While government needs taxes to run, not all taxes are equal in their effect. A new report from the Tax Foundation–State and Local Sales Taxes in 2012–evaluates the burden of state and local sales taxes across the United States. It shows great variation. State sales tax rates range from 0 percent (Alaska, Delaware, New Hampshire, Oregon), to 7.25 percent (California). Some states have local sales taxes, while others do not. And of course states define the “base” differently: Some tax food and clothing while others don’t.
If you look only at state-level taxes, Minnesota has the seventh-highest burden in the land, behind California, Indiana, Mississippi, New Jersey, Rhode Island, and Tennessee.
Local sales taxes in Minnesota are widespread or high as they are in some other states. So when you add in the burden of local sales taxes and rank the states, Minnesota drops from its position as the seventh-highest-taxed state (in sales taxes). But in the “new” position of 17, it’s still more heavily taxed than other states. When you consider all taxes, Minnesota is the seventh-most heavily taxed state.
Relying on the income tax, whether personal or corporate, presents a lot of challenge for state lawmakers as well anyone who depends on the state budget. For one thing, income taxes, especially progressive ones, are prone to boom-or-bust revenue cycles. (Minnesota has the 44th-heaviest burden of personal income taxes, so it’s quite a relevant point.) This means that the state has to scramble whenever hard times come, and that lawmakers are tempted to build unsustainable growth into the budget when times are good. Aside from cutting back from spending (a good thing in itself), the way to budget stability is to change the mix of taxes that government depends on. To quote from Russell S. Sobel (West Virginia University) and Gary A. Wagner (University of Arkansas), “the retail sales tax, when it includes food, is quite a bit more stable than is the individual income tax, and that when it excludes food it is about as variable as the income tax.”
Given all this, I wouldn’t mind seeing a higher sales tax rate if it meant lower rates in income taxes.
John LaPlante is a senior fellow for Minnesota Free Market Institute at Center of the American Experiment.