Minnesota tax system is at its regressive worst

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.

Minnesota's relatively progressive personal income tax masks the fact that the state is not a leader in progressive taxation, and the trend shows we are gradually getting more regressive over time.

Those are the unfortunate major conclusions we can draw from the 2009 Minnesota Tax Incidence Study. While we are not yet sure about the reasons, we know all major taxes are sliding toward greater regressivity (i.e. the poor and middle class paying a greater share of their income, the rich paying less). Addressing this worsening situation should be a high priority as we also look at tax policy to encourage business growth and replace declining revenues.  

With some drama, we can say the Minnesota system has arrived at its regressive worst in the two decades since we started studying tax incidence. In fact, we saw an unprecedented doubling in regressivity from 2004 to 2006 — the years represented in the 2007 and 2009 studies.

Those who dismiss disproportionate taxation as a concern will claim this widening unfairness is just a matter of business cycles. However, the falling trend lines clearly indicate that major tax policy shifts may be needed to nudge the tax system back toward proportionality.

An unexpected addition to the Tax Incidence Study was the use of an aging 50-state report by the Institute on Taxation and Economic Policy (ITEP) for comparison purposes. Based on 2002 ITEP data (when Minnesota regressivity was at a low point), the state's tax system ranked as 11^th most progressive in the nation. Low-tax Delaware has a progressive tax structure, and ranked first; high-tax Washington ranked 50^th, or most regressive.

The Revenue Department cautions against comparing the Suits numbers in the January 2003 ITEP study to the Suits numbers calculated in the 2009 Tax Incidence Study, and we don’t know what has happened in other states since 2002. The ITEP methodology is somewhat different, and we are left wondering if it is not entirely possible Minnesota has dropped to the middle of the pack. Almost certainly our dramatic four-year slide in regressivity — from -.018 to -.053 — would have us heading in the wrong direction in those rankings.

Unfortunately, it may be even worse than the indicated -.053 regressivity.

The 2009 study should have included in its 2006 data the highly regressive 75-cent cigarette and tobacco “Health Impact Fee” passed in 2005. Keep in mind, the HIF was declared by the Minnesota Supreme Court as a tax burden on users, not a health impact charge on tobacco companies and distributors.

Minnesota Revenue researchers, headed by Dr. Paul Wilson, have always conducted the study using the highest social scientific standards. So, it was not surprising at all to see the straight-shooting Wilson supply a House committee with testimony indicating that including the HIF bumps our regressivity factor even more steeply to -.059. We look forward to the day when the HIF is formally considered as tax revenue in the study.

Regardless where we might rank today, Minnesota's overall regressivity has tripled in the four years between 2002 and 2006, more than 25 percent worse than at any time previously measured. We have a lot of work to be done if we hope to achieve a proportional tax system — let alone the loftier goal of progressivity.

Comments

[Craig Westover]

Politics in Minnesota notes that according to the study the reason for in increase in regressiveness is not the result of any change in tax policy, but results from a wider income gap between the very wealthy and the rest of the pack.

The assumption of your post is that a regressive system in and of itself is "unfair" and therefore "bad." The real question, which G&I does not address is whether a significant income gap, significant inequality of wealth is an economic disadvantage for the state.

Your post is all about creating a specific type of tax system, but never explains how the proposed system will produce more prosperity, a higher standard of living for more people, more jobs or any of a number of economic/quality of life benefits.

Is a progressive tax system a "lofty" goal because it represents some higher plain of morality, or would a progressive tax system that reduced, if not eliminated income disparity, produce an economically healthier society? How might it do that?

[Robert Loscheider]

The first step in tax reform is to determine what level of government (Fed.State,Local) has the responsibility to provide a particular governmental function or service.

Example: Natl defense is a national gov. responsibility.

[Nate Anderson]

Utterly absurd. The dems in our state house implemented the largest "regressive" tax hike in MN history last year. Gas taxes, license fees and other nickel-and-dime taxes hurt lower income citizens the most. Now those same tax hikes are being used as evidence that we need to further increase taxes.

WE DO NOT NEED TO INCREASE TAXES! PERIOD.

This is a shameful attempt at initiating a class-envy feeling that will provide enough cover for politicians to raise taxes on ALL OF US.

[brian davis]

taxes need to be reduced. spending must be reduced. this state spending is out of controll. drastic spending cuts must be made. if you want something pay for it yourself and get of the public tit. be resonsible for yourselves and your families.

[mike]

Minnesota has three state income tax rates: 5.35 percent, 7.05 percent and 7.85 percent.

It looks fair to me. Actually it looks like the rich pay more and if you include things like property and sales tax, you find that they pay a lot more in real dollars than lower income people.

You seem to be including items that have nothing to do with income.

I choose to live in a cheaper house than I can afford, because I do not want to pay higher property taxes, would you like to tax me more because I am saving money?

[Britt]

This survey and your data are not accurate. Minnesota has 3 tax levels: 5.35%, 7.05%, and 7.85%. These are facts. All the other "taxes" listed are not apples to apples.

Using accurate data to make your point will make more people pay attention. Sometimes the data is favorable to your cause, sometimes it isn't...

[Bruno]

Utter garbage - Minnesota's system is amongst the most progressive (as if that were fair in the first place) of all the states in the Union. If you so-called growth and justice people are so into confiscating other people's property, I suggest you move to Cuba or Venezuela.

[Wilbur]

Bruno,
As the initial post makes clear, it's saying very little to say that Minnesota is "amongst the most progressive" tax systems in the nation. It's not progressive at all, and is in fact regressive. The nicest thing you can say is that MN is less unfair than most states. Put another way, even if your idea of "fairness" is that you should have a tax system that's just flat overall, Minnesota has not achieved that basic goal.
RE the comments of Britt and Mike, both are arguing that only income taxes matter-- that sales/excise and property taxes shouldn't be added together to get an overall incidence picture. Britt's explanation is that these other taxes aren't "apples to apples," while Mike says that these other taxes "have nothing to do with income."
Can either of you explain a little bit more what these criticisms mean? It seems to me that sales and excise taxes absolutely have a predictable relationship with income (the more income you have, the lower your effective rate in each of these taxes is). Neither is precisely calculated based on your income, of course, but that's why they're each regressive. And if you want to understand the overall fairness of Minnesota taxes, you have to add these things in. So, what part of your arguments am I missing?