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Minnesota Taxes Heavy on Low & Middle Income Families

April 21, 2009 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

Minnesota's low and middle income families are paying a higher percentage of their income in state and local taxes than the wealthiest Minnesotans. This is the conclusion of the 2009 Minnesota Tax Incidence Study (MTIS) prepared by the Minnesota Department of Revenue.

The MTIS addresses the question of "who pays Minnesota taxes."  The 2009 MTIS focuses on state and local taxes in 2006.  According to the Department of Revenue, the primary objective of the MTIS "is to provide taxpayers and policymakers with important information on the equity or fairness of the overall distribution of Minnesota taxes."

In assessing the fairness of Minnesota taxes, the 2009 Minnesota Tax Incidence Study (MTIS) examines the state and local tax burden across households of varying incomes.  In doing this, households are grouped by "population deciles."  The first decile consists of the ten percent of Minnesota households with the lowest incomes, while the tenth decile consists of the ten percent of households with the highest incomes.  The table below shows the 2006 income range of each of the ten population deciles.

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The graph below shows the effective tax rate (i.e., total state and local taxes as a percent of income) by population decile.  In this graph, the first decile is omitted because effective tax rates (ETRs) for the first decile are not reliable due to "data anomalies and measurement problems."

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This information demonstrates that Minnesota's tax system is regressive.  Low and moderate income households pay a significantly larger percentage of their income in state and local taxes than do high income households.  In fact, for the 2nd through 9th deciles (incomes from $9,783 to $123,937), the ETR ranges from 11.5 percent to 12.5 percent, while the wealthiest ten percent of Minnesota households have an ETR of just 10.0 percent.

According to the 2009 MTIS, Minnesota's state and local tax system has become sharply more regressive from 2004 to 2006, meaning that an increased share of total Minnesota taxes is being borne by low and moderate income households and a smaller share is borne by high income households.

For example, from 2004 to 2006 the total Minnesota ETR fell from 11.6 percent to 11.2 percent.  However, the ETR increased from 11.3 percent to 12.5 percent for households in the second decile and from 11.9 percent to 12.4 percent for households in the fifth decile.  Meanwhile, for the wealthiest decile, the ETR fell from 10.9 percent in 2004 to 10.0 percent in 2006.  Clearly, from 2004 to 2006, more of state and local taxes were shifted from wealthy households to low and moderate income households.

However, there is significant variation within the 10th decile that should be noted.  Using data from the 2009 MTIS, it is possible to break the 10th decile into eight discreet segments.  The ETR for each of these eight segments is shown below.*


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Households at the low end of the tenth decile (income below $175,704) have an average ETR of 11.1 percent, only slightly below the average for all households of 11.2 percent.  Households with incomes from $123,938 to $175,704 comprise half of the tenth decile.

As incomes approach $348,000, the average ETR hovers between 10 percent and 11 percent.  The decline in ETRs accelerates as incomes grow beyond that.  As incomes surpass $1 million, the average ETR drops below 9 percent.  For households with an income above $31.9 million (i.e., the wealthiest 0.001 percent of all Minnesota households), the average ETR is just 7.4 percent.

Households with incomes in excess of $194,000 comprise only about four percent of all Minnesota households.  However, they comprise 30 percent of 2006 Minnesota income.  Taxing these households at the same effective tax rate as the statewide average would generate over $800 million based on 2006 data.  Over the course of a two year biennium, this would be sufficient to close approximately one-quarter of the state's $6.4 billion structural budget deficit projected for FY 2010-11.

Minnesota's budget problem is mainly a revenue problem.  Even Governor Pawlenty has acknowledged this fact by proposing to sell future tobacco settlement dollars for the sake of a one-time revenue infusion.  The question is: do we want to generate revenue through shifts and one-time gimmicks or through fair and progressive taxation?

*The income ranges shown in the graph are of irregular width because this analysis combines data from different sections of the 2009 MTIS.
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