Take care in reading the Tax Incidence Report findings

Jim Robins is a former Minnesota Senate Majority researcher assigned to taxes, metropolitan and local government, and transportation issues. He currently operates www.ScooterMaxi.com.

Every two years, one of the most-impressive bureaucratic endeavors undertaken in Minnesota is carried out. This week we eagerly anticipate receiving the 2009 Tax Incidence Study. [The report will be available here this week.] This report has a sterling national reputation and should be celebrated by everyone who treasures the use of empirical data in developing fair and progressive tax policy.

However, it is a challenging document for the casual reader, and the potential is great for abusing one or two statistical estimates out of the tens of thousands reported. Take note that the Tax Incidence Study necessarily contains a four-year black hole between measured historical data and forecasting estimates. For 2009, that means we have no data reported for 2007-2011 — an important time frame considering the huge economic swing Minnesota and the nation are currently experiencing.

Although mine is only an educated guess, you can safely assume that the Minnesota tax system is more regressive (taxing the poor at a higher rate than the rich) right now than it will show in the boom-time 2006 results, or the 2011 estimates when at least some level of economic recovery is anticipated. In down times, the tax system is most regressive.

The volatility of progressive tax sources, particularly revenue from the income tax, is the key factor in determining changes in the Suits index — used as a summary measure of overall progressivity or  regressivity. Suits measures from +1 (100 percent progressive) to -1 (100 percent regressive). Minnesota had an essentially neutral system in 1990, but has trended somewhat more regressive ever since. 

We headed in the wrong direction throughout the 1990s, dipping to a hefty 4 percent overall regressivity in 1998. Boom times at the start of the current decade partially masked regressivity, but we have been heading downward again in recent years (1). It is particularly important to keep in mind these extended trend lines over many years rather than focus on just one or two new Suits index numbers unveiled in the 2009 study.

Finally, we should think about the Tax Incidence Study findings in the context of the current political discussions. We have the opportunity to enact substantial overall tax reform this year, and it appears that business taxes will be a key factor in debate. Although we intuitively assume state business taxes are progressive, the 2007 measurement (based on 2004 data) indicated that they are 16 percent regressive (2).

However, the much-maligned corporation franchise tax is 47 percent exported out of Minnesota as measured in both the 2007 and 2005 reports (3), and that means we would be giving nearly half the tax relief to non-residents. Perhaps we can find better ways to provide business tax breaks without sending so much of the relief to people who don’t live in Minnesota. As I have documented in a past posting, our state has done particularly poor job of generating outside revenue compared to other states. We shouldn’t make things even worse.

[According to a 2002 report by the Center on Budget and Policy Priorities, "only a handful of states systematically assess the impact of tax changes on families at different income levels [and] only three states (Maine, Minnesota, and Texas) now require such analyses of major state tax legislation by either the legislative or executive branch."]

Without sounding too wonkish, it will be exciting to get our hands on this year’s Tax Incidence Study. Let’s hope our state policy makers make the most of the data, and put together the kind of proposals that will result in tax fairness at a time when we need it most.

1) 2007 Minnesota Tax Incidence Study, p. 3 Download PDF

2) 2007 Minnesota Tax Incidence Study, p. 13

3) 2007 Minnesota Tax Incidence Study, p. 83; 2005 Minnesota Tax Incidence Study, p. 85 Download PDF

Comments

[Tom]

Has the state looked into companies who develop software products and services in the state and license them in low or no tax countries so the revenue is outside of the State?

I'm aware that Thomson Rueters uses this method of tax avoidance.