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Monday, November 1, 2010

Regressive Tax Structure Not Correlated with Healthy Economy

Rep. Gerald Lange (D-8/Madison) has consistently advocated measures like repealing the sales tax on food and extending the bank and insurance income tax to corporate income in general to make South Dakota's tax structure more progressive. His opponents in the District 8 House race, Republican Patricia Stricherz and "Independent" Jason Bjorklund, have climbed all over each other to swear their opposition to income tax. Stricherz and Bjorklund both prefer a regressive tax system where they both as working-class folks pay 10% of their income in taxes while the rich people who control this state pay only 2% of their income in taxes.

Bjorklund and Stricherz have little reason other than electionering against Rep. Lange to oppose the income tax and other efforts to make our state's tax system more progressive. States like Minnesota with progressive tax systems are just as likely to enjoy healthy economic performance and business climate as state like South Dakota with regressive tax systems.

Think tank Minnesota 2020 studied the correlation between state tax structure and state economy in 2008. Minnesota 2020 ranked the states for tax progressivity, then ranked states on six different indices of economic well-being: economic performance, business vitality, development capacity, competitiveness, and two different measures of quality of life.

The results: comparing the progressivity rank with ranks with each economic index produces a slight positive correlation. In other words, states like Minnesota that move away from sales taxes and toward income taxes have a slightly better chance of having good business climates and quality of life than states like South Dakota that stick tax the poor harder than the rich. The correlation isn't much—the highest is a measly 0.20 on the economic performance index—but where it does show up, the correlation smiles on the tax system Gerry Lange proposes.

Now this doesn't mean you can't achieve relatively good economic results while laboring under a regressive tax system. South Dakota ranks 46th for progressivity in taxes, yet we come out in the top ten on three of the economic indices used in this study. We also rank 48th in business vitality, a measure of competitiveness and job growth from new businesses.

But you can also enjoy relatively good economic outcomes under a progressive system:

Why is this? One explanation is that states with the most progressive tax systems are better able to finance the educational and transportation infrastructure and the public services that a modern economy requires because they don't shift a disproportionate share of the burden of paying for these investments to households with the least ability to pay. The loss of high income households due to progressive taxation is offset by an increased ability to pay for public investments [Jeff Van Wychen, "Progressive Taxation: Not So Bad for Business After All," Minnesota 2020, 2008.01.21].

The evidence keeps building that Gerry Lange is right and South Dakota's tax system is wrong. Remember that at the polls tomorrow.


  1. Is Mr. Lange proposing those that make less than a certain amount would pay no state income tax?

    Video Lottery is a tax of choice. You decide whether you wish to pay or not.

    We need a sales tax that everyone pays, so that everyone understands that government has a price tag. The sales tax has an additional benefit - spreading the tax to our visitors and tourists.

  2. Rep. Lange would disagree with you, Thad, on the value of video lottery. He characterizes video lottery as an immoral choice on our state's part to tax losers rather than winners.

    I don't recall if Gerry has advocated a minimum income to be hit by a personal income tax. In his forum appearances here in Madison, he has focused on the benefits of a corporate income tax. He says a corporate income tax, asking Wal-Mart to pay the fair share that it currently exports to Arkansas, would wipe out our deficit problem on the spot.

    If we need a sales tax that everyone pays, don't we need an income tax that everyone pays? Gerry makes the point that we have an income tax on banks and insurance companies; why not apply that to all companies in South Dakota, so they all understand government and the benefits they derive therefrom in South Dakota have a price?

  3. A Wal-mart tax would hit lower income residents even harder. Wal-mart passes all their tax burdens on down to the consumers, thus making Mr. Lange's plan a secondary tax.

  4. So wait: do we just give up on taxing Walmart? Are they a "person" immune to taxation? Why don't I get to pass my sales tax on to someone else?

    If what you say is true, what if we replace the sales tax with a corporate income tax?

  5. Cory,

    While I am not an expert on our tax system I am going to attempt to explain where I stand on this issue.
    At the forums I insistantly said that I do not favor a State income tax for South Dakota taxpayers.
    I agree that our current system is flawed and needs some drastic changes made.
    I have always believed that our tax system should be one that is a tool that works to our benefit to only equalize our economy, raising and lowering taxes as the economy needs. At all times spending should be kept to a minimum.
    Until the Federal tax rate structure can balance and is set at a rate that is fair and equal to taxpayers, protecting the lower income families, creating a State Income Tax will only burden South Dakota taxpayers.
    The more you make the more you are taxed is the most likely tax system. What we currently have is bassackwards.
    What has been happening since the 1950's is that new taxes are created to relieve an economic slump, instead of those new taxes being repealed they stay in place, then spending goes hay wire, debt is created and a new tax created to relieve that debt. It is a dangerous cycle that has gotten out of control and needs to stop.

    Patricia Stricherz

  6. I would have the state reopen the Homestake Gold Mine. Operate the NSF lab and also mine the gold. All profits from selling the minerals would go straight to the general fund of our state.

  7. Check out this paper from the Tax Foundation.

    According to these folks, we've nowhere to go but down.

  8. Thad, your proposal for the public takeover of the Homestake is intriguing. What is the mechanism for making it work?

  9. Stan, good study! When I run the numbers based on the Tax Foundation rankings, I get a negative correlation between progressive tax rank and business climate rank of -0.34. In other words, by TF's metrics, more progressive tax structures correspond with less healthy biz climates. That's a stronger negative correlation than any of the weak positive correlations found on the six indices used in MN 2020 study.

    When I average the seven indices, including TF's, and then rank the states by that average, I get a correlation with tax progressivity of 0.06. So which metric(s) do we believe?

    Thad is always thinking outside the box. Larry, I would think we could use a mechanism similar to what we used to bring the mine into our hands for setting up the research facility. Heck, don't we own it now? Wouldn't restarting the mine "simply" be a matter of contracting a mining company to come in and start digging again in ways that would not disrupt the scientific operations?

  10. Water is the more important commodity in my view, Cory. Barrick still owns rights in much of Lawrence County.

    Reclamation is best done when metals prices are high. Barrick is Canadian and seems dispossessed to remediate affected sites. Expecting a newly rearmored earth-hating GOP legislature to consider public ownership is quixotic but not delusional.

  11. ...quixotic but not delusional... sounds like my kind of policy! Thad! Get on the horn to Nelson, Romkema, and Turbiville, see what they think!


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