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Every day is tax day somewhere in Minnesota

We call this tax day, but most of the taxes most of us pay do not come due in mid-April.

Internal Revenue Service building

Move over Tea Partiers and OccupyWallStreeters. Everyone wants to get in on the act on Tax Day. Restaurants are pitching free fries and other stress-easing foods. Politicians, as usual, will have plenty to say.

Even the staid Journal of the American Medical Association published a research letter saying that fatal car crashes jump by about 6 percent on the day of the IRS filing deadline. Whew-- death and taxes together!

Truth be told, though, most of the taxes most of us pay do not come due in mid-April. We face tax deadlines every time we pump gas, buy a beer, pay rent and perform a myriad of other routine activities.

In Minnesota, 69 cents of every dollar state and local governments collect next year will come from sources other than the individual income tax, according to estimates in the Department of Revenue’s latest Tax Incidence Study. State and local property taxes account for the biggest share of the burden, about 35 cents on the dollar. Another big-ticket item is the sales (or consumption) tax, about 30 cents.

State taxes: Where do you fit?

The political debate begins with the question of what’s fair in the distribution of the overall tax burden.

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Pull together every state and local tax Minnesotans pay and you clearly can see that the households with the highest incomes pay the lowest effective tax rates.

The top 1 percent of Minnesota households – those with incomes higher than $472,626 -- can expect to pay an effective rate of 9.7 percent in 2013, the study says. That compares with 12.1 percent for folks in households with incomes between $11,299 and $18,732.

The disparities are driven largely by sales taxes and property taxes. They fall harder on lower income earners. And Minnesota has tilted toward those taxes as it held the line over the past few years on income taxes.

Here’s the rub, though. The high earners shoulder by far the largest dollar-for-dollar burden. The 10 percent of Minnesota households with the highest incomes -- $142,666 and over – will pay 37.5 percent of the taxes next year. Meanwhile, the bottom 10 percent – incomes of $11,298 and under – will pay just 2.3 percent of the overall taxes.

No wonder the political debate seems to lead to nothing more than a big headache. One side points to disparities in the tax rate while the other side argues that top earners already pay the most.  

Effective Tax Rates in Minnesota

IncomePercent of Total Household IncomeInd Income TaxState Sales Tax TotalTotal Residential Local Property TaxesOtherTotal State and Local Taxes
$11,298 & under0.87%-1.6%10.4%10.2%11.5%30.5%
$11,299 - $18,7322.00%-0.8%5.2%3.8%3.9%12.1%
$18,733 - $26,7883.00%0.2%4.0%3.5%3.3%11.0%
$26,789 - $35,5614.12%1.3%3.4%3.7%3.2%11.6%
$35,562 - $46,0445.38%2.5%3.0%3.5%3.1%12.1%
$46,045 - $59,4375.38%3.1%2.7%3.3%3.0%12.1%
$59,438 - $76,2768.97%3.5%2.5%3.1%3.0%12.1%
$76,277 - $99,38611.58%4.1%2.3%3.0%2.9%12.3%
$99,387 - $142,22515.59%4.5%2.1%2.6%2.7%11.9%
$142,226 & over41.47%5.4%1.5%1.7%1.8%10.4%
$200,907 & over (top 5%)30.44%5.6%1.4%1.4%1.7%10.1%
$472,626 & over (top 1%)15.60%6.0%1.2%1.0%1.5%9.7%

Projected 2013 Effective Tax Rates by Population Deciles for Minnesota. Projected 2013 data from the 2011 Minnesota Tax Incidence Study. Total projected household income is $198,138,396,000. Each row represents 10 percent of the households in Minnesota unless otherwise noted. Sales tax percentage is composed of about 2/3 paid directly by households, and about 1/3 paid by businesses and passed along to households in the form of higher prices or lower compensation.

(Caveat: The above chart shows that the 10 percent of Minnesota households with the lowest incomes – those earning $11,298 and less will pay a whopping effective tax rate of 30.5 percent. That stat is accurate as far as it goes, but analysts caution that it includes a lot of Minnesotans who draw from resources other than taxable income – for example, seniors who rely on savings supplemented by relatively small earned incomes.)

Federal taxes: Who pays and how much? 

At the federal level, you can find your spot in the fair-share debate with the use of this nifty tool created by Kiplinger, based on 2009 tax returns.

Poke around in it, and you will see that it takes an adjusted gross income of at least $344,000 to earn a place in the controversial and coveted One Percent Club. That little group of top earners took home nearly 17 percent of all the income reported that year. Loopholes aside, though, the group also paid 37 percent of all the tax dollars sent to the IRS. 

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Here again, the income tax doesn’t tell anywhere near the whole story of the money we send to Washington.

Nearly half of American households don’t have to pay federal income taxes for a variety of perfectly legal reasons: some earned very little and were entitled to the earned-income tax credit, some were able to stack credits and deductions for children and items like home mortgage interest, etc., some earned most of their income from lower-taxed capital gains and were able to offset what they did owe with various deductions.

Even so, those same households undoubtedly paid federal taxes. Last year, payroll taxes – Social Security and Medicare – claimed 5.65 percent of the incomes of families of four earning up to $75,648, according to the Tax Policy Center. The rate would have been higher without the so-called payroll tax holiday which is set to expire at the end of this year.

Add to that the federal taxes we pay directly or indirectly for items like liquor, plane tickets, cigarettes, firearms, phone calls – even tanning at a salon. The bottom line, says the Congressional Budget Office, is that families earning $18,000 to $42,500 on average pay no income tax but still shell out 10 percent of their incomes for federal taxes.

A Pew Research Center poll found strong bipartisan agreement in December that Congress should scrap the overall tax system and build a new one from scratch. On any American tax issue though, bipartisanship goes only so far. Democrats saw the current system as unfair, while Republicans said it is too complex.

So the very notion of reform means different things on different sides of the political divide.

Where do our Minnesota tax dollars go?

Still, this is the one day we call Tax Day. So, it seems like the right time to ask where our tax dollars go.

Total State 2012-13 Operating Budget, February 2012 Forecast. Data provided by Minnesota Management and Budget, based on February 2012 forecast.

In Minnesota, the bulk of the tax take goes into funds that support the state’s operating budget. From those funds, almost 42 cents on the dollar goes for health and human services, including a raft of senior services such as nursing home care. This category also includes aid for needy children, the disabled and the mentally ill.

Almost 30 cents goes for education, especially K-12 schools.

Another 10 cents goes for transportation.

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So now you have just 18 cents left to pay for courts, state parks, prisons, farm programs, criminal investigations, restaurant inspections, property tax refunds, fish stocking in the 10,000-plus lakes and a long list of other services and programs.

At the federal level, health programs – including Medicare and Medicaid – take the biggest slice of the tax dollar – about 21 cents, according to the Center on Budget and Policy Priorities.  Tied for second place (20 cents each) are defense spending and Social Security. Another 13 cents goes for safety net programs such as food stamps, school meals, child tax credits and home heating assistance. About 6 cents of every dollar goes to pay interest on the national debt.

In each of those federal and state categories, there is plenty of room to argue whether we pay too much or too little. So have at it.

Meanwhile, this is a good day to eat comfort food – and, above all, drive safely.