The Department of Revenue presented the hot-off-the-presses Tax Incidence Study in House Tax Committee yesterday and the results are dramatic. The study provides information on who pays Minnesota state and local taxes for 2006, the most recent year for which data is available, as well as projections for 2011. It found:
- The regressivity of our state and local tax system went up significantly from 2004 to 2006. When a tax is regressive, that means that low- and middle-income people pay a higher share of their incomes in that tax than upper income people do. Put another way, taxes became markedly less fair. The results were so surprising, the Department of Revenue said they first thought they had gotten the results wrong (they found they had it right). The geeky way to put this: The Suits Index, which measures the degree to which a tax is regressive or progressive, dropped significantly. The Suits Index assigns a number between –1.0 and 1.0. A proportional tax has a Suits Index of 0. A progressive tax has a positive Suits Index and a regressive tax has a negative Suits Index. The study found a drop in the Suits index from -0.024 to -0.053. That is quite a drop – it’s hard to move the needle on the Suits Index.
- There continues to be a large gap between what the highest-income Minnesotans pay and what average Minnesotans pay in Minnesota taxes. In 2006, the wealthiest 1% of Minnesotans (those with household incomes $448,000 and up) paid 8.9% of their incomes in total state and local taxes, compared to the average of 11.2%.
- Why did fairness drop so much? The Minnesota Department of Revenue testified that some of the increase in regressivity can be traced to increases in income inequality. As the economy grew, the money made went disproportionately to those with the highest incomes. But tax policy matters too – see my next point on local property taxes…
- Following current law, local taxes (primarily property taxes) are projected to increase substantially from 2006 to 2011. Local taxes projected to grow 37.5% (2.5 times faster than income), while state taxes are projected to grow 9.7% (less than the projected income growth of 15.5%).
- Taxes make up about the same share of Minnesotans’ budgets as they did in 2000, and are a smaller share than in the mid-1990s. Total state and local taxes as a share of income – what’s also called the effective tax rate – has declined since 2004 to 11.2%, and is projected to be 11.4% in 2011. This is similiar to rates found in 2000 and 2002, and is significantly lower than in the mid-1990s, when Minnesotans on average paid close to 13% of their incomes in total state and local taxes.
This report blares a clear warning: Minnesota’s tax system is unbalanced and it’s getting worse. The fairness of our tax system has deteriorated, and the reliance on local property taxes is increasing substantially. Policymakers have the opportunity this session to respond with legislation ensuring our tax system is fair and that it raises adequate revenues to fund the state’s priorities.
Heads-up: The Minnesota Budget Project will soon publish a brief on this study, with a focus on the declining fairness in the tax system. Also, check out Lori Sturdevant’s column on the Tax Incidence Study in yesterday’s Star Tribune.