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Minnesota's overall tax burden is increasingly regressive

Before I leap into a thicket of tax facts, I'm going to expose my cynical side, the part of me that believes this: Facts don't matter. Perfectly sensible people will defend their positions on tax issues — even positions that run against their own best interests — because they subscribe to a certain political dogma, not because of the facts. 

"Baloney," says my idealistic side. That side has kept me digging for facts through three decades of working as a journalist. That side insists on believing that legions of thoughtful voters do weigh facts that are relevant to their choices. And they are not well served by journalists who let the facts get lost in the dust of the political horse race.

My idealistic side wins, as usual. So this article will kick off an occasional series about taxes, beginning with the question of whether wealthy Minnesotans get a break from paying their fair share.

Measuring everything we pay
For Minnesota taxpayers, the facts are not at all obscure, thanks to a project at the state Department of Revenue called the Minnesota Tax Incidence Study. [PDF]

Analysts who completed the most recent study, issued in 2009, didn't stop with state taxes. They did the extra work to include sums that households and businesses pay in local taxes, too — from your property tax bill to the extra sales tax you paid on a restaurant meal in Mankato, St. Cloud or downtown Minneapolis.

The upshot is that the study reflects 99 percent of all the state and local taxes we pay in Minnesota. Examples of the few items left out are some lodging taxes (many paid by travelers from other states) and aircraft registration taxes (many paid by companies located in other states).

You get the point. This is comprehensive analysis. Here's what it says:

The 10 percent of Minnesota households with incomes of $123,938 and higher paid by far the largest share of state income tax in 2006, the most recent year analyzed. This group of 244,887 households sent to St. Paul about 43 percent of all the income taxes paid for that year.

But the income tax doesn't tell the whole story.


Effective tax rates in Minnesota, considering state and local taxes

Source: Minnesota Department of Revenue

If you consider all the state and local taxes paid in Minnesota, the balance tips the other way. That top group took home 43 percent of the state's total income that year but paid 38.5 percent of all taxes.

Higher incomes, lower rates
As a whole, those top earners have a lower effective tax rate than households making less than $9,782 for the year.

And the bulk of the taxes in the state were paid by middle-income households, earning between $23,000 and $86,000 a year.

Look higher up the income ladder, and you see a wider gap. The effective rate for the top 5 percent of households, those earning $175,704 and higher, was 9.7 percent — compared with 12.4 percent for a family earning between $31,000 and $40,000.

For the top 1 percent, those earning $447,889 a year, the rate fell to 8.9 percent.

So when you hear politicians and their various cheerleaders talk about taxes, pay close attention to which tax stats they're slinging around. Minnesota's income tax is progressive, meaning those who earn more pay more.

But the overall tax burden is regressive. Those at the bottom are paying a far larger share of their incomes in sales taxes, the various taxes that businesses pass along to consumers and also property taxes paid either as homeowners or renters.

Spread widens
The spread in Minnesota's effective tax rates has changed dramatically over the past 20 years. In 1990, most households paid an effective rate between 11 percent and 12 percent, including those at the top. 

One reason the spread has widened with those at the top paying lower effective rates was that the income gap widened, too. Income was more concentrated in that top group than it had been 20 years ago.

Between 1988 and 1996, the top 5 percent of Minnesota households accounted for 26.7 percent of the income, said the revenue department's report. By 2006, that group claimed 32.2 percent of the income.

Much the same picture is projected for 2011 unless state law changes.

"A substantial portion of the increase in regressivity in 2006 and 2011 is likely the result of the unusually high share of income received by the richest Minnesotans," said the revenue department's report.

Paying the feds
Of course, Minnesotans send a hefty load of taxes to Washington, too.

The federal income tax is structured so that those who earn more are supposed to pay more. And lawmakers have loaded it with so many deductions and credits that about one in three middle-class filers end up paying no income taxes. You can read MinnPost's article on that subject here.

The overall federal system is progressive too, the Congressional Budget Office said in a 2009 report [PDF]. In addition to federal taxes, CBO counted payroll taxes, and excise taxes such as Washington's share of your gas tax and telephone tax.

In 2006, households in the bottom fifth of income paid 4.3 percent of their income in those four types of taxes, CBO said. Those in the middle group paid 14.2 percent and the highest group paid 25.8 percent. The top 1 percent of households earned 18.8 percent of income and paid 28.3 percent of taxes.

The exception to that overall rule comes with the payroll taxes — Social Security, Medicare and the like. Those taxes cost the bottom one-fifth of taxpayers 8.5 percent of their incomes. The highest one-fifth, on the other hand, paid 5.8 percent.

Payroll taxes are one reason people believe their income taxes are rising when, in fact, most filers pay less at both the state and federal levels than they did a decade ago.

Sharon Schmickle covers the economy, science, Greater Minnesota and other topics.

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Comments (19)

How is it that after all these years of "no new taxes" we end up with the rich paying a far lower percentage of the proceeds of their hourly work for the "common good" than the middle class, with the poor paying the highest percentage.

By design... By design...

We've been had, folks.

The people who've been promising us something for nothing, that fabled free (tax) lunch, have made off like bandits. The rest of us have had our lunch money stolen (and the money for every type of educational, societal, and physical infrastructure, as well) while we weren't paying attention to what was really happening.

Have we figured out yet that when someone promises us something that sounds too good to be true (like a prosperous, working, functional state without paying our fair share of taxes), it usually IS too good to be true.

I repeat: we've been had.

The question for me is... how many of us are so addicted to the snake oil now, that we're desperately waiting for the "good doctor" to arrive with his (or her) colorfully painted wagon, "medicine show" and pretty promises so we can buy more of that intoxicating elixir and use it to go back to happy land: in other words obliviously sink ourselves even deeper into "no new taxes" self destruction until this formerly hard-working, solid citizen of a state, is left half dressed, lying in the gutter, smelling bad, with the rest of the states around us looking the other way as they step over us and shake their heads?

State and local taxes are the fee we pay to live in a decent state. Minnesota is a decent state to live in - the best in the country until recently. I do wish we would talk more about the quality and value of the services we receive and not just the cost of these services.

Much of the credit for this change goes to our soon to be former Governor. There is no tax he does not like, but when I look closely I don't see him making any sacrafices in the state services he desires.

Anyhow, I'm looking forward to thanking Mr. Emmer for the improvements he has help make to our libraries. It's much easier to find books now, since there are fewer new books to crowd the shelves.

"Thicket of tax facts" seems an appropriate phrase. Still, it's interesting stuff – at least for some of us – and in an election year, it's going to seem especially relevant.

There's nothing wrong with progressive tax rates, but as the piece points out, those progressive rates for income taxes don't readily translate to other tax vehicles like sales and property taxes, license fees, etc. Those tend to be regressive, not just in Minnesota, but in other states, as well.

This is very good reporting on half of the story. The other half of the story is the benefit received from the lower income brackets from state subsidies. Can a person pay 25% of gross income to receive a benefit of 40% in MN? Yes, probably just in health insurance benefits, so you can't compare different brackets, because you would exclude a substantial portion of the gross tax benefits received from the lower income brackets.

This is the reason effective rate comparisons are a joke in a regressive tax model. The full benefit to the lower income brackets are excluded from the calculation of the actual tax burden.

The focus, I think, should always be on two questions: what do we want from the government and is that what we're getting.

I prefer to see the tax base broadened by expanding the sales tax and then make provisions for low income folks. At the same time we also need tax reform. We have a tax system that was not structured for today and beyond. It is a tax system that is nearly 50 years old.

One candidate for governor wants to raise the taxes on the wealthy. He goes as far as saying that he considers his proposal as better "justice" in the tax system.

But in the end, we need to focus on paying for what we get with minimum distortions, not on classes of people. If that means wealthier people pay more let's be clear that this is efficiency and not justice.

The misinterpretation of the tax incidence study findings continues unabated.

It is business taxation, not individual taxation, that is responsible for the downward slope of the incidence curve as incomes increase. Taken together, individual income taxes, individual sales taxes, and net residential property taxes result in a very progressive MN tax system with rates steadily increasing all the way up to the 9th decile. And the very top decile, while featuring a slight decline from the 9th decile, is still substantially higher than middle incomes households.

Only when you include business tax incidence which is highly regressive, do you create the appearance of significant “tax fairness” problems.

Vigorous public debate should be welcomed about the whether there is a need for more tax revenue and, if so, how additional revenues ought to be raised. But manufacturing a fairness crisis to influence this debate is disingenuous –especially when there is ZERO interest in addressing the primary cause of Minnesota tax system regressivity.

10 percent of Minnesota households with incomes of $123,938 and higher paid 43 percent of the state's bills.

Yeah, those bastards are getting away with murder.

I am going to start out by saying that I agree with the author that facts don't matter (to a lot of people).

Mr. Swift's comments betray this attitude. Tom, the appropriate question to ask is: "What percent of taxable wealth is held by the top ten percent?" If indeed they had less than 43% of the wealth this would be unfair.

Unfortunately for this sound-bite kinda argument the facts don't seem to bear it out. As you are no doubt aware, Mr. Swift, we have one of the greatest disparities between what those on the top have and what those on the bottom do. So much so that Mr. Gates has been able to "guilt" some of his fellow billionaires into giving half their money away!

If anyone - not Tom - actually is interested in facts, I'd highly recommend the post by Professor G. William Domhoff, who is in the Sociology Department at UC Santa Cruz.

http://bit.ly/cowVnu

Just to put thing in perspective, in 2000 - and I am sure it is a lot worse now, the situation was:

Country - wealth owned by top 10 percent

Switzerland 71.3%

United States 69.8%

Denmark 65.0%

France 61.0%

Sweden 58.6%

UK 56.0%

Canada 53.0%

Norway 50.5%

Germany 44.4%

Finland 42.3%

Any clue about why numbers like these imply that the numbers you sarcastically quoted might be MORE than fair, Tom?

Sharon, might you be able to find out what percentage of their income the wealthiest Minnesotans give each year to non-profits to provide services that tax-supported government services are not providing, or are providing inefficiently to the detriment of both those who need the services and those whose taxes pay for them?

Bea, do a google search. There are many studies out there on giving and income. As a percentage of income the poor give more to charity than the wealthy. I guess it makes sense, eh? You don't become wealthy giving money away.

Bill, I doubt that Tom understands what owning 69% of the wealth in this country actually means. What it means Tom, is that the top 10% or the people in the country own almost 70% of EVERYTHING in the country! It gets worse. Financially the top 10% own 93% of the wealth in this country. That means, stocks, bonds and cash. So its not shocking that they pay 43% of the taxes, it SHOCKING that they pay 43% or the taxes!

Sharon neglects to talk about the property tax. In my opinion it should be talked about more than our State and Federal Income Tax. It should be pointed out that our property tax system is PREDATORY. If onr does not have the income to pay all the property taxes, the local government can take your home to collect the taxes. The State has made provisionsto help the poor with property tax rbates. But that is not enough in many instances to avoid the confication. How can that be that one level of our government sees as wealthy while another level of our government sees us as poor. The property tax system is broken. Are there no people in Minnesot that can see this outrage? Of course there is a solution to all this where the local governments would get the same revenue stream while the taxpayers would be taxed fairly.And best of all the predatory nature would be removed and tha State would save billions of dollars in property tax relief payments.

From the article:
"A substantial portion of the increase in regressivity in 2006 and 2011 is likely the result of the unusually high share of income received by the richest Minnesotans," said the revenue department's report."

Now, if one earns $500,000 per year, she probably own a very nice house. It probably is worth somewhere in the high $100,000 range, say $750,000. (There are not that many million dollar homes in Minnesota.)

If, however, one earns $50,000 per year, he probably own a house worth $150,000. The tax on the more expensive home is, if in the same community, 5 times that of the less expensive home, but the owner of the more expensive home earns 10 times the other owner.

Similar considerations occur with sales and other taxes. The rich don't have to spend their money on things that are taxed to the same extent as others. They spend money on services, clothes and travel and other things that aren't taxed in Minnesota. And they save and invest money.

As long as a good portion of our tax burden is attributable to taxes other than the income tax, the rich will pay a smaller proportion of tax in Minnesota. The alternative is to tax the rich at such an income tax rate that there is a good chance many will leave Minnesota.

The article points that the federal income tax does hit the rich harder than the average individual. Therefore their total tax burden is probably higher than others. Maybe that's all we can expect.

This study is nothing but fishing for numbers until they prove your "fact". While taking into account "all taxes", what the study conveniently ignores is that many people bought more house than they can afford.

Well duh, you bought yourself a bigger house and now u owe more local and county taxes. That was a totally discretionary act on your part. Now blame the government.

Also is this study going to include the fact that upper incomes are going to be excluded from every kind of college aid. Why don't we add that up as taxes. Oh wait that would disprove the "fact" of this study.

//This is very good reporting on half of the story. The other half of the story is the benefit received from the lower income brackets from state subsidies.

This is one of the other tax myths frequently promoted by tax cutting magic planners. The idea that the wealthy don't benefit as much from government services as the poor do. To begin with, at 20 million dollars a year the Pohlad family is currently the greatest welfare recipient in the state. But beyond that the idea that the wealthy could be wealthy without the transportation infrastructure and court systems that enforce their contracts is ridiculous. Remember, the wealthy used to have to live behind castle walls and maintain private army's in order to keep themselves and their belongings safe.

Paul - I don't know if your familiar with fractions but when you decrease the denominator the effective percentage will increase. An example of this would be the exclusion of government payments from gross income when calculating effective tax rates. In Minnesota could just me more of my "tax magic" but in North Dakota it was first grade math.

Most of the regressivity is coming from property taxes, which this year are higher than income taxes for the first time in fifteen years. We haven't cut income taxes since Ventura, so it's mostly because our state no longer pays the local costs of education and teacher health care costs are skyrocketing.

If elected this year, I would fight for property tax relief and affordable health care.

The fundamental issue here is this: We've run out of other people's taxes to raise. We're going to raise yours - whoever you are.

//Paul - I don't know if your familiar with fractions but when you decrease the denominator the effective percentage will increase.

Joseph, I'll google these "fractions" you speak of. In the meantime maybe you explain how does this demonstrates that the wealthy benefit less form government expenditures than the poor?

We need to think about where the wealth is going in our society and who pays the bills. Increasingly, the wealth is concentrated at the top at an unprecedented rate (at least since the 18th century) but the taxes are proportionally heavier on the lower classes.

Somebody said that the top 10% only paid 43% of the taxes and "got away with murder" (I haven't fact-checked that number), but if the top 10% has earned, hypothetically, more than 43% of the wealth (which I think is probably true), shouldn't they pay at least an equivalent proportion of tax? In fact, I think the folks that are making the big bucks should give back more to our society, in a progressive manner--the more you make, the higher the percent of tax you pay. To whom do these people owe their success? (I sound like a Teddy Roosevelt progressive, and I mean to.) We've come a long way from Ike, Reagan, and Clinton, too.