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Tuesday Talk: Are Minnesota’s new tax laws fairer?

July 23, 2013 By Joe Sheeran, Communications Director

Minnesota’s policymakers made a major overhaul to the state’s tax system, shifting taxes away from middle-income homeowners and renters on to Minnesota’s top two percent, who, despite the changes, continue paying an effective tax rate below the state’s middle-class. While this is the biggest change, there are a number of other new provisions to ensure revenue adequacy, increase transparency, or improve fairness in our tax system.

Conservatives argue everyone is getting hit by new taxes and local governments will just spend the new income tax revenue instead of using it to provide property tax relief.

Minnesota 2020’s Tax Policy Director Jeff Van Wychen will join us this morning from 8 to 10 am to fact check conservative claims and answer your questions about the new tax laws. Here’s his recent analysis on Minnesota’s new tax laws

Share your opinion, what do you think of the new tax laws?

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18 Comments:

  • Rachel says:

    July 23, 2013 at 7:46 am

    Good morning! Just a reminder to use “refresh” on your browser to see new comments. We’ll be starting in a few minutes.

    What questions do you have for Jeff?

  • Jeff Van Wychen says:

    July 23, 2013 at 7:56 am

    Good morning!  In general, progressives celebrated the 2013 tax act, since it reduced the regressivity of Minnesota’s state and local tax system and generated new revenue that would replace a portion of previous state budget cuts and fund important new initiatives.  Conservatives, on the other hand, bemoaned the increase in taxes, fearing its impact on our economy.  I’m looking forward to your questions on this important topic.

  • Herbert Allan Davis says:

    July 23, 2013 at 7:57 am

    With even the Democrats focusing on regressive taxes, is there hope for a truly progressive tax system? What can be done?

    • Jeff Van Wychen says:

      July 23, 2013 at 8:03 am

      I disagree that Democrats are focused on regressive taxes.  The overall impact of the 2013 tax act is powerfully progressive and has considerably reduced the regressivity of Minnesota’s state and local tax system.  True, there were some regressive tax increases (most notably the tobacco tax increase), but the overall impact of the act was unequivocally progressive.  In short, I am more optimistic than you about progress on tax progressivity.

      • Herbert Allan Davis says:

        July 23, 2013 at 8:11 am

        I’m aware that they did do some good moving the whole system to be more progressive. And I grateful for that. Without an increase in the minimum wage and an increase in the minimum welfare grant, the impact for most of the poor has been regressive.
        Not being real poor I have benefited but, the impact on the poorest 10-30% has been regressive. I’m including all of the “fees” that are in place and which make up a bigger percentage for the bottom 30%.

        • Jeff Van Wychen says:

          July 23, 2013 at 8:18 am

          While I don’t pretend to be an expert on minimum wage and welfare issues, I think that there is a reasonable chance for an increase in the minimum wage during the upcoming legislative session.  You are correct about the regressive nature of fees; most tax incidence analyses (including the ones that I most frequently reference) do not factor in the impact of fees.  The bottom line is that while the 2013 tax act made progress in reducing tax regressivity, the overall system remains regressive, especially after you factor in fees.  Clearly, more work needs to be done.

  • Rachel says:

    July 23, 2013 at 8:03 am

    (from email)

    Bruce Ahlgren, Mayor City of Cloquet, asks:

    The previous formula was confusing and complicated but this new formula is much simpler. Do fewer variables mean that it is less accurate or fair?

    • Jeff Van Wychen says:

      July 23, 2013 at 8:06 am

      Not necessarily.  While the new formulas contains fewer variables, the formulas were updated based on current city conditions and thus are probably better aligned with current city needs than were the old formulas, that were crafted over a decade ago.  In addition, the new LGA program contains three separate city revenue needs formulas (one for cities under 2,500 population, another for cities from 2,500 to 10,000, and a third for cities over 10,000), while the old LGA program contained just two (for cities over and under 2,500).  The insertion of a third need formula will enable the new program to more accurately predict the revenue need of cities over 2,500.

      In general, there is a tension between the desire to craft an LGA formula that is (1) simple, but also (2) able to respond to the many forces that affect the need for public expenditures in over 800 very different cities.  The fact that the major city organizations in the state were able to agree on a new LGA program is a good sign that the new program did a good job of achieving a balance between these competing goals.  For more on the new LGA formula, see the March 20 Minnesota 2020 article and the March 22 Hindsight post.

  • Dan Conner says:

    July 23, 2013 at 8:32 am

    THe new tax laws are fairER and less regressive, but still not progressive.  Tax rates on the wealthy still need to be increased to restore fairness and progressivity to income taxes.

    • Jeff Van Wychen says:

      July 23, 2013 at 8:37 am

      You are correct.  The best measure of the overall regressivity of a tax system is the Suits index.  The 2013 tax act was sufficient to reduce the regressivity of MN’s state and local tax system from -0.049 to -0.033 (with zero denoting a proportional system and positive values denoting a progressive system); this is a big improvement but the system still remains somewhat regressive.

      • Dan Conner says:

        July 23, 2013 at 9:10 am

        What surprises me most about the income tax issue is not about the measures or statistics, it’s about how selfish people have become, particularly the wealthy.  They have so copiously benefited from our State and economy, yet they have deluded themselves to think they have accomplished these things all by themselves. 

        These same rich people have sacrificed very little for our country.  They don’t serve in the military and risk their lives, but I’m sure they view themselves as doing their part by making wars.  I think public service requirements need to be enacted.  People need to benefit their communities by devoting time and effort in proportion to how much they have benefited from our country.

        • Jeff Van Wychen says:

          July 23, 2013 at 9:27 am

          Thanks, Dan.  You correctly summarize the view among some very high income households.  However, we should be careful not to over-generalize.  A few years ago, Growth & Justice carried in ad in the Star Tribune bearing the names of scores of wealthy Minnesotans calling for a state income tax increase on high income households.  In addition, there is a national group, the Patriotic Millionaires, that advocate for progressive taxation.  As with any group, there is a diversity of opinions and attitudes among upper income households.

  • Craig Clark says:

    July 23, 2013 at 9:45 am

    With LGA cut or flat in recent years, our city has seen how inflation has eaten away at the purchasing power of local government aid. How do you expect inflation to impact LGA and what can cities do to deal with these increasing costs while keeping equity between our cities?

    • Jeff Van Wychen says:

      July 23, 2013 at 9:49 am

      The Legislature provided an $80 million increase in LGA funding in the 2013 session, which is sufficient to replace a significant portion of the amount cut during the preceding decade.  However, the LGA appropriation is frozen in future years, so over time inflation will erode the purchasing power of LGA dollars.  State revenue increases over time, so there is no need to permanently freeze the city LGA appropriation.  It is important for cities to communicate to their legislators about the need to adjust LGA annually so that the appropriation keeps pace with inflation and population growth.  For more on this subject, please see the March 25 Minnesota 2020 article on this subject. [ http://www.mn2020.org/issues-that-matter/fiscal-policy/lga-must-keep-pace-with-inflation-and-population-growth ]

  • Dave Smiglewski says:

    July 23, 2013 at 9:47 am

    As a result of the compromise between cities and the additional funding used to re-tool the LGA formula, many cities in Greater Minnesota are using the increase in LGA to hold the line on property tax increases and also to restore some funding for some of their capital needs that were delayed or set aside when LGA was cut several times in the recent past.  These cities are choosing to look at this as money that would be best used for one-time expenses instead of using it for ongoing, recurring operational costs. While many of those capital improvements or expenses have increased in cost versus what they might have cost a few years ago, it seems prudent to move forward with them now instead of waiting once again. In most cases, these are all improvements or equipment replacement items that are part of long term capital improvement plans. Also, if a future legislature or administration decides in the event of an economic downturn to trim LGA funding again cities are better off paying for those one-time expenses instead of using that additional LGA money for operating expense.

    • Jeff Van Wychen says:

      July 23, 2013 at 10:03 am

      Thanks, Mayor.  You raise a good point.  Cities remain nervous about the state’s long-term commitment to LGA, given the events of the last decade, over which time LGA was cut by 24% in nominal dollars and by over 50% in real (i.e., inflation-adjusted) per capita dollars.  (For more on this, please see MN 2020’s March 13 article [ http://www.mn2020.org/issues-that-matter/fiscal-policy/restoring-property-tax-relief ]).  LGA will be more effective in holding down property taxes in the long-term when city officials can have confidence that the aid appropriation won’t be the target of disproportionately large state budget cuts.  Current state policymakers have shown support for LGA by increasing the appropriation and reforming the formula; the next step they need to take is to adjust the appropriation for inflation and population growth in future years.

  • Joan Tangen says:

    July 23, 2013 at 3:34 pm

    I approve of increasing the taxes on the top group.  In fact I think there should be another increase to bring it to the same level as middle class tax payers.

  • Bernice Vetsch says:

    July 23, 2013 at 7:38 pm

    It’s government’s JOB to collect and spend tax money to build and maintain the common good.  When its revenues are less than they should be, the common good shrinks.  When the poor and middle classes have to pay a higher percentage of their income in taxes than the rich, the economy shrinks as spending on goods and services drops and public spending on services rises.  In Minnesota, when LGA funds to cities are reduced, citizens have to cough up ever more in property taxes to cover what the state should have provided funds for. 

    When revenues (taxes) are set at levels that support public services and private growth, everyone is better off.  The work done by the legislature this session goes a long way toward returning Minnesota to a system of fair taxation and decent services.