This is economist John Spry’s take on Mark Dayton’s proposal for a surtax on consumers loans:
“Tax the poor some more.”
That is exactly what one of Mark Dayton’s tax hike proposals will do. He proposes a 30 percent surtax on consumer loans that carry an interest rate in excess of 15 percent annually. Minnesota would become a national outlier as the only state with a surtax on loans.
The Minnesota Legislature passed this surtax on consumer loans in 2009 and it was vetoed by Gov. Tim Pawlenty.
The authors of this surtax said they wanted to tax predatory credit card companies instead of taxing their constituents. Some lawmakers were concerned that this surtax would hurt people. Other legislators asked, “Who is going to pay the new 30 percent tax?”
Basic economics says the real pain of this tax would be borne by Minnesota consumers in the form of higher interest rates on loans.
Government can make a business, like a credit card company, collect a tax on gross sales, but the consumer feels the pain. Monthly phone and utility bills routinely show that costs of taxes collected by business are added onto your bill.
My research shows that this tax on loans would be one of the most regressive taxes in Minnesota. Regressive taxes collect more revenue as a percentage of income from low- and middle-income families than from high-income families. I analyzed data from the most recent Federal Reserve Board’s Survey of Consumer Finances, the best source of data about families’ finances, to study how families with different incomes would be affected by this tax.
The data show that the proposed surtax on credit card bills focuses the tax burden on the most financially vulnerable families with credit card debt. The struggling families with unpaid balances on credit cards with interest rates over 15 percent are 11.8 percent of all households. The average tax bill for these families would be $164 a year.
Twenty percent of the new tax would be paid by Minnesota families with the lowest 10 percent of income. Thirty-seven percent of the tax would be paid by families with the lowest 20 percent of income. The surtax obviously places a disproportionate tax burden on the poor.
In contrast, the families with the highest 20 percent of income would pay less than 1 percent of the proposed surtax on consumer loans. It is not logical to say “tax the rich” while proposing a tax that burdens low-income families struggling with debt.
This is the worst tax proposal I have seen in my career as an economist. It breaks almost every principle of good taxation. This tax on loans would create disproportionate economic costs for the people of Minnesota compared to other proposals to raise additional revenue.
It violates the principle that taxes should be visible. Hidden taxes allow elected officials to camouflage the cost of taxes. Visible taxes make the tax burden clear so that citizens can compare the costs of taxation to the benefits of government services funded by taxation.
This surtax on consumer loans would hurt the Minnesota economy in general by damaging credit markets and promoting a credit crunch. Stanford University’s Robert Hall, an eminent economist, finds that increasing the gap between the interest rates consumers pay and those on lower-risk Treasury bills is a “potent source of trouble” for the macro-economy.
When the macro-economy is in trouble, unemployed workers feel real pain.
There is a final very serious defect in the loan surtax legislation the Minnesota Legislature passed and Sen. Dayton proposes. The legislation sets a firm 15 percent interest rate threshold for the 30 percent surtax, with no provision for adjustment when inflation and interest rates rise. If inflation increases in the future, then interest rates will also climb and more people will feel the pain of the surtax on consumer loans. The combination of high national interest rates and a surtax on consumer loans would have strong negative effects on the Minnesota economy by further increasing interest rates in Minnesota.
There is a larger lesson about taxation from comparing this tax on loans against principles of good tax policy. Imposing hidden taxes collected by business hurts the very people whom well-meaning progressives mean to help. Hidden taxes are politically tempting because candidates think they can disguise the true pain of the taxes on people. The hidden taxes remitted by business that are borne by people are significant and regressive.
Minnesota should reform its tax code by increasing its use of visible taxes while reducing hidden, regressive taxes.
John Spry of St. Paul is an associate professor in the Department of Finance at the University of St. Thomas.
This commentary was originally published by the Pioneer Press. We have added emphasis throughout the column which you can see here: http://www.twincities.com/opinion/ci_16450554?nclick_check=1