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MN2020 - New Study: Minnesota Taxes Remain Regressive
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New Study: Minnesota Taxes Remain Regressive

March 04, 2013 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

Taxpayers at the top of Minnesota’s income scale continue to pay a much smaller share of their income in state and local taxes than their less well-off neighbors, according the 2013 Minnesota Tax Incidence Study (MTIS), which was released Friday (March 1). The Minnesota Department of Revenue (DOR) publishes the MTIS every two years; the 2013 MTIS examines income and tax data for calendar year 2010. The folks at DOR should be proud of this report, as the biennial MTIS is the most comprehensive and sophisticated tax incidence analysis of its type in the nation.

A key concept used in the MTIS is the “effective tax rate.” The effective tax rate (or ETR) refers to taxes as a percentage of household income. The MTIS examines ETRs in each of ten groups of equal population—referred to as “population deciles”—ranked in order from lowest income (the first or bottom decile) to highest income (the tenth or top decile), with the tenth decile further broken down into the top five percent and the top one percent. The 2010 income range for each of these groups is presented below.

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Throughout recent history, Minnesota’s state and local tax system has been regressive, with high income households paying a significantly lower ETR than lower and middle income families. The 2013 MTIS shows a continuation of this pattern into 2010. The graph below shows the ETR for the second through tenth population deciles, with the tenth decile broken out into three parts. (The first decile is typically excluded from most analyses due to data problems.*) The dashed line indicates the 2010 statewide average effective tax rate of 11.5 percent.

[ graph: click title to view in browser ]

The 2013 MTIS observes that the primary cause of tax regressivity in Minnesota is low ETRs experienced by taxpayers within the tenth decile. The graph certainly bears this out. Only taxpayers in the top decile experience ETRs that are below the statewide average. Furthermore, only taxpayers in the top one percent have effective tax rates that are more than 1.0 percent below the statewide average.

Meanwhile, the highest ETRs are seen among the poorest taxpayers with the least ability to pay; taxpayers with incomes between $10,155 and $16,449 have an average ETR of 14.0 percent. State and local taxes per dollar of income for these very low income households is 22 percent above the statewide average and 46 percent above what is paid by the top one percent.

Middle-income taxpayers (defined here as taxpayers in the fifth and sixth deciles) also bear more than their fair share of Minnesota state and local taxes. State and local taxes per dollar of income for these middle-income families are 27 percent greater than what is paid by the top one percent—a disparity slightly worse than what was observed in 2008 based on data from the 2011 MTIS.

The overall regressivity of a tax system can be gauged using a statistical measure known as the Suits index. A Suits index of +1.0 denotes a tax system that is completely progressive, while an index of -1.0 denotes a tax system that is completely regressive. The Suits index for Minnesota’s state and local tax system in 2010 is -0.056, which denotes a modest degree of regressivity. Minnesota’s Suits index for 2010 is slightly lower than what it was in 2008 (-0.054), denoting a minor increase in the overall degree of tax regressivity in the state.†

As noted previously by Minnesota 2020, the regressivity of a tax system typically fluctuates along with the business cycle. The best way to gauge the long-term trends in tax regressivity is by comparing the Suits indices at similar points in the business cycle. The years which correspond most closely to the end of the last two recessions for which MTIS Suits indices are available is 2002 and 2010. In 2002, the Suits index for Minnesota’s state and local tax system was -0.018. As noted above, by 2010 it had fallen to -0.056. In other words, Minnesota’s Suits index is three times greater at the end of the Great Recession than it was at the end of the previous 2001 recession, thereby denoting a significant long term increase in tax regressivity.

The 2013 MTIS underscores the ongoing lack of fairness in Minnesota’s tax system. Fortunately, Governor Dayton’s tax plan reduces the degree of regressivity in Minnesota’s state and local tax system, as demonstrated in a recent DOR analysis, while at the same time generating needed public revenue. The 2013 MTIS further highlights the need for progressive tax reform of the kind proposed by Dayton.

 

*The first decile is frequently omitted from a comparison of ETRs across deciles because (1) households in the first decile often have temporarily low incomes or have better overall economic well-being than indicated by their money income, (2) income in the first decile can be understated because the MTIS cannot identify all sources of income, and (3) various other reasons. Data problems with the first decile are more fully described on page 17 of the 2013 MTIS.

†This analysis uses “population decile” Suits indices. However, “full sample” Suits indices are more accurate than population decile Suits indices. Based on a comparison of full sample Suits indices, the index for Minnesota’s state and local tax system in 2010 is unchanged from the 2008 value of -0.060. The population Suits indices are used in this article to facilitate comparisons to earlier years for which full sample Suits indices are not available.

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3 Comments:

  • John Crampton says:

    March 13, 2013 at 10:30 am

    The American rich are the most vicious, greedy, despicable class of human vomit that has ever walked the earth.  In their greed they will destroy everything.  That’s why they are so engaged in manned space travel to other planets.  When they are done ruining this earth and its ability to support human life, they’ll be on their way to the next planet.

  • John Cook says:

    March 13, 2013 at 10:36 am

    There are certainly other ways to gauge “fairness” than tax regressivity.  If “fairness” was calculated by tax burden, a family who consumed fewer government services but contributed more than those who did might consider themselves to be unfairly treated.

    So, for instance, when a family making $68,000 with 3 kids in public school contributes $8,000 to the general fund while a family making $450,000 with 3 kids in private school contributes $42,000 it is clear that the family with the higher tax burden is subsidizing that with the lower.

    Another point ignored in the regressivity measure is that the family with the higher tax burden very likely has options to reduce that tax burden that the family with the lower burden does not. Those options will likely show up in an index of regressivity but it does not, necessarily, indicate unfair treatment.  The biggest danger, however, in measuring tax burden on a progressive/regressive scale is that one of the options the higher tax burden family could have is to move themselves and their business interests into a situation with lower net tax burden thus removing themselves from the pool of those who are subsidizing their less fortunate neighbors.

    The real solution to fairness is to adjust the level of services so that the average taxpayer does not have to be subsidized by the fortunate.  That adjustment would keep the overall tax burden competitive which would allow the fortunate to conclude that their contribution by any measure was “fair”

  • Jeff Van Wychen says:

    March 13, 2013 at 1:33 pm

    Thanks for your comment, John.  There are some public services that are consumed less by high income households than by low income households.  In your example, the wealthy family directly consumes less public education than the lower income family.  However, the wealthy family may be benefiting indirectly from public education.  For example, if the wealthy family owns a business, its income may be derived from access to a skilled workforce; most of today’s workforce receives at least some of its education from public institutions.  In addition, the prosperity of the business may depend on a public transportation system that allows raw materials and goods to be transported.  Furthermore, the business (and the family that owns it) benefits from the public safety and legal system that protects property rights and enforces contracts.

    If all of the institutions funded by public tax dollars were to collapse, the high-income family would have the most to lose simply because they have the most to begin with.  For this reason, I contend that high income households should pay taxes at least in proportion to their income in order to maintain a society from which they derive the greatest benefit.  Thus, tax regressivity / progressivity is one valid measure of tax fairness.

    In addition, the prosperity of any business depends on consumers.  The concentration of income at the top and the shrinkage of the middle class is the single largest threat our economy faces.  We will not see job growth and economic expansion without strong consumer demand from a robust middle class.  A reduction in regressive taxation is one way of keeping purchasing power in the hands of those households whose consumption is critical to spurring economic growth.

    Your concern that high income households will flee the state is not supported by the best studies on this subject.  I hope to write about some recent studies on this topic for MN 2020 soon.  Dayton’s modest 2% increase in the income tax rate on the portion of taxable income in excess of $250,000 (married joint filers) will not lead to significant tax flight.  However, the investment in education, transportation, and workforce development made possible by this tax increase will provide a boost to the state‚Äôs economy.