Skip to Content

Study confirms Minnesota's tax system is unfair

scales
CC/Flickr/dnnya17
In Minnesota and the vast majority of other states, low- and middle-income families are paying a much larger percentage of their income in state and local taxes than are the wealthiest households.

A new report from the Institute on Taxation and Economic Policy (ITEP) provides fresh insight on who is paying state and local taxes in the United States. "Who Pays? A Distributional Analysis of the Tax Systems in All 50 Statesconfirms that in Minnesota and the vast majority of other states, low- and middle-income families are paying a much larger percentage of their income in state and local taxes than are the wealthiest households.

The 2013 edition of "Who Pays" is based on 2010 income levels and tax amounts estimated byITEP’s microsimulation model, incorporating tax changes enacted through Jan. 2, 2013. Who Pays examines individual and corporate income taxes, sales and excise taxes, and property taxes in every state, with the incidence of each tax broken down into seven income groups:

  • The bottom 20% (income below $23,000)
  • The second 20% (income from $23,000 to $41,000)
  • The middle 20% (income from $41,000 to $62,000)
  • The fourth 20% (income from $62,000 to $96,000)
  • The next 15% (income from $96,000 to $182,000)
  • The next 4% (income from $182,000 to $433,000)
  • The top 1% (income over $433,000)

The findings in the "Who Pays" report excludes elderly taxpayers.*

Largely because it includes only major categories of taxes and excludes other smaller but still significant taxes — such as estate, insurance premium, and MinnesotaCare taxes—the effective tax rates† for Minnesota in the "Who Pays?" report are lower than the rates indicated in the more comprehensive 2011 Minnesota Tax Incidence Study‡ (MTIS). For example, the most recent MTIS shows a total Minnesota effective tax rate of 11.5 percent, compared to 9.2 percent in the 2013 "Who Pays?" report.

However, findings from both the 2013 "Who Pays?" and the 2011 MTIS indicate that middle income households have higher effective tax rates than upper income households. The graph below illustrates the effective tax rates for each of the seven income groups based on the most recent "Who Pays" report.

State and local taxes per dollar of income are 26 percent higher for middle-income taxpayers (defined as the middle 20%) than for the top one percent based on both the 2013 "Who Pays?" report and the 2011 MTIS. Thus, while "Who Pays?" and the MTIS use different data sources, they reach an identical conclusion: middle income families are subject to much higher effective tax rates than high income households.

The findings of the 2013 "Who Pays?" report bolster Gov. Dayton’s case for progressive reform of Minnesota’s tax system. High income households simply are not bearing their fair share of state and local taxes. The most efficient way to focus a tax increase on high income households is through a fourth tier income tax such as that proposed by Dayton; the Dayton income tax proposal would apply only to income in excess of $250,000 for married joint filers, $200,000 for heads of households, and $150,000 for single filers. Only the top two percent of households by income would be affected by the Dayton income tax proposal.

Nobel laureate Joseph Stiglitz and other leading economists further bolster the case or progressive tax reform. During a recession or fragile economic recovery, the sensible way to resolve a state budget deficit is through a tax increase focused on high income households. High income households tend to spend a smaller share of each dollar of disposable income than do middle income households and — of what they do spend — a smaller portion is spent locally. For these reasons, a tax increase focused on high income households does the least short-term damage to a state’s economy and is the best way to balance a state budget during hard times. The alternatives — cuts to direct public spending or tax increases directed toward low and moderate income households — would have a much more adverse impact on consumer demand and the state’s economy.

The data from the 2013 "Who Pays?" report provides further proof that high income households are not paying their fair share of state and local taxes. With another budget deficit on the horizon and a long list of underfunded public investments ranging from K-12 education to transportation, state policymakers can no longer afford to cut these wealthiest Minnesotans a sweetheart deal. It’s time for the legislature to make Governor Dayton’s progressive income tax proposal the law of the land.

*According to the Who Pays report, “Because so many states offer special consideration for elderly taxpayers, including elderly families in the Who Pays analysis would not give an accurate depiction of how the tax structure treats the majority of taxpayers.”

†As used in Who Pays and the Minnesota Tax Incidence Study and in this article, “effective tax rate” refers to state and local taxes as a percent of income. Effective tax rates can be presented for all taxpayers or for subcategories of taxpayers grouped by income. So as to be consistent with the information presented in the MTIS, the effective tax rates presented in this analysis are prior to factoring in the effects of federal deductions. The reasons for focusing on effective tax rates without adjusting for the effects of federal deductions are explained in chapter 4, section C of the 2011 MTIS.

‡The 2011 MTIS contains analysis of 2008 and preliminary 2013 tax and income data. The MTIS analysis cited in this article is based on the 2008 data and thus does not align precisely with data from the most recent Who Pays report, which is based on 2010 income data adjusted for tax changes enacted through January 2, 2013. The 2013 MTIS, scheduled to be released in March, will contain an analysis of 2010 and preliminary 2015 data.

Jeff Van Wychen is a Fellow and Director of Tax Policy & Analysis at Minnesota 2020. He served as a senior research analyst for Gov. Mark Dayton from January 2011 - December 2012. Minnesota 2020 is a nonpartisan, progressive think tank based in St. Paul. This article first appeared on the organization's website.

WANT TO ADD YOUR VOICE?

Write your reaction to this piece in Comments below. Or consider submitting your own Community Voices commentary; for information, email Susan Albright

Get MinnPost's top stories in your inbox

Related Tags:

Comments (17)

But the wealthiest 1-5% are

But the wealthiest 1-5% are avoiding taxes, so raising their taxes may not even affect them. Is this new budget proposal just blowing smoke at us or will the wealthy actually contribute more in taxes at the end of the day?

Please read the article, the

Please read the article, the top 5% pays 17.2% of all income taxes.

The study doesn't determine

what's fair or unfair, it merely reports findings. Fairness is a subjective term. A fair tax system could as easily be defined as one in which all paid the same effective tax rate, perhaps thorugh a system which applied a flat tax to income after deducting property taxes actually paid and scheduled sales tax, plus any sales tax paid on large purchases (e.g., autos). It may not be progressive, but it seems a good deal more equitable than the current state of affairs.

Fairness

James: Fairness is not necessarily subjective. If 2% of the population has more money than the bottom 40%, fairness says they must give up more of their income to support the state and all the things it provides--especially to wealthy people who use more of the state's resources--they outdo the cost of welfare and all the other things that conservatives yell about.
They should be willing to give up more for all the benefits they get (taken from another website): defense, for example, makes up 20% of the budget, but it benefits the rich more, because they have more to defend. It's the same principle as insurance: if you have a bigger house or a fancier car, you pay more to insure it. Social security payments, which make up another 20% of the budget, are dependent on income-- if you've put more into the system, you get higher payments when you retire.
Investments in the nation's infrastructure-- transportation, education, research & development, energy, police subsidies, the courts, etc.-- again are more useful the more you have. The interstates and airports benefit interstate commerce and people who can travel, not ghetto dwellers. Energy is used disproportionately by the rich and by industry.
Who uses the judiciary system more? The wealthy and their lawsuits and mergers and corporate actions. Every large corporation has a large staff of lawyers and they go to court much more than us middle class and lower-income people.
As for public education, businesses need well-educated people, and with technological advances, they need even better educated people. That costs money and the costs start in pre-kindergarten--although the gains are very high. Colleges and universities and technical institutes obviously produce the kinds of educated workers business needs.
Beyond all this, the federal budget is top-heavy with corporate welfare. Counting tax breaks and expenditures, corporations and the rich snuffle up over $400 billion a year-- compare that to the $1400 budget, or the $116 billion spent on programs for the poor.
As for a flat tax--that is so unfair as to be not worth consideration--although the wealthy like it. The hard step in figuring your tax bill is to compute your taxable income — roughly, the amount you earn, less the myriad exemptions, deductions and various other offsets described in the 3.4-million-word code of the Internal Revenue Service. You’d also have to calculate your adjusted gross income under a flat tax.
Also, a flat tax would reinforce the trends toward greater income inequality that have been seen over the last several decades. As documented by a recent Congressional Budget Office study, the top 1 percent of income recipients in the United States earned 275% more in 2007 than they did in 1979 (these rates are from a NYTimes article and the rate is even higher than this now-), adjusted for inflation, a period when the earnings of middle-income households grew by less than 40 %. A flat tax would increase inequality by substantially reducing rates on the most prosperous households, while increasing them on low- and middle-income households.
We may have a complex tax system and it should be revised (and Dayton's proposal overall is a good start) but a flat tax would be much worse.

Fairness?

"fairness says they must give up more of their income to support the state and all the things it provides--especially to wealthy people who use more of the state's resources--they outdo the cost of welfare and all the other things that conservatives yell about." Can you provide some examples of how and where the wealthy consume more of the state's resources. It looks to me like Health and Human Services (32%) and K-12 education (40.9%) consume 72.9% of the budget. Add in Public Safety (5.3%), State Govt at (2.7%), Higher Ed at (7.5%), and Debt Service (1.4%) and the total is ~90%. None of these areas seem to disproportionally favor the wealthy.

Top down

The upper 40% pays 73% of the taxes.

Not a suprise at all

The poor and middle income folks do not write the laws, so of course the laws are unfairly slanted to favor the wealthy, who essentially write the laws. If the individuals are not technically "wealthy" themselves, their sponsors are and loyalty to sponsors is always rewarded. Just look at Norm Coleman, and to a lesser extent, Tim Pawlenty. If it were possible for the poor to run for office, we might start hearing a dfferent tune, but that is not likely to happen in a land where money is what gets you elected.

Progressive/Regressive Fair/Unfair

If we look historically at taxes in the United States, the more progressive taxation is (the more you make the more you pay) the better the growth and the less inequality we have, this is good for everyone. Over the last 30-40 years our tax system has gotten more and more regressive (the less you make the more you pay) and both growth and inequality have been negatively impacted. You can obtain historical incomes and income tax tables from the IRS website for all years that ilustrate this for the federal income tax portion, the information for other taxes is available from state and local sources.

Pulling the diversion trick, the top 40% pays 73%, proves the old adage "figures don't lie but liers can figure". Why should it not follow that if you are in a group (corporate or individual) that makes 98% percent of all the income you should pay 98% of all taxes. Neither argument tells the true story.

Flat taxes are the most regressive of taxes. You can usually tell who benefits from an idea if you look at who's pushing the idea. Steve Forbes comes to mind on this one and I doubt he would support something that did not, in some way, benefit himself.

Adding tax brackets to the top of the tables would do much more to create a more progressive tax system. It seems to me a shame that someone making 350K pays the same rate as someone making 350 million and so on. Looking at the system itself and reducing deductions that benefit a relatively small number of taxpayers could also do much to level the playing field.

When anti-tax folks speak they ignore the truth of the difference between the effective and marginal rate taxpayers actually pay. The higher the income the greater the difference in what the tax tables say and what you actually pay.

Taxes are the price we pay for a civilized society, it seems we have lost sight of that fact in the name of some imagined "freedom".

Flat Tax

The flat tax would be a great replacement for regressive taxes at the state level. Most of the federal taxes are progressive in nature, so yes, by that comparison, a flat tax is more regressive. At the state level though, a flat tax would be ideal since the state depends on so much regressive tax revenue; sales tax, cigarette tax, gas tax, etc... That would be a better system.

A flat tax would be the best system for the state.

And again we have numbers . . .

The upper 40% may pay 73% of the taxes, but that 40% is measuring number of taxpayers, not their taxable incomes. Given that income inequity has grown substantially even in the past decade, it is not unreasonable to assume that the upper 40% have much more than 73% of the income (before tax shelters, offshoring, legal-but-smelly maneuvers, etc.)

Various kinds of adjustments

I wonder what the actual number of dollars that 73% would represent when expressed as percentage of GNP? And similarly, up and down the ladder.

It's commonplace to express other numbers of concern on a percentage basis relative to GNP. Does anyone know if tax burdens relative to income levels (and their representation in the population - i.e. "the 1%") are expressed this way anywhere?

Irrational arguments

Family A, of 4 makes $35,000 a year and pays 10% in tax, end of year, take home is $35,000-3,500=$31,500.

Family B, of 4 makes $350,000 a year and pays 50% in tax, end of year, take home is $350,000-175,000=$175,000.

Please explain to me why @ $31.5K take home you are under taxed and at $175K take home 5.5X you are over taxed. Who would you rather be?

Rational argument

Look at your argument from a different perspective. Taxes are what pays for the various services that are provided by the Federal, State, and local governments. That being said, most of the services are consumed on a per capita basis. For example, poor or rich, you still have the same police, fire, roads, parks, schools.... For those services that aren't it may be reasonable to assume that the poorer folks are more likely to consume more services than the richer folks (i.e. welfare of the various sorts). So do you think the family that pays $175K is paying more or less than what they consume from government? Same question for the family paying $3.5K in taxes. While certainly a system in which every person/family paid for only what they consume would place an extraordinary burden on the poor the notion that the rich aren't paying their fair share is seemingly rather disingenuous.

Thank you

…to Ms. Heffernan and Mr. Wagner. Pat Berg asks an interesting and relevant question, but I’ve no idea where or how to find the answer. In the meantime, both Heffernan and Wagner make good points. As an old man whose income has never, ever, reached the "median" level for the community in which I lived, I've often, at least mentally, gone through an exercise like Wagner's.

Heffernan's point about our economic history and inequality is spot-on in terms of the historical record. Within my lifetime, federal income taxes on the genuinely wealthy have been as high as 90 percent. There was no mass exodus of the wealthy to foreign countries with few or no taxes. And, to get back to Wagner's exercise, the CEO of UnitedHealth was paid more than $48 million last year. Even if taxes take 90 percent, he still has $4.8 million to live on, and no basis for complaint.

Just because tax rates were

Just because tax rates were that high, doesn't mean much. The effective tax rates were still much, much lower in the 1950's, and revenues were about the same as they were during the 80's with the top marginal rate at 28%. Hauser's law of economics, it's been true since the 1950's, that the government will only bring in about 18.5% of GDP in revenues regardless of the marginal rates.

Tax rates don't really solve much in regards to revenue, what matters is economic activity. The only time in the history of our country we got over 20% of GDP in revenues was the late 90's. It had nothing to do with tax rates, but the internet boom. It was a change that comes along once in a lifetime, so many new startups, and so much economic activity happening that it brought revenues up. That's the best we've ever done, when that once in a lifetime opportunity happened.

Pretending like a 90% tax rate would do anything is a fantasy, and won't help, you'll just have people stop working. No one will work 40+ hours a week for 10 cents on the dollar, when if they're that wealthy they can make 5% in a mutual fund on their already accumulated wealth. Also, a 90% rate would never work anyways, with state tax, Medicare and SS, many would be over 100%. You'd just have no economic activity coming from a lot of wealth, which would hugely hurt revenues.

It was a recent report by the former budget analyst of President Obama that said the ideal marginal rate should be 33% (no deductions, just a flat rate). It would give the maximum revenue.

It's an arguement for a flat tax

This is a never ending debate until we implement a flat tax in all honesty. We have a huge number of regressive taxes that the state depends on, like the sales tax, cigarette and gas taxes, all state fees, etc... As sales rise and fall with the economy, these taxes go up and down, but it's always true that these will always impact the poor and middle class the most. Why not just get rid of all of these and have a flat tax of 9% across the board? It would be great for tourism, have people come from WI, ND or Iowa shopping here with no sales taxes, we'd have an influx of money coming into the state, more businesses open then. We can have a simpler tax code.

At the state level, with so many regressive forms of taxation, the answer shouldn't be making the income tax more progressive, we should just even them both out, simplify the tax code, and have a single type of tax. It would be a tax increase for the wealthiest, a tax cut for the middle. It would be simple, easy, more friendly to businesses who don't have to collect 10 different type of taxes at grocery stores or convenience stores, overall it's a better system.

Flawed assumptions

As is typical with all of these various studies on fairness of taxation. They all leave out the impact of Federal taxes. Because of the very progressive nature of the Federal income taxes this money is removed for most people before they ever take possession of it (withholding). As a result the denominator is not nearly as large for the higher incomes as is portrayed in these analyses. The net result is a much flatter effective tax rate than is indicated by these charts. Other significant flaws in these analyses is in the claimed regressive nature of real estate and personal property taxes. For example someone who buys less of a house than their gross income would indicate they could afford looks by this analysis to not be paying their fair share. The property assessment (and resale value) is based on the value of the property not the income of whoever owns it. The same can be said of personal property purchases such as vehicles.