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Commentary: Raising taxes in recession a poor option

To date, legislators who eventually must resolve the looming $6 billion budget deficit have been trial-ballooning spending cuts and tax increases while looking over their shoulders with fingers crossed hoping that the federal stimulus package would help bail them out.

The bill President Obama signed promises about $2 billion in general fund dollars for Minnesota in "one-time" money. That will certainly help with the 2009-10 budget cycle, but one-time money doesn't address the sustain-ability, or lack of sustainability, of current and projected levels of state spending.

Certainly state government can work smarter and improve efficiency, but given current spending levels, it is also imperative that Minnesotans rethink how and what services government is meant to provide. Reform is not simply one option.

Nor is it an option, as some on the left are suggesting, to maintain state spending at its current levels, using the bailout money to help plug the budget hole and increase income taxes on the top wage earners to fund the rest. That doesn't solve the systemic gap between revenue and spending, and it's bad policy in a time of recession.

Under Minnesota's progres-sive income tax, the bottom half of filers, those households making under $45,000 per year, pay about 5 percent of all state income taxes. Overall, they pay less than 2 percent of their household income to the state for income taxes.

The top 10 percent, households earning over $130,000, pay an average rate three times higher. It's about 6 percent individually and 55 percent of all state income taxes collected. These house-holds are generally two-income professionals with children. They are middle-aged famili-es making house payments, saving for college tuition and for retirement while meeting day-to-day expenses.

A progressive system? Absolutely. So why are some folks proposing to raise the top tax rate again?

The progressive argument is that high wage earners "can most afford" to "pay for a better Minnesota." The fact is they can't. Not now. The reason the state has a deficit is because given our progressive income tax structure, in times of recession when higher earners see investment earnings tumble or lose their jobs, state revenue is hit disproportionally hard.

The top 5 percent of households have incomes over $180,000 and pay 43 percent of all state income taxes. This group includes many small- and medium-size businesses whose owners who run their businesses as S-corporations. This means that business income is pas-sed directly through to them on their personal tax return.

According to the Minnesota Chamber, 92 percent of all businesses flow their business income through a personal tax return where it appears as personal income. In fact, from that "income," the owner must take his personal income and find money to plow back into the business to make it grow.

Today, when many employers are simply trying to keep the doors open and the staff employed, increasing already high taxes is not a tax on the wealthy so much as a tax on a struggling small-business owner, which puts his working-family employees' jobs at risk. In a recession, tax increases equate to layoffs. The employer's tax burden has to come from somewhere.

Taxes on the "wealthy," like so many progressive policies, actually works against its stated objectives. If the tax burden gets too high, the "wealthy" simply pick up and leave for warmer climates. Homes are cheap in Florida and a dollar stretches a lot further when there are no state income taxes. When they move, they take the jobs they provide and the taxes they pay along with them. And, ironically, to woo new high-earners with job mobility to the state, companies must offer higher wages to offset higher income taxes, in effect increasing, not decreasing the wage gap that seems so "un-fair." Mobility is much easier for citizens and businesses in the 21st century.

I would hope that before any legislators consider a class warfare offensive, they remember who it is that pays for their state programs. Punishing hard work and ingenuity does not bode well for the long-term health of our economy.

Punishing job creators so that we can expand non-sustainable government programs makes no economic sense. Even President Obama has stated that raising taxes is not an appropriate action to take in a recession. I urge his Minnesota disciples to take him at his word.

Pat Anderson is the president of the Minnesota Free Market Institute and a former Republican state auditor and commissioner in the Pawlenty administration.