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
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.
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.