Could Dayton tax plan generate $4 billion extra in biennium? Revenue department estimate differs

One of the planks in the gubernatorial campaign of former U.S. Sen. Mark Dayton is that the state could raise nearly $4 billion more every two years if the rich were taxed at the same rate as the rest of us.

In Albert Lea on Monday, he said the state could raise that amount by making “the wealthiest 10 percent pay the same in income taxes as everyone else.”

Is that an accurate estimate?

I asked the state revenue department for its opinion and folks there seem to conclude that the estimate is high, given the revenue drop from the recession. But the Dayton camp then elaborated on their calculations.

The revenue staff took a look at 2006 numbers, which are apparently the latest available for analysis, and came up with a lower number in potential added revenue than $4 billion. And they also caution that an estimate based on 2006 would be significantly higher than likely revenue since the economic downturn.

The brief — and technical — analysis from the Revenue Department:

Dayton’s numbers were derived by his staff from the latest DOR Tax Incidence Study. The total ($3.8 billion, I believe?) does not come directly from us — and apparently was derived in a different manner, using the tax as a percent of income for those in the 5th decile rather than the average for all in the bottom 90%.

The Tax Incidence Study tables show the following:

1. In calendar year 2006, the combined state and local tax burden on the top 10% of Minnesota households was estimated to be 10.0% of their income.
2. In calendar year 2006, the combined state and local tax burden on the other 90% of Minnesota households was estimated to be 12.1% of their income.
3. If in calendar year 2006 the combined state and local tax burden on the top 1% of Minnesota households had been 12.1% rather than 10.0%, the additional burden would have totaled $1.48 billion. If multiplied by 2 for a biennium-like total, the additional burden over two years would have been roughly $2.96 billion.

The Tax Incidence Study also projected taxes five years forward from the 2006 data. Those projections are quite dated, being based on a forecast that preceded our latest economic downturn. Nevertheless, if you just take those estimates for calendar year 2011, the additional burden on the top 10% of households if their burden was the same share of their income as the other 90% (estimated at 10.1%) rather than 12.3% estimated for the top 10%, the projected added burden in calendar year 2011 would have been $1.71 billion. Multiplied by 2 for a biennium-like comparison, the total would be $3.42 billion. However, these projections to calendar year 2011 are, as noted above, based on an old forecast that predated the current (recent?) recession.

The Dayton camp then elaborated on its calculations, with this email from Brian Klaas, Dayton’s policy director / deputy campaign manager:

The major difference in the numbers comes from the fact that we include the Health Impact Fee as part of our calculations. As you may know, the Health Impact Fee is a cigarette tax by another name, simply titled as a “fee” so that Governor Pawlenty could sign it into law and break the gridlock at the end of the 2005 Session. The fee, which is a 75 cent tax per pack of cigarettes, increased the regressivity of Minnesota’s tax code because it hits lower income earners the hardest. The numbers cited by the Department of Revenue do not take that added regressivity into account, keeping the “fee” separate from tax incidence.

If you take the Health Impact Fee into account, the average amount paid by the bottom 90% is 12.5%, not 12.3%. The top 10% is essentially unaffected by the Health Impact Fee (after all, 75 cents per pack of cigarettes for households who make, on average $310,000 a year, is insignificant).

So that’s the baseline: the bottom 90% pay 12.5% of their incomes in state and local taxes. The top 10% pay about 10.1% of their incomes in state and local taxes. If they paid the same amount, it’s a difference of 2.4% (12.5 – 10.1 is 2.4). 2.4% of the total income of the top 10% ($79.7 billion per year) is $1.91 billion. For a two year budget cycle, or biennium, $1.91 billion a year would produce $3.82 billion per biennium.

Those numbers are projections for 2011. As the Department of Revenue points out, the most recent tax incidence study is not based on the most recent forecast. That’s because forecasts come out frequently, but a comprehensive analysis of Minnesota’s tax incidence is produced every two years. Our numbers are based upon the most recent tax incidence study, which is the most accurate study available. When a new one comes out, we’ll use the adjusted numbers; but for now, we’re basing our analysis on the Department of Revenue’s own calculations.

Now, Mark says nearly $4 billion. 3.82 is nearly 4, and moreover, 2011 projections are being used to discuss the budget gap for the 2012-13 biennium, which the next Governor will face. Inflation will likely expand the $3.8 figure and push it close to, or beyond $4 billion.

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Comments (3)

  1. Submitted by Steve Titterud on 02/18/2010 - 12:46 pm.

    Let’s take WHATEVER additional revenue is produced by making the wealthiest 10% pay their fair share of taxes!

  2. Submitted by Paul Brandon on 02/18/2010 - 01:34 pm.

    And of course in a supposedly progressive tax system (income tax rates increase as income goes up) one would expect the rich to pay a _higher_ percentage of their total income in taxes (after all, the marginal rate on their top income IS higher under current tax law).
    So, if we up the take on their income to 15%, we’d nearly double the revenue produced.
    Dayton’s proposal is actually pretty conservative!

  3. Submitted by Herbert Davis on 02/20/2010 - 06:35 am.

    That is precisely why we need a progressive income tax! Dayton didn’t propose true progressivity!

    Google the “history of federal income tax rates” and you will find that a truly PROGRESSIVE income tax would generate income and make the tendency to go after every last dollar of profit somewhat less attractive.

    Profitable companies often leave the USA to go after that “last dime” because there is no incentive or disincentive…why stay in America when you can make more by moving out?

    Progressive income taxes solved the problems of the Great Depression and made the GI Bill and middle class lifestyle possible. How does anyone think we built all the colleges and the infrastructure now decaying?

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