Rethinking Minnesota Taxes

“Rethinking Minnesota Taxes” Discussion in Northfield, Minnesota

Can Minnesota’s tax system be fairer for families and better for business growth?

Growth & Justice says YES!

Join us for a presentation of the Growth & Justice tax proposal presented by

Joel Kramer, Growth & Justice Executive Director

After more than a year of research and public discussions involving 150 citizens, Growth & Justice is proposing that Minnesota make its tax system fairer for families and better for economic growth by agreeing to a swap: higher individual income taxes on high earners and lower taxes on business. And, we show several ways to do it.

Tuesday, April 5, 2005
4:30-6:00pm

Space in this discussion is limited.
Please RSVP to Emily Saunoi-Sandgren, 651-251-0725.

Location: Room SS106 in the
Northfield Community Resource Center
1651 Jefferson Pkwy
Northfield, MN 55057

A changing share of the pot
Mike Meyers
Star Tribune National Economics Correspondent
Published April 3, 2005

The cost of government in Minnesota today is significantly lower than a decade ago, but the little guy is picking up a greater share of the tab.

State and local revenue this year will represent 15.7 percent of total Minnesota personal income — a drop from 17.7 percent in 1995, according to a projection by the state Department of Finance. Over that 10-year period, the tax burden has shifted gradually toward people of average and small means and away from the state’s most prosperous residents.

The trend is likely to continue.

“The tax system is expected to become slightly more regressive from 2002 to 2007, because for higher deciles [the highest-earning groups of Minnesotans] income growth is expected to outpace growth in tax liability, while the reverse is true for middle to lower deciles,” the Department of Revenue said in a report released in March.

Put simply, taxes — in particular, property taxes — are growing faster than the incomes of most people. But the incomes of Minnesota’s most prosperous residents have climbed faster than the cost of state and local government. That’s why, as a share of Minnesotans’ total income, the tax burden is in decline.

“Even as income goes up and up, even if you have a second home, eventually there’s only so much property” that can be taxed, said Dick Gebhart, director of tax research at the state revenue agency. The same goes for purchases — sales taxes claim a lesser share of incomes as incomes rise.

“If you’re in the middle-income category, you’re paying 21⁄2 times more than if you’re at the top,” said Wayne Cox, executive director of Minnesota Citizens for Tax Justice, a group financed mostly by labor unions.

After combining the state and local tax burden and factoring in the federal deduction of state income taxes, Cox concluded that people making $40,000 to $80,000 face a net effective tax rate of 11.3 percent in Minnesota. The elite group making $11.4 million or more faces a net effective tax rate of 4.7 percent.

A state analysis shows a similar pattern. It projects for 2007 effective Minnesota tax rates — after federal taxes — ranging from 6.8 percent for people with incomes of $323,340 or more to 18.1 percent for people with incomes of $8,344 to $14,056.

There are a number of reasons for the disparity, but the most obvious is the cuts in income tax rates passed in recent years. Those cuts spare far more in taxes for those with high incomes than they do for people at the other end of the scale.

For the lower-paid, “the biggest part of their tax bill — sales taxes and property taxes — is not what got lowered when the state lowered tax rates,” said Nan Madden, director of the Minnesota Budget Project at the Minnesota Council of Nonprofits.

The Legislature’s decision five years ago to lower property taxes for corporations also shifted more of the cost of local government toward homeowners.

Business property tax rates on $1,000 of assessed value were five times that of Minnesota households in the early 1990s. Today, the ratio of business to household property tax rates is closer to 31⁄2 to 1.

The effective state and local tax rate — taking into account income, sales, property and other taxes — came to 18.2 percent for those who made less than $8,344 in 2002, according to the Department of Revenue. Middle-income taxpayers, making $45,437 to $57,589, paid an effective rate of 12 percent. (The year 2002 is the most recent for which tax and income analysis is available.)

The top 5 percent, making $139,652 and up, faced an effective tax rate of 10.5 percent. After taking into account state income tax deductions on federal taxes, the effective state rate fell to 8.4 percent for the top 5 percent in 2002. In contrast, Minnesota’s middle-income taxpayers saw their effective tax rate after federal taxes inch down a minuscule 0.7 percent to 11.3 percent from 12 percent.

The trend for those on the lower end of the pay scale would look even worse if the state factored in fees when assessing the distribution of the tax burden.

Fees, for everything from garbage pickup to auto license tabs, are raising hundreds of millions more today than in the past. Minnesotans this year will pay an estimated $881 million in fees, up from $482 million in 1997, according to the Department of Revenue.

Government fees have grown at more than double the rate of state and local tax revenue over the same period. In 1997, fees accounted for $1 of every $28 in state revenue. This year fees will make up $1 of every $22 in state revenue.

“A good illustration is tuition at university,” said Joel Kramer, executive director of Growth & Justice, an economic policy think tank in Minnesota. “If you have a $5,000 tuition charge and your household makes $50,000, that’s obviously much greater than for a $250,000 household. All fees work the same way.” Kramer is a former publisher of the Star Tribune.

Lynn Reed, executive director of the Minnesota Taxpayers Association, argues that Minnesotans with high incomes still pay a large amount of state and local taxes.

Minnesotans who made more than $139,652 in 2002 — the top 5 percent of all earners — paid about $3.7 billion in state and local taxes that year, he noted.

“How much is enough?” he asked.

Examined another way, the top 5 percent made 28.1 percent of all Minnesota income in 2002 but paid 26 percent of their income in state and local taxes.

David Strom, president of the Taxpayers League of Minnesota, said he’s not persuaded that ironing out imbalances in the tax burden should be the overriding goal of tax policy.

“You have to ask yourself how wedded are you to progressivity as a fairness tool when the price may be less economic activity,” Strom said. “I would prefer more economic activity.”

Strom and Reed both maintain that the state risks losing entrepreneurs and other high-income residents to other states if Minnesota were to attempt to shift more of its tax burden onto the wealthy.

However, Growth & Justice released a study last week based on IRS figures that found little evidence of high-tax states losing their most successful residents.

“We found no clear pattern of systematic flow [of high-income residents] from high-income tax states to low,” Kramer said. “States that lost proportionately the most to migration are low-income-tax states.”