New Study: Minnesota Taxes Remain Regressive
Taxpayers at the top of Minnesota’s income scale continue to pay a much smaller share of their income in state and local taxes than their less well-off neighbors, according the 2013 Minnesota Tax Incidence Study (MTIS), which was released Friday (March 1). The Minnesota Department of Revenue (DOR) publishes the MTIS every two years; the 2013 MTIS examines income and tax data for calendar year 2010. The folks at DOR should be proud of this report, as the biennial MTIS is the most comprehensive and sophisticated tax incidence analysis of its type in the nation.
A key concept used in the MTIS is the “effective tax rate.” The effective tax rate (or ETR) refers to taxes as a percentage of household income. The MTIS examines ETRs in each of ten groups of equal population—referred to as “population deciles”—ranked in order from lowest income (the first or bottom decile) to highest income (the tenth or top decile), with the tenth decile further broken down into the top five percent and the top one percent. The 2010 income range for each of these groups is presented below.
Throughout recent history, Minnesota’s state and local tax system has been regressive, with high income households paying a significantly lower ETR than lower and middle income families. The 2013 MTIS shows a continuation of this pattern into 2010. The graph below shows the ETR for the second through tenth population deciles, with the tenth decile broken out into three parts. (The first decile is typically excluded from most analyses due to data problems.*) The dashed line indicates the 2010 statewide average effective tax rate of 11.5 percent.
The 2013 MTIS observes that the primary cause of tax regressivity in Minnesota is low ETRs experienced by taxpayers within the tenth decile. The graph certainly bears this out. Only taxpayers in the top decile experience ETRs that are below the statewide average. Furthermore, only taxpayers in the top one percent have effective tax rates that are more than 1.0 percent below the statewide average.
Meanwhile, the highest ETRs are seen among the poorest taxpayers with the least ability to pay; taxpayers with incomes between $10,155 and $16,449 have an average ETR of 14.0 percent. State and local taxes per dollar of income for these very low income households is 22 percent above the statewide average and 46 percent above what is paid by the top one percent.
Middle-income taxpayers (defined here as taxpayers in the fifth and sixth deciles) also bear more than their fair share of Minnesota state and local taxes. State and local taxes per dollar of income for these middle-income families are 27 percent greater than what is paid by the top one percent—a disparity slightly worse than what was observed in 2008 based on data from the 2011 MTIS.
The overall regressivity of a tax system can be gauged using a statistical measure known as the Suits index. A Suits index of +1.0 denotes a tax system that is completely progressive, while an index of -1.0 denotes a tax system that is completely regressive. The Suits index for Minnesota’s state and local tax system in 2010 is -0.056, which denotes a modest degree of regressivity. Minnesota’s Suits index for 2010 is slightly lower than what it was in 2008 (-0.054), denoting a minor increase in the overall degree of tax regressivity in the state.†
As noted previously by Minnesota 2020, the regressivity of a tax system typically fluctuates along with the business cycle. The best way to gauge the long-term trends in tax regressivity is by comparing the Suits indices at similar points in the business cycle. The years which correspond most closely to the end of the last two recessions for which MTIS Suits indices are available is 2002 and 2010. In 2002, the Suits index for Minnesota’s state and local tax system was -0.018. As noted above, by 2010 it had fallen to -0.056. In other words, Minnesota’s Suits index is three times greater at the end of the Great Recession than it was at the end of the previous 2001 recession, thereby denoting a significant long term increase in tax regressivity.
The 2013 MTIS underscores the ongoing lack of fairness in Minnesota’s tax system. Fortunately, Governor Dayton’s tax plan reduces the degree of regressivity in Minnesota’s state and local tax system, as demonstrated in a recent DOR analysis, while at the same time generating needed public revenue. The 2013 MTIS further highlights the need for progressive tax reform of the kind proposed by Dayton.
*The first decile is frequently omitted from a comparison of ETRs across deciles because (1) households in the first decile often have temporarily low incomes or have better overall economic well-being than indicated by their money income, (2) income in the first decile can be understated because the MTIS cannot identify all sources of income, and (3) various other reasons. Data problems with the first decile are more fully described on page 17 of the 2013 MTIS.
†This analysis uses “population decile” Suits indices. However, “full sample” Suits indices are more accurate than population decile Suits indices. Based on a comparison of full sample Suits indices, the index for Minnesota’s state and local tax system in 2010 is unchanged from the 2008 value of -0.060. The population Suits indices are used in this article to facilitate comparisons to earlier years for which full sample Suits indices are not available.