under the individual income tax, and so changes to the individual income tax affect the taxes you pay for your business.

Crann: When you hear the argument being made that raising taxes on the wealthiest Minnesotans or any Minnesotans for that matter will just move jobs out of state, how much validity do you see to that argument?

Kalambokidis: Well, the reason the argument is made is because some of the people in the top tax bracket in Minnesota and who would be in the new tax bracket that the governor has proposed, some of those tax returns have business income on the return. And so some of those people are getting business income, and so the taxes that they pay are costs that the business incurs.

And when you impose costs on a business, then the business owner has to make some decisions about what to do, whether they become more efficient and absorb those costs or they reduce profits or they reduce wages. Do they move? There are lots of different kinds of choices they could make in response to a change in business taxes.

Crann: Is there any evidence or correlation between the higher tax rate and then the hesitancy to hire or create jobs, as it's sometimes called?

Kalambokidis: I don't know of an actual number for Minnesota, where you could say, 'If you raised the rate to this, then you would lose this number of jobs,' but the way to think about it is: How many of those tax returns in the top tax bracket have business income? And then how many of those businesses have employees? Because there are a lot of tax returns that are in the top bracket that have business income but don't have any employees, and so ... there wouldn't be a direct effect in terms of losing jobs.

But another big piece of the puzzle is what happens to the revenue that is raised when you increase the income tax. And yes, you could potentially have a dampening effect, some dampening effect on the economy by raising income taxes, but that money then is going to be used to generate public goods and public services that people in Minnesota and the businesses in Minnesota demand. And that spending will have a stimulative effect.

So you can't just look at the effect of the taxes in isolation from the effect of the spending. And so if you're spending that money in ways that it's going to employ people or keep state government workers from losing their jobs or that's going to lead to more construction jobs or that's going to be an investment in early childhood education or an investment in keeping Minnesota to be the kind of place that people want to live and work (in), then you have to balance that positive stimulative effect against whatever effect the tax increase had.

(Interview edited and transcribed by MPR News reporter Madeleine Baran.)