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MN2020 - Two Decades of Growing Regressivity
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Two Decades of Growing Regressivity

October 28, 2013 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

Over the last twenty years, Minnesota’s total state and local effective tax rate has fallen. However, it has not fallen for everyone. In fact, average effective tax rates have increased for lower- and middle income Minnesotans and declined only for high-income households. These trends are indicative of a pattern of rising tax regressivity in Minnesota—a problem the 2013 tax act partially remedied.

The “effective tax rate” (ETR) refers to taxes as a percent of income. Because it takes into account both the level of taxation and the ability to pay as measured by income, ETRs are the preferred measure of variation in tax levels among income groups. The biennial Minnesota Tax Incidence Study (MTIS) from the Minnesota Department of Revenue presents the state and local ETR* for ten equally-sized groups—referred to as deciles—ranging from the lowest to highest income, with additional details for the tenth (highest income) decile. The earliest year for which final ETRs by decile are available is 1990† and the most recent is 2010.

The table below shows income range and ETRs by decile for 1990 and 2010 based on MTIS data, with the tenth (highest income) decile further broken down into the “bottom half 10th decile”, the “next 4%” (i.e., the top half of the tenth decile excluding the top 1%), and the “top 1%.” Information for the first (lowest income) decile is omitted from this table due to data anomalies described in the 2013 MTIS.

 

In 2010, the statewide average ETR was 11.5 percent, down from 11.8 percent in 1990. However, the ETR decline was concentrated at the high end of the income spectrum. Taxpayers in the ninth decile saw their average ETR drop slightly from 11.8 percent to 11.7 percent, while those in the tenth (highest income) decile saw it drop significantly from 11.7 percent to 10.3 percent. The largest declines were restricted to the top half of the tenth decile, with the ETR of the top one percent dropping from 11.2 percent to 9.6 percent.

Meanwhile, the average ETR for the eight lowest income deciles—including all low- and middle-income households in the state (i.e., all households with income under $89,747 based 2010 data)—increased over this 20 year period. The ETR increase ranged from a low of 0.1 percent in the eighth decile to 2.9 percent in the second decile.‡ The overall statewide ETR declined over this twenty year span—despite the fact that ETRs increased in the lowest eight deciles—because the majority of statewide income is concentrated in the top two deciles.

On a statewide basis, the average ETR for the eighty percent of Minnesota households with the lowest incomes increased by 0.7 percent over the twenty year span, while the ETRs of the top 20 percent fell by 1.0 percent. As a result, Minnesota’s state and local tax system went from nearly proportional in 1990 to significantly regressive in 2010.

Changes in state and local tax regressivity can be due to any of a number of factors. One factor that played a role in increased tax regressivity in Minnesota is an increase in income inequality. A recent report from Growth & Justice demonstrated that income inequality as measured by the Gini coefficient increased significantly from 1989 to 2009.

However, while an increase in income inequality can contribute to increased regressivity, a Minnesota 2020 analysis of 50-state tax incidence data demonstrates that the mix of taxes on which a state depends is generally more potent than income inequality in explaining changes in tax regressivity. An increased dependence on regressive property taxes and a reduced dependence on progressive income taxes is probably the major driver of the growth in tax regressivity in Minnesota from 1990 to 2010.

The expanding gap between the state and local effective tax rates of low- and moderate-income households on the one hand and high income households on the other resulted in a significant increase in tax regressivity in Minnesota from 1990 to 2010. Fortunately, progressive state policymakers made significant strides in reversing this trend during the 2013 legislative session. Part 2 of this series will examine the success of the 2013 tax act of stemming the tide of rising tax regressivity in Minnesota.

 

*As used in this article, the term “effective tax rate” will refer to the state and local effective tax rate as calculated by the Minnesota Department of Revenue.

†Technically, ETRs for 1988 are available from the 1991 MTIS. However, due to changes in methodology, the 1988 ETRs from the 1991 MTIS are not comparable to ETRs from subsequent Minnesota Tax Incidence Studies. The earliest year for which ETRs comparable to today’s ETRs is 1990. The 1990 ETRs cited here are from the 1993 MTIS.

‡The largest ETR increase (from 26.6 percent in 1990 to 31.5 percent in 2010) actually occurred in the first (lowest income) decile. However, because of data anomalies referenced above and described in the 2013 MTIS, information from the first decile is omitted from many analyses.

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9 Comments:

  • Mike Downing says:

    November 4, 2013 at 1:14 pm

    Good article Jeff.

    The DFL know this yet they have not attacked the most regressive MN tax namely property taxes. The DFL has been offered bills for over 10 years to address true property tax reform by tying property taxes to income (2.7% of income would work). Yet the DFL has balked at it. The DFL controls everything so why don’t they address property tax regressivity?

    • Jeff Van Wychen says:

      November 4, 2013 at 2:27 pm

      While the legislature did not implement the plan to cap all property taxes as a percent of income, they did approve a massive expansion of the homeowner’s property tax refund in the form of the new Homestead Credit Refund and a significant increase in the renters’ property tax refund.  These two programs are powerfully progressive and are contributing to the reduction in tax regressivity that Minnesota is experiencing under the new tax act.

      • Mike Downing says:

        November 4, 2013 at 4:08 pm

        You are right Jeff but it is a little band-aid and is no reform. It must be acceptable to the MN Legislature to have retired seniors paying 10-30% of their income on property taxes.

        Marlowe Hamerston (liberal Democrat) and I (conservative independent) worked together when we were part of the MN Senior Federation to promote an income based property of tax system. However, we found the MN legislature has no appetite for true property tax reform. It is sad that our Legislature is so risk adverse toward true reform.

        • Dan Conner says:

          November 6, 2013 at 10:32 am

          Homestead credits are not a band-aid.  They result in considerable saving to property tax payers and a loss of revenue to the State.  Also, considering your posts on this site, I too would be skeptical of any tax plan you approve of.  Your concerns seem to lie more in what’s good for Mike, and less about what’s good for Minnesota.

    • Dan Conner says:

      November 4, 2013 at 3:35 pm

      Mike, it is silly for you to blame regressivity of property taxes on Democrats.  Wasn’t it just Republicans that controlled the House and Senate for 2 years?  Why didn’t they do it?  I think you need to get off your Tea Party competitiveness and start thinking about the people in Minnesota.  Don’t attribute to Democrats what Republicans could have easily done.

      I think Republicans promote regressivity, anyway.  They promote our regressive income tax, as well.

  • Don says:

    November 4, 2013 at 1:46 pm

    This is simply outrageous!  Soak the rich!  By all means, soak the rich!

    • Dan Conner says:

      November 4, 2013 at 3:35 pm

      Agreed Don!

  • Stan says:

    November 5, 2013 at 10:39 am

    I agree that we need to continue to tweak the MN Tax code so that it becomes slightly more “progressive”.  Maybe we should discuss targets; e.g. the lowest decile’s ETR rate could be 9.5%, the highest decile’s ETR rate could be 12%, such that the average would stay at 11.5 to 11.6% ETR.  To accomplish this we should create property tax “credits” that are based on “total net worth”; e.g. if you have low income - but enjoy significant assets from which to pay the property tax you would receive no tax-credit and conversely if you have low income but no accessible assets, you would receive a higher property tax credit.  Naturally, a retrospective review may lead to some of the middle decile rates to be higher than the top rate, but the underlying impact to the MN economy would be stable. 

    Furthermore, it is time that we pass a constitutional amendment that limits the ability to quickly raise or lower tax collections (e.g. changes in taxes collected must be gradual (+/- the % change in population), or can only take effect 4 years in the future).  The stable expectation of state imposed costs would create a policy focus on efficiency/productivity and provide the economy with clarity of potential costs.

    • Dan Conner says:

      November 6, 2013 at 10:41 am

      Stan thanks for the actual thought and suggestion you submitted.  It’s far better than the easy criticism and finger-pointing offered.  I agree income and property taxes need to be progressive.  However, I would even favor a more progressive tax than you offered.  Taxes have been regressive for many many years.  In addition to restoring progressive equity, I think taxes need to be increased to make up for the years of inequity.  The rich have unjustly accumulated enormous wealth in a very favorable tax climate.  That past inequity needs to be leveled as well as setting a more progressive path for the future.  And like you have mentioned, wealth needs to be considered, in addition to income.

      I do not support your budgeting Constitutional Amendment.  There are times governments need to make more timely adjustments to revenues because of unforeseen events.  There is disaster assistance, economic downturns, but to name a couple.