Minnesota tax trends: As income taxes fall, property taxes pick up difference

If you’ve complained that your property taxes are rising while lawmakers in St. Paul hold the line on income taxes, you now have documentation in a new study [PDF] the Minnesota Department of Revenue released on Wednesday.

The income tax made up 35.2 percent of all the state and local taxes we Minnesotans paid collectively in 2008. That was down from 37.4 percent in 2006. It is on track to fall even further — to 35 percent in 2013.

So far so good.

But here’s what happened in the meantime: Property taxes made up a good share of the difference, increasing from 30.1 percent of our total tax bill in 2006 to 32.1 percent in 2008. They are projected to rise to 33.1 percent in 2013.

Political decision
Of course, the 2011 Minnesota Tax Incidence Study doesn’t tell you what to do if you don’t like this trend. That’s a political decision. You could march on city hall or the county government center — and maybe the school board, too — demanding a brake on local spending.

Or you could tell legislators in St. Paul to lift their lid on income taxes.

It might comfort you to note, though, that the overall tax rate we pay in Minnesota has dropped over recent years — from a high of 13 percent in 1994 to 11.5 percent in 2008. And the Revenue Department projects we will hold steady at the 2008 level through the next two years. (Because of technical adjustments, the 2008 rate may be slightly higher, but the general trend in the comparison still holds.)

One reason the overall tax burden has dropped is that state and local governments have reduced spending, not forcing taxpayers to fully compensate for cutbacks in the aid they get from the state.

Between 2000 and 2009, the inflation-adjusted revenues collected by Minnesota’s cities fell by 11 percent, according to a recent report from State Auditor Rebecca Otto. During the same time frame, inflation-adjusted city spending fell by 8 percent.

In that sense, the pressure to lower taxes is working.

Taxing value rather than income
Still, many Minnesotans argue that any shift from income taxes to property taxes is the wrong way to go because the property tax falls more heavily on low- and middle-income families. It is based on the value of a home rather than on the owner’s income. And a good share of the tax on apartment buildings is passed along to renters.

As the following table shows, Minnesota households with incomes higher than about $130,000 pay a higher effective income tax rate than everyone else, but a lower property tax rate on their homes.

Effective tax rate (2008)

Income range (in dollars) Personal income tax Homeowner property tax (before refund)
9,795 & under -1.2% 6.4%
9,796 – 16,278 -0.7% 2.6%
16,279 – 23,691 0.1% 2.5%
23,692 – 31,689 1.1% 2.7%
31,690 – 41,161 2.3% 2.6%
41,162 – 53,314 3.0% 2.8%
53,315 – 68,696 3.4% 2.7%
68,697 – 89,936 3.9%
2.7%
89,937 – 129,566 4.4% 2.4%
129,567 & over 5.4% 1.4%
Source: Minnesota Department of Revenue

Top pays lower rate but more dollars
Looking at income alone, the study says that taxpayers in the top 10 percent of households bore 38.5 percent of the total tax burden while earning 42 percent of the total income in the state. Meanwhile, those in the bottom 10 percent paid 2.4 percent of the total tax burden while earning 0.9 percent of the income.

That is one reason Gov. Mark Dayton and many other DFLers claim the top earners aren’t paying their fair share.

Seen another way, though, those top taxpayers contribute far beyond their ranks to the state’s overall tax take.

The top 10 percent accounted for 56 percent of the individual income tax collected while the bottom 10 percent paid no income tax. Hence the GOP arguments that those people should not be driven from the state by higher taxes.

Highlights
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.

Here are some other tidbits from the study:

• The consumption tax (chiefly the sales tax) grew slightly as a share of state revenue between 2006 and 2008, from 32.5 percent to 32.7 percent. Thanks to the tough economy, though, that is expected to fall substantially (to 31.8 percent) in 2013.

• The business tax share of total tax revenue fell from 32.1 percent in 2006 to 31.4 percent in 2008. With recovery, it is projected to rise to 32.3 percent in 2013.

• Incomes are expected to grow by only 14 percent between 2008 and 2013. Tax receipts and tax burdens on Minnesotans are also forecast to grow by 14 percent, so the overall effective tax rate is projected to remain unchanged at 11.5 percent.

• 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.

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.

Comments (13)

  1. Submitted by Greg Kapphahn on 03/17/2011 - 12:50 pm.

    The key issue is mentioned in this article. More and more taxes are being paid based on property values and/or purchases being made.

    Neither of these types of taxes have any real connection to the ability of the person being taxes to actually afford those taxes.

    ONLY the income tax reflects the ability of the person being taxed to actually afford to pay.

    The bottom line is that, over the past decade or so the people bearing the burden for needed government services in Minnesota have, more and more, been people who are LESS able to afford to pay for those needed services,…

    whereas the people who could MOST afford to pay, out of the massively excessive levels of their own incomes (there being NOTHING, no benefit to society nor the cosmos that justifies the astronomically high level of compensation being extracted from the rest of us in order to pay some of these individuals their salary/benefit packages)…

    those who can most afford to pay have been asked to contribute less and less, to their very great enrichment and to the impoverishment of the rest of our state’s citizens.

    At the same time, the promise that, with all that extra money in their pockets to invest, they would create jobs sufficient to cause our economy to expand to the benefit of us all has not turned out to be the case. Indeed, the opposite has proved true.

    It’s time to repeal the Ventura-era tax changes and take Minnesota back to what worked much better for the vast majority of our citizens.

    If there are those who will leave the state as the result, then they will prove by their actions that they were never good Minnesotans in the first place. We’ll do better without people such as them to extract excessive wealth from the rest of us while providing precious little benefit in return.

  2. Submitted by Linda on 03/17/2011 - 01:54 pm.

    Of course the top pay more dollars……….but it is easy to pay high dollars if you have high dollars left after…………if you don;t make very much more taxes kill because you are living month to month…….

    If I have $500,000 income I could afford to pay an extra $100,000 and still would have more than enough to live WELL. If I make $50,000 and have to pay $10,000 it might mean going without food.

    Those that have much enjoy much and should be more than willing to pay more………..I, and most others, would gladly trade places with them if they would want to switch.

    Again what is needed is a strong MIDDLE class,,,,,,,,not a few haves and alot of have nots………together everyone achieves more!!

    Over the past 30 years the top 5% have increased their assests and income significantly, while the other 95% have stayed the same. Not right folks!!

  3. Submitted by Kevin Wynn on 03/17/2011 - 04:14 pm.

    I wonder if there is a corresponding analysis of public services consumed as relates to income levels? Does the guy making $500,000/year consume $34,000 in public services? And what is the level of services (cost) for lower income taxpayers. It would seem like this should be part of the discussion when the progressivity of the tax system be debated.

  4. Submitted by Dennis Tester on 03/17/2011 - 05:37 pm.

    Republicans see taxation as paying for the costs of government and therefore the best taxation policy should be tax collection based on actual usage of those government services using fees.

    A tax on income is a tax on a man’s labor in that the more a man works, the more he earns and the more taxes he is required to pay. This is immoral and indefensible in a free society.

    A consumption tax is fair because it’s voluntary. You’re only taxed when you choose to buy something. You can limit your payment of a consumption tax by limiting your spending.

    A property tax is actually a tax on wealth in that it’s based on the value of the property. There are plenty of rich people who avoid paying income tax because they no longer earn a salary, but they’re still wealthy. If you really want to tax the rich you need a tax on wealth, not income.

    Democrats see taxation as a means of imposing social engineering. They’re not concerned that taxing a man’s labor is immoral and they’re not satisfied with the knowledge that the more he earns the more he pays in taxes. No, they want to further impose the punishment of his higher earnings by using a graduated tax rate system that unbelievably makes him pay at an even higher tax rate than those who earn less.

    If our concern was really funding government in the fairest possible way, we should eliminate the income tax, increase the consumption tax, impose a wealth tax, or increase the property tax (same thing).

  5. Submitted by andrew stephens on 03/17/2011 - 05:38 pm.

    The idea behind progressive taxes is to counteract some of the negative aspects of a market economy. As was seen in the late 19th century wealth begets more and more wealth. Without some protections of and distribution to the less well off economic expansion will benefit the top almost exclusively.

    Taxing the very wealthy to the benefit of the larger society is far more moral than the alternative, as proposed by Dennis Tester in an earlier thread, where the wealthy buy legal protection and the poor and working class become indebted to the government and the wealthy.

    I would also argue that having a stable society benefits the well off in the extreme. It protects their property rights and prevents the kind of instability that is not conducive to enterprise.

  6. Submitted by Charlie Quimby on 03/17/2011 - 06:53 pm.

    “One reason the overall tax burden has dropped is that state and local governments have reduced spending…”

    And yet you would not know if you listen to 98% of the news, discussion or legislative debate about the budget.

  7. Submitted by Charlie Quimby on 03/17/2011 - 07:09 pm.

    Kevin, there have been studies of business taxes that attempt to quantify whether businesses fairly pay for the benefits they derive. Whether they pay too much or to little hinges on how the value of an education system is allocated to business — that is, the value to employers of an educated workforce and top quality university-based research.

    Education is a big piece of state spending, so this valuation has a proportionately large influence on the resulting number.

    Extend the calculations to the courts system. It could be argued business benefits more from the ability to enforce contracts than we average Joes benefit. Same with police and fire services. Do the rich benefit more because they have higher assets being protected?

    Whatever assumptions go into the calculation, they will be controversial with the other side.

  8. Submitted by Dennis Tester on 03/17/2011 - 08:56 pm.

    Andrew Stevens makes my point that the left’s purpose of taxation is not to fund government as we’re all told, but to re-distribute wealth and to impose controls on certain people.

    Charlie Quimby tries to calculate who benefits more or less from various government services, which is the mode of thinking people fall into when the funding of government is not based on actual usage through fees, but through taxation methods and formulas devised by people who are more interested in taxation not as a funding mechanism but as an attempt to equalize a supposedly free society.

    And Charlie, the rich don’t benefit more from government protection because they have more assets being protected. They have something far more effective. They have private insurance.

  9. Submitted by Thomas Eckhardt on 03/17/2011 - 09:15 pm.

    “The top 10 percent accounted for 56 percent of the individual income tax collected”

    So what. We pay all kinds of taxes, many of which fall more heavily on the middle class and poor. As the report says, the rich pay an effective tax rate 2% lower than the middle class. Yet Republicans always want to shed tears for the top 10% who pay more of the income tax.

    “taxing a man’s labor is immoral.” Really? Since sales taxes and property taxes are paid from your income (labor) are they immoral too?

    “taxpayers in the top 10 percent of households bore 38.5 percent of the total tax burden while earning 42 percent of the total income…those in the bottom 10 percent paid 2.4 percent of the total tax burden while earning 0.9 percent of the income.” I won’t say it’s immoral, but it is class warfare, started by the rich.

  10. Submitted by Charlie Quimby on 03/17/2011 - 11:32 pm.

    Please, Dennis. I point out the futility of such calculations. The studies I cite were sponsored by businesses seeking to justify lower tax rates.

    To add to Andrew’s point: “Private” insurance works because of 1) a system that enforces contracts; 2) a regulatory system that ensures the guy taking your premium maintains enough reserves and will be around when you need a payout; 3) a pool of people who pay into the system but often don’t directly receive payouts. Sort of like taxes.

  11. Submitted by Dennis Tester on 03/18/2011 - 07:06 am.

    “taxing a man’s labor is immoral.” Really? Since sales taxes and property taxes are paid from your income (labor) are they immoral too?”

    No, because those taxes are based on a person’s wealth and consumption. Taxing a man’s labor is not only immoral, it’s counterproductive in a society that supposedly values hard work and self-reliance.

    “The purpose of government is to provide services and correct market imperfections.”

    There’s your problem right there. No one ever bothered to teach you that the role of government is to protect your constitutional rights. It’s not to give you stuff. You’re thinking of Cuba.

  12. Submitted by Paul Udstrand on 03/18/2011 - 02:18 pm.

    //The top 10 percent accounted for 56 percent of the individual income tax collected while the bottom 10 percent paid no income tax. Hence the GOP arguments that those people should not be driven from the state by higher taxes.

    It’s really important to remember this just math, not class warfare. Any percentage of a larger number will yield a greater number than the same percentage of a smaller number. This is a product of income disparity. As long as you have some people making thousands of times more than than others the numbers will shake out this way… it’s just math. We base taxes on percentages because it distributes the burden more fairly… there’s no other way to do it.

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

  13. Submitted by Paul Udstrand on 03/18/2011 - 02:55 pm.

    //A tax on income is a tax on a man’s labor in that the more a man works, the more he earns and the more taxes he is required to pay. This is immoral and indefensible in a free society.

    Yes Dennis, an $11 million dollar a year football player works sooooo much harder than $60,000 Nurse, or factory worker, or cop? Where do you people get this crap? Income is not based on the level of “work” done, if it were the richest people in the country would be restaurant workers and roofers, not health care executives who play golf twice a week… during the week. Or put another way, if income were based on work levels, it would be possible for anyone to make a million dollars a year if they just worked hard enough. You’re not going to make a million on a $20 an hour salary no matter how many hours you work, there simply aren’t enough hours in a year.

    And by the way, trickle down economics is no less of a social engineering scheme than any liberal plan. The difference is we know that republican economics don’t work.

    As for this idea that only Republicans want to pay for government services with taxes, it’s a distinction in search of a difference. The problem is you’re not measuring “government services” accurately. The fallacy is that the wealthy aren’t using government, but are paying for everyone elses services. The truth is that the wealthy get just as much or more out of government than anyone else. The Pohlads are the biggest welfare family in the state for instance, but their $20 million a year doesn’t show up on the tax incidence study as a government service expense. Business owners, exectuives, etc. who make more money off of commerce are actually benefiting more from the infrastructure and protections that government provides than their workers are. Our government provides impartial and relatively un-corrupt protection of contracts and patents that are worth trillions of dollars for the wealthy.

    I know you champions of the wealthy like to pretend that the rich are some kind of yeoman libertarians flying on a wire without a net but he fact is they are just as if not more dependent on government services and protections than anyone else. Just because they don’t live in subsidized housing or use food stamps doesn’t mean they don’t use government. And since they have 90% of the wealth, it’s only fitting that they pay for it.

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