Minnesota Tax Rates Decline! For the wealthy...

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	Minnesota Tax Rates Decline! For the wealthy... It's a right wing dream. Total state and local taxes as a percentage of statewide personal income have fallen from 2002 to 2006. However, only the very wealthiest Minnesota households are benefiting from this decline. The vast majority of Minnesota households have seen their state and local tax bite increase over this period. Previous Minnesota 2020 analysis has demonstrated that Minnesota's state and local tax system is regressive . In a regressive tax system, a disproportionate share of taxes is borne by low and moderate income families. Minnesota 2020's analysis of tax regressivity is based on information from biennial tax incidence studies from the Minnesota Department of Revenue. The most recent tax incidence study was released in March 2009 and presents data for tax year 2006. Effective tax rates (ETRs) measure taxes as a percentage of income. The Minnesota tax incidence studies examine the ETRs for households with varying levels of income. 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 income range of the ten population deciles for 2002, 2004, and 2006 based on information from the last three Minnesota tax incidence studies. The total state and local effective tax rate for all Minnesota households fell from 11.3 to 11.2 percent from 2002 to 2006. However, the decline in ETRs was concentrated among the highest income households. The chart below shows ETRs by population decile for 2002, 2004, and 2006. In this graph, the first decile is omitted because, according to the Department of Revenue, ETRs for the first decile are not reliable due to "data anomalies and measurement problems." As demonstrated in previous Minnesota 2020 research, the first nine deciles (i.e., households with a 2006 income below $123,938) tend to have higher effective tax rates than the tenth decile. The above graph demonstrates the disparity in ETRs between the tenth decile and the lower nine deciles has increased over time. For the lower nine deciles, ETRs have risen from 2002 to 2006; only the wealthiest tenth decile has experienced a decline in ETRs over this period. The graph below shows the change in ETRs from 2002 to 2006 by decile. The lower income deciles have seen the highest rate of growth in their effective tax rates from 2002 to 2006. Particularly large ETR jumps occurred within the second, third, and fifth deciles. The ETR increases in the sixth through ninth are more modest. However, the wealthiest ten percent of Minnesota households saw a dramatic reduction in ETRs over this four year period. The modest reduction in the statewide ETR from 2002 to 2006 was driven by a dramatic reduction in the ETRs for the wealthiest ten percent of Minnesota households. In each of the first nine income deciles, the ETR actually increased. This provides a stark illustration of how the taxes as a percent of income have increased for lower and moderate income families, while they have fallen for the wealthiest Minnesota households. However, there is considerable variation within the tenth decile. The graph below compares the change in effective tax rates from 2002 to 2006 for the bottom half of the tenth decile (2006 household incomes from $123,938 to $175,703) to the top half of the tenth decile (2006 household incomes above $175,703). The lower half of the tenth decile experienced a decline in effective tax rates of 0.3 percent from 2002 to 2006. Over the same period, the wealthiest half of the tenth decile (i.e., the wealthiest five percent of Minnesota households) saw an ETR decline of 0.8 percent. Thus, while the decline in effective tax rates is being enjoyed only by the wealthiest households, the very largest declines appear to be reserved for the uber-rich. All of this confirms what was demonstrated in a previous Minnesota 2020 analysis : not only is Minnesota's tax system regressive, but it is becoming more regressive over time. The state and local effective tax rate of the wealthiest Minnesota households, which was below the statewide average to begin with, has declined, while the effective tax rate for low and moderate income households has increased. The governor's unilateral budget cuts will only accelerate the drift toward increased tax regressivity in Minnesota. The cuts in state aid to counties and cities will contribute to increases in regressive property taxes. The school funding shifts will put additional financial pressure on school districts, which will contribute to even more property tax increases. Finally, the cuts in the renters' property tax refund will dump even more of the costs of public services on to those households with the least ability to pay. To a considerable extent, the growth in tax regressivity in Minnesota is driven by economic changes beyond the control of state government. However, state tax policy has contributed to the growth in regressivity. Rather than accelerating the drift toward increased tax regressivity, state policymakers should make our state and local tax system fairer through adoption of progressive policies that spread public costs based on the ability to pay. Jeff Van Wychen is a research fellow with Minnesota 2020, which describes itself as "a progressive, nonpartisan think tank" focused on "the issues that matter for Minnesota's future success."