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Promoting Tax Fairness in Minnesota

June 22, 2009 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis
Minnesota's tax system is regressive, meaning that low and middle-income families pay a higher percentage of their income in state and local taxes than wealthier households.  It's grown even more regressive in recent years, a trend that will further accelerate with the governor's unallotment of aid to local governments.

A number of lobbyists mill about the State Capitol attempting to protect this regressive system so that the wealthiest Minnesotans are spared from the "onus" of having to pay the same state and local tax rate as other Minnesota families.  Progressives should be aware of their arguments and how to rebut them.

Commonly you'll hear regressive taxation apologists argue that the relatively low state and local effective tax rate (i.e., state and local taxes as a percent of income) enjoyed by the wealthiest households is offset by high federal effective tax rates.  Based on national data, the combined state, local, and federal effective tax rate of the wealthiest one percent of households is 1.1 percent higher than the U.S. average.

However, nearly a third of state and local government revenue consists of non-tax revenue, including various fees, special assessments, and other charges that are generally regressive.  So any progressivity in our tax system could be totally or partially offset by these regressive non-tax revenues.

More importantly,a progressive federal tax system is no excuse for a regressive state and local tax system.  Regardless of how progressive federal taxes are, state and local governments will have a hard time paying for public services if they are relying disproportionately on money coming from low and moderate income families.

For example, since FY 2003 state investment in Minnesota's schools has fallen significantly, forcing a heavier reliance on property taxes.  Property taxes fall disproportionately on Minnesotans with the least ability to pay.  As more school costs have been shifted on to lower-income families, real per pupil school revenue has fallen.  There's no doubt increased reliance on a regressive property tax system has led to a decrease in school funding.

Minnesota counties and cities are in the same boat as our schools.  Increased dependence on regressive revenue sources for local services has contributed to a steady decline in real funding, as we attempt to squeeze more dollars from those families who can least afford to pay.  Progressive federal taxes will be a small consolation for communities with dwindling resources as they struggle to replace Pawlenty's cuts to state aid through increases in
property taxes and other regressive revenues.  As funding for schools and local services continue to fall, Minnesota's quality of life will erode at the expense of all Minnesotans.

Defenders of regressive taxation also argue that progressive or proportional taxes are unfair to the wealthy.  For example, if a family with an annual income of $400,000 pays the same percentage of their income in taxes as a family with an income of $40,000, the wealthier of these two families will be paying ten times more in taxes than the middle-income family because its income is ten times greater.  In fact, one business lobbyist has concluded that the alleged discrepancy between taxes paid versus benefit received will lead to a tax revolt, such as that which contributed to rigid property tax caps in California back in the 1970s (referred to as "proposition 13").

The premise behind this defense of regressivity is that each of these two families is benefiting equally from public spending and thus one should not pay more than the other.  However, this premise is highly questionable.

For example, assume that the family with the $400,000 income owns a widget company.  The widget company is relying on public infrastructure to move raw materials and finished products.  The widget company is also relying on a workforce--largely educated at public expense--to produce high quality widgets.  The company is further relying on a public safety and court system to enforce contracts and protect property rights.  In short, the owner of the widget company is utilizing and benefiting from public services and infrastructure proportionately more than the middle-income family and thus should be expected to pay proportionately more to fund public functions.

As a general rule, it is not a stretch to conclude that people roughly benefit from public investments in proportion to their income.  Certainly high income households have more to gain from a stable society that protects their wealth.  For this reason, it should not violate anyone's sense of propriety to have high income households pay for state and local services in proportion to their income.

As far as the property tax revolt in California, it most certainly was not the result of over-dependence on progressive taxation.  Rather, the tax revolt in California that lead to proposition 13 was the result of over-reliance on a regressive property tax system that was out of proportion to both the ability to pay and the benefit derived.

Proposition 13 has been a disaster for California, contributing to a deterioration in public education and public services and a perennial fiscal crisis for both state and local governments.  If Minnesota wants to avoid the fate of the Golden State, we should seek reduced--not increased--reliance on regressive property taxes.

In the final analysis, the strongest rebuttal to arguments in favor of regressive taxation is common sense tax fairness.  If low- and middle-income families can pay a share of their income to support state and local government services, there is no reason why we can not expect the same share from high income households.

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