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Study finds Minnesota's tax system still regressive

High-income Minnesotans continue to pay lower overall tax rates than everyone else, according to a new tax incidence study released today by the Minnesota Department of Revenue.

In 2008, lower- and middle-income households paid a substantially higher percentage of income in state and local taxes than high-income households, according to the study.

"Minnesota's tax system is more regressive than it was a decade ago," acting Revenue Commissioner Dan Salomone said in a statement about the study. "Despite a slight improvement over the last study, the system remains notably more regressive than the historical average since 1991."

Every two years, the Revenue Department examines the overall burden, or effective tax rate, of state and local taxes on households at different income levels. This year's study is based on tax year 2008 data and the November 2010 forecast.

A previous version of the study was the basis for Gov. Mark Dayton's claims that wealthier Minnesotans aren't paying their fair share of taxes. This update bolsters that claim, and Dayton is sure to cite it in arguments about closing the state's $5 billion budget gap. The counter argument from Republicans in the Legislature has been that many of those top earners are the state's job generators.


The overall state and local tax burden averaged 11.5 percent of income in 2008. The state's highest-income taxpayers — the 10 percent of households earning more than $130,000 — paid an effective tax rate of 10.3 percent. The remaining 90 percent of low- and middle-income households paid a substantially higher effective tax rate of 12.3 percent.


Overall State & Local taxes Minnesotans paid in 2008

Overall State & Local taxes Minnesotans paid in 2008
Source: Minnesota Department of Revenue

Further, the income gap between top earners and the rest of Minnesota workers has grown since 2001. And local taxes — mostly property taxes — have assumed a larger share of the overall mix of taxes.

Minnesota's income tax is progressive — increasing as income rises — but not progressive enough to outweigh the regressive nature of other major state and local taxes, the Revenue Department said in the study.

Property and consumption taxes are inherently regressive, even with state tax credits for eligible homeowners and renters. That's because these taxes are based on the value of purchases or property rather than a taxpayer's ability to pay.

Effective tax rates for 2006 and later years would have been 0.2 percentage points higher except for a methodological change that expanded the definition of income.
Source: Minnesota Department of Revenue
Effective tax rates for 2006 and later years would have been 0.2 percentage points higher except for a methodological change that expanded the definition of income.

In 2008, Minnesota's economy remained relatively strong, which increased the share of household income going to those in the upper brackets, noted Paul Wilson, the department's tax research director. Meanwhile a smaller share went to the 80 percent of households in the middle and lower brackets.

This year's study, which includes projections for 2013, analyzes $23.8 billion — over 99 percent of all state and local taxes — collected from Minnesota households and businesses in 2008.

A copy of the study is available here. [PDF]

Sharon Schmickle writes about national and foreign affairs and science. She can be reached at sschmickle [at] minnpost [dot] com.

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Comments (28)

How about we just return to the good old days when Minnesota was demonstrably more prosperous and better-functioning?

Repeal the Ventura-era, three-way tax compromise.

That, at least, would be a step in the right direction rather than what we're seeing now from the legislature which amounts to just seeking to invent policies which will re-create "The China Syndrome" in terms of our state's quality of life and the well being of all but our wealthiest citizens.

Using this study as the foundation, every progressive needs to keep asking GOP leaders and conservatives why it is fair for low and moderate income folks to pay 12% of their income in state and local taxes while upper income people pay 10%!

It would be nice if Don Shelby would hang out at the Capitol and ask that question of each GOP member! GO for it Don!

Don would be wasting his time, I can tell you what they'll say. First, the wealthy are paying for everyone elses services. Second, the more income we let them capture the better off our economy is. Both propositions are bogus but that hasn't stopped them from arguing this since the 50s.

It's a long haul but I address this issue in depth on my blog:

http://pudstrand.fatcow.com/blog/?p=8

The progressive income tax only makes sense if you lived in a Marxist ("From each according to his abilities, to each according to his needs.") society.

If we're going to insist on taxing a man's labor, rather than worry about "effective tax rates," why don't we worry about the cost of government and then use a flat tax rate, not unlike the sales tax, and apply it to all income earners to pay for it.

I forgot, wait for it.... the Republicans will now use the exact same study to point out that the wealthy put as much or more dollars than everyone else into the tax coffers. It's true, but only because of the tremendous income disparity. Again, check me blog.

I also explain why we have progressive rates. And no Dennis, it has nothing to do with Marxism.

"taxing a man's labor"

I think you're confusing "labor" with "income".

The progressive income tax makes perfectly good sense if the goal of taxation is to raise revenue with which to provide services to the state’s citizens. A flat income tax operates the same way as a sales tax. It’s regressive, and its effect is to tax those of modest income at a higher rate than those who are wealthy.

A progressive income tax has little to do with someone’s labor, or even the value of that labor to the society – a Hispanic gardener making $22,000 a year labors at least as hard as a corporate executive who makes 10 times that amount. A progressive tax is based on someone’s ability to pay. Those with higher incomes are obviously better able to pay taxes than those with lower incomes, and to do so without suffering significant consequences to their standard of living. I should add that those with higher incomes receive benefits from the society that are paid for, in part, by those with far lower incomes, so their affluence is, to a degree, subsidized by the poor.

It’s worth pointing out, as well, that we’re not talking about tripling the effective tax rate for the wealthy, whose well-being is apparently one of Mr. Tester’s primary concerns. The study merely points out that – to pay at the same rate as the 90 percent of us who aren’t making $130,000 per year per household – the effective tax burden for the affluent would need to increase by 2 percent.

Factoring in the increase in property taxes on a home whose value has declined by 25 percent in 2 years, my effective tax rate went up quite a bit more than 2 percent this year. If I can stand it, the households whose interests Mr. Tester is guarding should be able to stand it, as well, and with more left over.

Dennis,

C'mon... Marxist?

Could it be that a progressive income tax is precisely so that the overall tax burden is shared fairly (i.e., eliminating that gap in percentage of income paid into the public coffers)?

I agree that government spending needs to be controlled. But that is not the only issue; we need to be purposeful in not only how we, as a society, spend money, but also in how we share the burden.

Those who generate the most income benefit a whole lot more from our government and society--and note that I am NOT saying that they did not earn it--than those at the bottom of the pile. Don't agree? Why don't you leave your American infrastructure, courts, banking and financial systems, and military behind and go live in a low tax haven like say, sub-saharan Africa, and see how that works out.

Funny, but guys like Dennis love to make sure we know that the "Rich" like Dayton are Trust Fund Babies. Yet, when it comes to raising taxes, suddenly there's a conversion and the wealthy got that way through "Labor".

It would be comical if it weren't for the fact it made me puke on my shoes.

Progressive taxes simply illustrate a basic rule of economics... you have to go where the money is, you can't get it from where it isn't... unless you're a Republican of course.

Talk about a slated article....you are figuring in Property and Sales Taxes....those are discretionary and should not be brought in to the discussion. Stack it up as Income vs income....we all know sales taxes are and what we spend on what is our choice. Stop the left leaning bs, report the facts black and white tax for tax......

RE: #4's comment on a flat tax:

If we adopted a flat tax rate, regardless of what else you might say about it, at least then the rich man could look the working stiff in the eye and for the first time in a long time, say: "I paid my fair share, just like you."

"A progressive tax is based on someone’s ability to pay."

Name another financial transaction in this society where that is the calculation.

If I bought ten loaves of bread, I'd pay ten times the amount that you did if you bought just one. If I made ten times the money you did, I'd pay ten times the taxes as you do with a flat tax.

Why should the price of government be determined any differently than the price of a loaf of bread?

First Steve Larson this is a tax incidence study it studies all taxes, it always has. To say this is deceptive is about 20 years too late. The purpose of the study is to determine how the distribution of the costs of government fall on all of the citizens.

The question is should the folks in the top 10% of Minnesotans pay less that the other 90% of Minnesotans. I think we can pretty much agree that that is not fair by any standard.

Whether we tax equally, or based on ability to pay (progressively) is another issue. One could argue that the more that you make the more that you have benefited from state investments and you should be willing to contribute more.

"One could argue that the more that you make the more that you have benefited from state investments and you should be willing to contribute more."

The more that I make, the more I do contribute whether the tax is calculated with a graduated rate or not. According to my calculator, 10% of $150,000 is ten times greater than 10% of $15,000.

And the notion that the more a person makes somehow correlates to how much he's benefitted from government services is laughable. The vast majority of the users of the police, fire, emergency medical, the courts, public defenders, the prison system and the government schools are the poor and working class. Shouldn't they at least pay something for those services?

To make me pay a higher rate in addition to already paying more in actual dollars for access to the same government services is probably a violation of the equal protection clause.

"In 2008, lower- and middle-income households paid a substantially higher percentage of income in state and local taxes than high-income households, according to the study."

If you get a 2% raise this year, will you come home and tell your spouse that you got a substantial raise? Is a 2% rise in your property tax bill substantial?

"Minnesota's income tax is progressive — increasing as income rises — but not progressive enough to outweigh the regressive nature of other major state and local taxes, the Revenue Department said in the study."

Sounds like the problem is with the tax system, not the taxpayers. What if we just reduce the income tax on the poor and middle class? The lesser amount paid by the lower two classes won't amount to much and everyone can quit their whining.

MOST financial transactions in this society, Mr. Tester, are based on someone’s ability to pay. Were that not the case, we could all afford those 4,000 square-foot lakefront “cabins,” drive the new big, black Mercedes SUV to them, climb into our 60-foot yachts to cruise the lake, etc., etc., ad nauseum. Ability to pay determines much of how one lives in this society, and in most others.

As Jody Rooney suggests, the issue is whether the wealthy should pay taxes at a lower rate than the other 90 percent of the population. I certainly understand your not wanting to carry your share of the burden of providing services to the state as a whole – it’s a somewhat perverted view of citizenship, though that’s a different issue for another time – but not wanting to pay your fair share doesn’t trump the fact that government, no matter what size it is, or who’s running it, needs revenue to provide services to the public, including you. Why should the wealthy pay proportionally less for their services than the poor, or the middle class, pay for theirs?

The loaf of bread analogy is sophistry.

Steve L (#12). Property and sales taxes are "voluntary?" Maybe you didn't think that through.

Do you mean that a low-income renter could live on the street instead of "voluntarily" renting an apartment on which s/he has to pay property tax (20% or more of his/her rent)? And perhaps those same low-income renters could avoid "voluntary" sales taxes by refusing to buy toothpaste or bath soap or other essentials.

As I see it, the only "voluntary" tax is the cost of lottery tickets that offer the almost-always false hope of a big win.

During Pawlenty's loooong eight years, his tax cuts for the wealthy cost the state $8 billion dollars. Since many of them (not all, by any means) did NOT invest in job-creating businesses, the proposed solution from the Right in the legislature is to continue the practice of continuing the tax cuts so they can not create even more jobs.

Ray, the transactions you describe are based on a set price. Everyone pays the same for those items. If they were based on "ability to pay," then the price of the lakefront cabin, black Mercedes SUV and 60-foot yacht would be different depending on how much you could afford.

But they're not. We all pay the same price for those items, just as we should all pay the same price for government services.

What you're asking for is for me to subsidize your government services out of the belief that I can afford to pay for them easier than you can. Well guess what? I can afford to pay for a loaf of bread or a gallon of gas, since you don't like bread, easier than you can and probably even an SUV but the government isn't making me subsidize you for those items. So what makes government services different?

Here's the difference - the progressive income tax is the second plank in the Manifesto and the Left is not going to give that up without a fight regardless of how inherently unfair progressive tax rates are in an otherwise free society.

Dennis, your points are all flawless. Unfortunately, they fall upon the deaf ears of the liberal left. Pure logic has no place in this discussion. Only age old failed redistribution of wealth rhetoric.

Btw - apparently, I'm "affluent" because I make slightly more than 130k. But I don't have "4,000 square-foot lakefront “cabins,” drive the new big, black Mercedes SUV to them, climb into our 60-foot yachts to cruise the lake, etc., etc., ad nauseum."

I live modestly; drive a 10 year old Jeep, and shop at Cub Foods. I like the Cub brand mac and cheese.. I also put 10% in my 401K so I won't have to rely on the Government later on.

It's not surprising that our budget has gotten so screwed up despite a state GDP over $250 billion a year. That's right, we're producing $250 billion dollars worth of economic activity a year, and we're pretending we're broke, and can't possibly pay off a $5 billion dollar debt. Why? Well for one thing, far too many of our people are economically illiterate.

Dennis, your attempt to distinguish voluntary and involuntary taxes is a beyond weak. If you want to pay less income taxes, you can always make less money. And no one put a gun to your head made you get a job in the first place... you always have a choice. This business of pretending that a large percentage of government revenue doesn't exist, and shouldn't be counted, may well explain the Republican inability to balance a budget. I mean what's the point of figuring out how much government costs or where the money comes from? I guess that's just a liberal trick eh.

Regarding progressive tax rates, it's no surprise that a citizenry so clueless regarding the basic nuts and bolts of our government should be so incapable of financing it. The need for progressive tax rates arises from the tremendous disparity of incomes. We have people who work full time and still live at or below the poverty line. So if you had a flat tax for everyone it would level the playing field, it would tilt it by driving people on the margins either into poverty, or deeper into poverty. Let's say for instance it costs $15,000 a year to live in a place. Now let's say you have a flat tax of 10% on all income. If you have a person who makes $15,000 a year, the income tax of $1,500 will drive them below the poverty level. No such fate awaits someone making $150,000 a year, or even $35,000 a year. If no one anywhere had an income below $25,000 a year we could collect our %10 and no harm would be done. But we know that's not the case. This is why we have progressive tax rates.

No you can argue that it's appropriate and fair to inflict poverty on some people while barely denting the income of much wealthier people if you want... good luck with that.

Some people seem to live under the illusion that the wealthy are paying for everyone elses government, a government that they don't use. This is fantasy pretending to be tax policy. The wealthy aren't paying for everyone elses services, they are paying for their own services as well. You may wonder why the US makes $14 trillion dollars a year (twice as much as the next largest economy), and Somalia has to rely on piracy. It's because the US has a government, without that government the wealthy in this country wouldn't exist. Try enforcing a patent without a government Dennis.

When you have a regressive tax system you end up with a system where the poor and the middle class are paying for a government primarily for the wealthy, especially if your cutting basic services while doing it. You can play it that way if you want... but I remind you- there are more of us than there are more us than there are you.

Paul,

"Dennis, your attempt to distinguish voluntary and involuntary taxes is a beyond weak. If you want to pay less income taxes, you can always make less money. And no one put a gun to your head made you get a job in the first place... you always have a choice."

Right - and a lot of folks have made this choice. Why work when you can leach off the system? Why be productive? Let the motivated individuals carry the weight.

"but I remind you- there are more of us than there are more us than there are you. "

That's the most profound thing I've ever heard...

//Right - and a lot of folks have made this choice. Why work when you can leach off the system? Why be productive? Let the motivated individuals carry the weight.

Remember, the Republican agenda is to erase the 20th century. That means regressive tax policy, Gilded Age wealth disparity, no social security payment, no unemployment, no public schools, no public transportation, no public health care, roll back voting rights, etc.

Tim, you can join the ranks of the unemployed and live the dream any to want man.

Paul,

The republican agenda is personal responsibilty. I will never rely on SS. I am employed due to an incredibly strong work ethic and an education I worked my a$$ of to pay for. I don't use public schools, public transportation, or public health care, nor would I want to.

And what's up with rolling back voting rights? What republican has ever endorsed that??

That doesn't mean I don't believe in welfare for those hard working citizens who can't make ends meet, and are actively trying to better their situation.

But quitting your job to pay less taxes, as you suggest to Dennis, is inane. I understand you are just making a point, but you also validate the argument against progressive taxation: the harder you work; the more successfull you are, the more you are punished by the tax code. Fact is, the top 2% of wage earners already pay 90% of taxes collected. We want to incentivise our brightest citizens, not punish them. My rich CEO's firm supports 100's of thousands of hard working people. And she deserves it.

Tim,

While it may be true that if you repeat a fallacy often enough, people will believe it, repeating a fallacy doesn't actually make it true. You can keep claiming the wealthy are being punished but the facts are they are paying a lower percentage of the much larger incomes than anyone else, and what part of the fact that they are wealthy is it you're not getting?

As for Republican personal responsibility, that's why not a single member of the Bush cabinet ever resigned after the largest fail in American history right? That's why Pawlenty had always taken full responsibility for 8 years of budget deficits right?

The current push for voter ID is little more than a veiled attempt to re-institute a poll tax. Republican efforts to limit voter eligibility and turnout are well documented. Historical Republican opposition to expanded voting rights is also a matter of historical record.

Oh, and Tim, if you work for a company with hundreds of thousands of employees, you work for a company that's either getting government contracts, or millions of dollars worth of government subsidies in variety of forms.

I'll wager you do indeed have a strong work ethic. In fact I'll wager you work ethic is much stronger than your CEO's. Which one of you is getting the CEO salary and retirement package?

Paul,

I'm not sure what you mean by "expanded voting rights". Per current law, if you a legal citizen of the US, you can vote. What more do you want?