Minnesota Moves Ahead: Tax Fairness in the 50 States
Over the course of the last decade, state and local taxes in Minnesota became increasingly regressive, meaning that a growing share of taxes were paid by low- and middle-income residents and an shrinking share was paid by those at the top of the income ladder. Now thanks to the powerfully progressive tax act of 2013 that trend has been reversed.
In 2008 Minnesota 2020 did the first fifty state tax regressivity ranking based on 2000 data from the Institute on Taxation and Economic Policy (ITEP). A new Minnesota 2020 report, “Minnesota Moves Ahead: Tax Fairness in the 50 States,” updates this analysis based on 2010 data, with adjustments to Minnesota’s regressivity ranking based on the impact of the 2013 tax act.
In general, state and local taxes in the United States are borne disproportionately by low- and middle-income households. Minnesota is no exception to this rule. However, in 2000 Minnesota was the 11th least regressive state in the nation, meaning that only ten states had a more fair tax system (i.e., taxes were more evenly distributed between rich, middle-income, and poor), while 39 states had a less fair system.
However, during the period from 2000 to 2010, tax regressivity in Minnesota nearly doubled based on ITEP data. Contributing to this tax regressivity growth were conservative policies that shifted an increasing share of public costs on to property taxpayers through real cuts in state aid to Minnesota counties, cities, and school districts and other property tax relief programs. This caused local property taxes to grow, which in turn caused tax regressivity to increase, since property taxes are borne disproportionately by low- and middle-income families. As a result of this and other trends, Minnesota slipped from the 11th least regressive state in 2000 to 16th in 2010.
Fortunately, the tax act passed by the legislature in 2013 balanced the state budget and shored up state investments in education, infrastructure, and other public assets not through increases in regressive property taxes that fall heavily on the middle class, but primarily through an income tax increase that was focused on the top two percent of Minnesota households. In fact, the revenue generated by the income tax increase on high income households helped to pay for the new homestead credit refund, increases in renter property tax relief, and an increase in state aid to counties, cities, and school districts, all of which produced the first statewide property tax decline in 12 years.
In this way, the 2013 tax act helped reverse the state and local tax regressivity that accumulated under conservative control of state government over the last decade, thereby improving Minnesota’s rank among the 50 states in terms of the degree of tax regressivity from 16th to 10th and cutting the level of regressivity by nearly half based on ITEP data.
Prior to passage of the 2013 tax act, a middle-income household in Minnesota paid approximately 27 percent more per dollar of income in state and local taxes than the richest one percent of households. After passage of the 2013 act, they were paying only ten percent more.
There is no need to shed tears for high income Minnesotans, since they are on average still paying a smaller share of their income in state and local taxes than are middle-income families. However, the 2013 tax act dramatically reduced the tax disparity between middle-income and upper-income families. While detailed tax information for the 2014 tax act is not yet available, it is expected to further reduce tax regressivity in Minnesota.
“Minnesota Moves Ahead: Tax Fairness in the 50 States” examines the causes of regressivity in the fifty states using a combination and data and statistical tools not found in other reports. In regard to Minnesota, this report shows that during the last two legislative sessions, progressive state policymakers not only succeeded in restoring investments in education, infrastructure, workforce development, affordable housing, and healthcare, but they also made Minnesota’s tax system more fair by reducing the share of state and local taxes paid by middle-income families.