Progressive Leadership Reduces Taxes for Most Minnesotans
For over a year now, Minnesota conservatives have been complaining about the tax increases enacted under progressive control of state government. However, an analysis of new information produced by non-partisan staff at the Minnesota Department of Revenue (DOR) indicates that taxes will decline for most Minnesotans as a result of the 2013 and 2014 tax acts passed by the progressive legislature and signed into law by Governor Dayton.
DOR’s 2013 Minnesota Tax Incidence Study provides the baseline of what projected state and local taxes in Minnesota would have been in 2015 if the 2013 and 2014 tax acts (specifically, chapter 143 passed in May 2013, chapter 150 passed in March 2014, and chapter 308 passed in May 2014) had never been enacted. Last month, DOR released an updated tax analysis which incorporates the impact of these three tax acts. By comparing these two analyses, we can assess the state and local tax changes resulting from the 2013 and 2014 acts.
The tax incidence analyses prepared by DOR breaks Minnesota taxpayers into ten equally sized groups or “deciles” ordered by income, with the first decile consisting of the lowest income households and the tenth decile consisting of the highest income households. In addition, the tenth decile is further broken down into three parts, consisting of the “next 5%” (i.e., the bottom half of the tenth decile), the “next 4%,” and the “top 1%.” The income ranges associated with each of these groups based on projected tax year 2015 data is shown below.
DOR data shows that taxes will decline across the entire middle portion of Minnesota’s income spectrum as a result of progressive tax legislation passed in 2013 and 2014. State and local taxes in the fourth through ninth deciles, covering households with annual incomes ranging from $26,398 to $146,400, will decline collectively by 0.8 percent. The reductions range from a modest 0.2 percent in the fourth and ninth deciles to 1.4 percent in the fifth decile. Taxes in the lower half of the tenth decile, covering incomes from $146,401 to $202,407, are expected to remain flat.
Taxes are projected to increase at both the low and high ends of the income distribution. Taxes are expected to increase collectively by 1.7 percent in the first through third deciles covering households with incomes below $26,398, peaking at a 3.2 percent increase in the first decile. The largest tax increases are in the top half of the tenth decile consisting of households with incomes in excess of $202,407, with the top 1% seeing a total tax increase of 12.1 percent; tax increases in this income range are driven primarily by the 2013 income tax increase directed at high income households.
The tax increases among low income households are heavily concentrated among tobacco users, driven largely by the $1.60 per pack cigarette tax increase in the 2013 tax act. As noted in a July 2013 Minnesota 2020 article, the tobacco tax increases—despite being steeply regressive—were justified on the grounds that it would reduce and prevent cigarette usage, particularly among price sensitive teens, and produce revenue to partially defray the heavy societal costs associated with tobacco usage.
It should be noted that less than one in six Minnesota adults are smokers and would be affected by the cigarette tax increase. Thus, excluding the impact of the 2013 cigarette tax increase would provide a better indicator of the impact of the 2013 and 2014 tax acts upon the vast majority of non-smoking Minnesota taxpayers.
Excluding the tobacco tax increases, the 2013 and 2014 tax acts will reduce taxes in each of the first nine deciles and in the bottom half of the tenth decile. The collective non-tobacco tax reduction for this group, which includes all households with incomes below $202,407, would be 1.6 percent, ranging from a high of 3.0 percent in the fifth decile to a low of 0.3 percent in the bottom half of the ninth decile. The only income range that would experience a net increase in non-tobacco taxes would be the top half of the tenth decile, with that increase largely concentrated in the top 1% with incomes in excess of $510,005.
The DOR tax incidence analyses do not allow us to calculate the precise percentage of Minnesota households that will experience a tax reduction as a result of the 2013 and 2014 tax acts. However, based on what we do know, it is reasonably clear that a majority of Minnesota households—and a large majority of middle-income households—will experience a tax reduction as a result of 2013 and 2014 tax legislation.
Despite the fact that most Minnesotans will see a tax reduction, the 2013 and 2014 tax acts succeeded in generating significant new revenue by concentrating the largest tax increases among high income households where a disproportionate share of Minnesota’s wealth resides. However, there is no need to shed tears for these high income households. As noted in part one of this series, the top half of the tenth decile—and specifically the top 1%—will continue to pay less of each dollar of income in state and local taxes than any other income group in the state. The 2013 and 2014 tax acts significantly reduced, but did not eliminate, the tax advantage enjoyed by the wealthiest Minnesotans.
These findings round out a portrait of astounding public policy successes achieved over the last two years. Not only did progressive state policymakers succeed in balancing the state budget, restoring a portion of past budget cuts, increasing state investments in education and other critical public assets, and reducing tax regressivity and enhancing tax fairness, but they accomplished these goals while simultaneously reducing taxes for most Minnesotans.