Dayton’s budget offers a chance to explore the rationale for collecting more taxes

The proposed budget Gov. Mark Dayton released today would close roughly two-thirds of the state’s $6.2 billion shortfall by raising revenues — primarily through taxes on top income earners.

You, like Republicans in the Legislature, may be adamantly opposed to tax increases. Period.

But the responses to MinnPost’s budget puzzle suggest that many Minnesotans are not drawing lines in concrete on any ideas for resolving the state’s fiscal mess.

So, let’s assume that a good share of Minnesotans want serious analysis of all the possible options. The governor’s budget offers our best chance to explore the rationale for collecting more taxes. So here goes.

Dayton’s proposal
The bulk of Dayton’s proposal involves tax hikes on top income earners and high-value homes.

He would add a fourth tier to the income tax code, imposing a 10.95 percent tax on joint filers for taxable income over $150,000 (about $200,000 in income before federal deductions). This would bring an extra $1.89 billion into state coffers for the years 2012 and 2013.

Gov. Mark Dayton
MinnPost/James Nord
Gov. Mark Dayton

On top of that, Dayton would add a temporary three-year surcharge for all filers making more than $500,000 a year in taxable income. That would net the state some $918 million for the next two fiscal years.

Finally, the governor would charge a state property tax on any portion of a home value over $1 million. That would raise another $84 million.

(His proposal also calls for closing corporate loopholes, health care surcharges and other revenue raisers. But taxes on the wealthy are the core of his plan.)

Dayton says 95 percent of Minnesota filers would see no tax increase.

Married joint filers with two children, an adjusted gross income of $500,000 and a home worth $1.5 million would pay an extra 1.9 percent. If that couple’s adjusted gross income doubled to $1 million and the home value jumped to $2 million, the increase would be 3.1 percent.

Who pays what Minnesota tax?
While the income tax would be Dayton’s biggest revenue gainer, he talks about the overall tax burden on Minnesota families.

Indeed, his rationale for proposing to raise income taxes is that the poor and middle-income families have suffered unfairly as the state cut support for cities and counties and property taxes rose in response.

So let’s look at the whole tax picture, using data from the most recent Minnesota Tax Incidence Study [PDF] at the Minnesota Department of Revenue.

A tax seesaw
We start on the income-tax end.

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.

If you consider all the state and local taxes paid in Minnesota, the balance tips the other way. Those top earners had a lower effective tax rate than households making less than $9,782 for the 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.

And the overall rates near the top have fallen in recent years while the rate paid by some middle-income categories grew.

What it comes down to is this: The bulk of the taxes in the state were paid by middle-income households, earning between $23,000 and $86,000 a year.

Effective tax rates in Minnesota, considering state and local taxes

Effective tax rates in Minnesota, considering state and local taxes
Source: Minnesota Department of Revenue

Blame property and sales taxes
The main reason Minnesota’s overall tax burden increasingly is regressive is that those at the bottom pay 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.

And in recent years, while officials in St. Paul held the lid on income taxes, the sales and property taxes grew as a share of all the taxes collected.

Source: Minnesota House of Representatives, Fiscal Analysis Dept.

Blame the income gap too
Another reason the spread has widened in recent years is that the income gap has widened too. By far, income is more concentrated at the top than it was 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.

Big government and small business
Of course there are other reasons to oppose income tax increases, beginning with the belief held by many that government has grown too big, and that it needs the same fiscal discipline the economy imposes on families and companies.

Another commonly stated reason is that higher taxes on top earners would scare away small-business owners and therefore drain jobs from the state. This MinnPost report offers analysis of that issue.  

Sharon Schmickle covers economics, international affairs and other issues. She can be reached at sschmickle [at] MinnPost [dot] com.

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Comments (8)

  1. Submitted by Ralf Wyman on 02/15/2011 - 04:35 pm.

    “You, like Republicans in the Legislature, may be adamantly opposed to tax increases. Period.”

    Please do not presume to speak for me and my position on taxes. And I’m pretty sure the polling last fall showed a clear national preference for modestly increasing taxes on high-income folks.

    To put this in kitchen table language, as pols so often like to: Sitting aound the table, seeing a massive gap between household income and expenses, most families will BOTH cut expenses and find ways to earn more. Maybe BettySue starts babysitting. Dad finds a way to get a few hours a week of overtime. Mom takes on a 10hr/week part time job.

    We Minnesotans need to both cut spending and bring in more income. That is common sense, real-family thinking.

    Calling all tax increases “job killing” is cute, but it’s not real and it’s not true. There is plenty of evidence that modest increases in taxes in fact increase state revenue without hurting the economy. Cutting education will be the real, long term, job killing legacy of the current GOP!

  2. Submitted by Nate Arthur on 02/15/2011 - 04:56 pm.

    I’m shocked at the disparity of the tax rates for the top earners in the State and bottom earners. We should be ashamed of our government’s tax rates for the poor. Please get real and even out the tax rates. Increase taxes on the top earners and WTF? Reduce the taxes on the bottom!

  3. Submitted by Eric Ferguson on 02/15/2011 - 05:06 pm.

    One simple fact should knock aside all the nonsense about “job creators” and the rich paying a big overall portion of taxes: the rich have almost all the money. There just isn’t much to be taxed further down. The easy budget cuts are long gone. The shifts can’t go on indefinitely, not when schools are barely functioning as is. Taxes have to go up because it’s the one thing we haven’t tried, and they have to rise at the top because that’s where the money is. Anyone who would be affected should admit the state has done very well by them. The bill is due.

  4. Submitted by Ray Schoch on 02/15/2011 - 06:34 pm.

    Good stuff, Sharon, and thanks for including the link to that October report, which adds another dimension.

    Nothing in this arena is as starkly either-or as the political sides would have us believe, but I come down on the side of the idea that there’s a rational (and moral) justification for progressive income tax rates, and beyond that justification, that it’s eminently fair for the wealthy to pay more of their income in taxes than those whose incomes are more modest.

    Only an ideologue would argue that the state’s wealthiest people should be exempt from higher taxes “because they create jobs.” First, as the article you referenced makes reasonably clear, there’s no firm link between level of income and creation of jobs. Second, and equally important, I think, is that the whole business of “creating jobs” is basically a smokescreen. Government requires money to operate – to deliver the services that the people of Minnesota have said they want delivered. At issue is not jobs, it’s how to pay for those services, and there’s no rational basis for arguing that the wealthy should get a discount for the services they receive, while those less wealthy should pay full fare.

    Especially since poll after poll shows the general public to be sympathetic to asking for greater contributions from those at the top of the income bracket, it’s amusing, in a way that almost goes beyond cynical, for Republicans to oppose raising taxes on less than 5 percent of the state’s population as if they’re involved in some populist campaign for social and economic justice.

    Closer to the truth is that current Republicans and Tea Partiers are prime examples of the Minnesota version of Thomas Frank’s iconic book. “What’s the Matter with Minnesota?” would be the local title, and in it, just as in the Kansas original, people fed a relentless diet of half-truths and propaganda repeatedly vote against their own – and their state’s – best interests, and instead pad the bank accounts of the wealthy.

    That doesn’t make every tax increase a good idea, nor does it remove the topic of more efficient delivery of government services – or the elimination of some desirable, but nonessential, government services – from the table. Far from it, but Dayton has at least started the conversation in a rational manner. It remains to be seen whether the political opposition will respond rationally as well, or instead fall back on the “government is evil” hysteria that’s been the right wing stock in trade for the past couple of decades.

  5. Submitted by Frankie Barbella on 02/15/2011 - 07:40 pm.

    I would rather see more budget reductions in medicaid, Minn-care and HHS.

    Progressive income and property tax is just plain immoral. Stated differently, it is not equitable for any entity to charge one group of individuals more for the same services consumed by all.

    Your benevolence, should not come at the expense of product of my labor, period!

  6. Submitted by Frankie Barbella on 02/15/2011 - 07:45 pm.

    When displaying statistics about the “income gap” please provide age demographics with it. You could also provide statistics showing income mobility. This pretend income gap is a false measurement of a false premise call inequity.

  7. Submitted by Thomas Eckhardt on 02/15/2011 - 11:24 pm.

    “it is not equitable for any entity to charge one group of individuals more for the same services consumed by all.”

    Then you’ll agree that it is not equitable for the poorest to pay a 22% rate while the richest pay 8.8%. Glad we’re on the same side.

  8. Submitted by Joel Shinder on 02/16/2011 - 12:59 pm.

    When Minnesotans pay Federal taxes they ask themselves, “How much of that money comes back to MN?”

    When a Minnesotan pays Minnesota taxes, don’t you think the taxpayer asks the corresponding question?

    Social benefits received by low-tax payers combine into a significantly higher percentage of that tax payer’s income than they are of a high-tax paying citizen’s income, no?

    On a cost-benefit analysis, how do Minnesota tax payers rank?

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