Reversing Two Regressive Decades
During the 2013 legislative session, state policymakers not only had to replenish depleted state revenues and restore a decade of disinvestments, but do so in a way that would stem the long-term tax regressivity trend. They succeeded on both counts through a powerfully progressive tax act, the centerpiece of which was an income tax increase directed toward the highest income households that had the lowest effective tax rate (ETR) in the state and the largest ETR decline since 1990.
In case you missed part one of this series, here's some background. From 1990 to 2010, the aggregate statewide effective tax rate* went down, but increased for the vast majority of Minnesota households. This apparent paradox is possible because the majority of the state’s income is concentrated in the hands of the wealthiest 20 percent. The trend of declining ETRs for the top 20 percent and increasing ETRs for everyone else was sufficient to drive a significant increase in state and local tax regressivity.
The 2013 tax act helped to reverse a significant portion of the ETR disparity that developed between 1990 and 2010. Based on recent Revenue Department projections, Minnesota’s statewide total ETR will increase from 11.5 percent in 2010 to 11.6 percent in 2015; however, the total ETR will still be less than the 1990 rate of 11.8 percent. More importantly from the perspective of stemming the tide of rising regressivity, the average ETRs of the lowest eight deciles‡—which includes households with a 2010 income under $89,747—are projected to decline by amounts ranging from 0.8 percent in the second decile to 0.2 percent in the seventh and eighth deciles.
For the most part, the projected ETR reductions from 2010 to 2015 among lower- and middle-income deciles are the result of income growth, not tax reductions resulting from the 2013 tax act. The state’s structural budget deficit combined with the need to restore state investments to education, infrastructure, healthcare, job training, and other public services did not allow the state to provide tax relief to all low- and middle-income taxpayers (although—as noted in a July 22 Minnesota 2020 article—taxes in many non-smoking households are projected to decline as a result of the property tax relief measures in the 2013 tax act, including the new Homestead Credit Refund). However, the tax increases projected to occur between 2010 and 2015 within each of the first eight deciles are less than the projected income growth, thereby producing a decline in average ETRs.
While the average ETRs in the first eight deciles are projected to decline from 2010 to 2015, the average ETR of the ninth decile is projected to increase negligibly and the average ETR of the tenth (highest income) decile is projected to increase by 0.6 percent. The projected ETR increase in the tenth decile is largely concentrated in the top half of the decile (i.e., the wealthiest five percent of households) and especially in the top one percent, which is projected to experience a 1.3 percent ETR increase from 2010 to 2015.
From 1990 to 2010, the ETRs of the bottom eight deciles increased and those of the top two deciles declined. From 2010 to 2015, the exact opposite is projected to occur, thereby undoing some of the growth in tax regressivity that occurred over the preceding two decades.
The degree of regressivity change can be measured by the “Suits index.” A negative Suits index† denotes a regressive tax system; the further below zero, the greater the degree of regressivity. Minnesota’s state and local Suits index is projected to go from -0.056 in 2010 to -0.034 in 2015. Fully two-thirds of this projected reduction in tax regressivity is the result of the 2013 tax act. While the degree of tax regressivity in Minnesota will still be higher than it was in 1990 (when the Suits index was -.007), the 2013 tax act represents a significant step in right direction.
No doubt we will continue to hear cries of “class warfare” from the right. A dispassionate review of the facts reveals this complaint to be bogus. Based on Revenue Department projections, the ETRs of the highest income households will continue to be less than they were in 1990 and will still be lower than any other income group, even after passage of the 2013 tax act. The 2013 tax act did not “soak the rich.” Rather, it simply required high income households to pay taxes at a rate somewhat closer to—but still less than—the rates paid by their less well-off neighbors.
The tax act of 2013 will not only generate adequate revenue to replenish dwindling state investments, but will do so in a way that will reduce the disparity in effective tax rates between high and low-income households and reverse the growth in tax regressivity that had been sporadically mounting since 1990. While the 2013 tax act is not perfect, it will move Minnesota in a fairer, more progressive direction.
*The effective tax rate refers to taxes as a percent of income. As used here, the term “effective tax rate” will refer to the state and local ETR. As noted in part 1 of this series, the ETR is the preferred measure of variation in tax levels among income groups because it takes into account both the level of taxation and the ability to pay as measured by income.
‡For a table showing the 1990, 2010, and projected 2015 income breakpoints and average household income for each decile based on information from the Minnesota Revenue Department, click here. ETRs for the first decile are omitted from this analysis for all three years (1990, 2010, and 2015) because of data anomalies described in the 2013 Minnesota Tax Incidence Study.
†All Suits indices presented here are based on population deciles. While the full-sample Suits index is more accurate than the population decile Suits index, full-sample Suits indices are not available for 1990. Thus, for purposes of comparison over time, the population decile Suits index is used. The 1990 Suits index cited here (-0.007) reflects a Minnesota Revenue Department adjustment to ensure comparability to Suits indices from later years. All Suits indices cited here are from 1993 or 2013 Minnesota Tax Incidence Studies, except for the projected 2015 population decile Suits index which was calculated by Minnesota 2020 using data from a June 2013 Revenue Department tax incidence analysis of the 2013 tax act.