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

The governor’s reasoning is that low- and middle-income families have suffered unfairly as the state cut support for cities and counties and property taxes rose in response.
• Dayton, GOP lawmakers schedule dueling budget ‘fly-arounds’

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.