Tax Rates Fall For Most Minnesotans Thanks to Progressive Tax Acts
Taxes will decline for most Minnesotans—particularly middle-income families—as a result of progressive tax legislation enacted during the 2013 and 2014 sessions. A July 7 Minnesota 2020 article examined the change in state and local taxes by income level resulting from the 2013 and 2014 tax acts. Another way of exploring the effects of the 2013 and 2014 acts is through an examination of effective tax rates.
“Effective tax rate” (or ETR) as used here refers to state and local taxes as a percentage of income. A recent Minnesota Revenue Department analysis examines the impact of the 2013 and 2014 tax acts upon ETRs across ten equally sized groups or “deciles,” with the tenth (highest income) decile further broken down into three parts: the “next 5%” (i.e., the bottom half of the tenth decile), the “next 4%,” and the “next 1%.” A table from the July 7 article summarizes the range of annual incomes associated with each of these groups. By comparing ETRs based on the recent DOR analysis to data from DOR’s 2013 Minnesota Tax Incidence Study (published prior to passage of the 2013 and 2014 tax acts), it is possible assess the ETR change for each income group resulting from the 2013 and 2014 acts.
The 2013 and 2014 tax acts are projected to reduce total state and local ETRs within six of the ten deciles, covering a broad spectrum of middle-income households ranging from $26,398 to $146,400 annual income. The largest ETR reductions (0.15 to 0.16 percent) occur within the fifth to seventh deciles with incomes from $35,601 to $77,704, while the smallest reductions (0.02 percent) occurring within the fourth and ninth deciles, which includes incomes from $26,398 to $35,600 and from $101,617 to $146,600 respectively. The bottom half of the tenth decile with incomes from $146,601 to $202,407 is expected to see no change in ETRs resulting from the 2013 and 2014 tax acts.
ETRs in the first three deciles (incomes under $26,398) and in the top half of the tenth decile (incomes over $202,407) are projected to increase as a result of the 2013 and 2014 tax acts. The largest ETR increase—1.16 percent—will occur among the top 1% with incomes in excess of $510,005; this is largely the result of the 2013 income tax increase that was focused on very high-income households. The ETR increase in the first decile is projected to be 0.96 percent, although this increase is probably overstated due to first decile data anomalies described in the 2013 Minnesota Tax Incidence Study. Because of these anomalies, the first decile is omitted from graphs in this article.
As noted in the July 7 article, tax increases among low-income households are concentrated among tobacco users due to the $1.60 per pack cigarette tax increase in the 2013 tax act. This tax increase was steeply regressive, but was nonetheless justified because it will incentivize current smokers to quit and encourage non-smokers—particularly price sensitive teens—from starting in the first place. In addition, the tobacco tax increase generates additional revenue to defray the heavy societal costs associated with tobacco usage, as noted in a 2013 Minnesota 2020 article.
According to the 2010 Minnesota Adult Tobacco Survey, only 16 percent of Minnesota adults smoke; the remaining 84 percent would be unaffected by the 2013 cigarette tax increase. An analysis which excludes the impact of the 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 Minnesotans.
Excluding the effects of the tobacco tax increase, ETRs drop for every income group with the exception of the top half of the tenth decile, with the largest ETR increase (1.2 percent) occurring within the top 1%. The largest ETR reductions occur in the first decile (0.41 percent), although the decline again may be overstated due to first decile data anomalies. In the second through fifth deciles, ETRs decline by 0.27 percent to 0.35 percent; above the fifth decile, the ETR reductions shrink as income rises.
Up to this point, the effects of the 2013 and 2014 tax acts might appear to constitute the “class warfare” that conservatives often complain about. However, an examination of total ETRs after the 2013 and 2014 tax acts reveals that this is not the case.
Even after the powerfully progressive 2013 and 2014 tax acts, total state and local ETRs continue to be lowest among Minnesota’s highest income households. Only within the highest income decile do ETRs dip below eleven percent, with the very lowest ETR (10.7 percent) reserved for the top 1% with incomes in excess of $510,005.
Prior to the 2013 and 2014 tax acts, state and local taxes per dollar of income among middle-income households* were 23.3 percent greater than among the top 1%. As a result of these acts, this disparity is projected to shrink to 8.6 percent. The 2013 and 2014 tax acts did not “make war” on Minnesota’s highest income households; it merely reduced the magnitude of the tax advantage that they enjoy relative to their less well-off neighbors.
Despite the fact that taxes will decline for most Minnesotans as a result of the 2013 and 2014 tax acts, significant new revenue was generated by focusing tax increases among the highest income households where wealth is most heavily concentrated and ETRs are the lowest. In this way, the tax acts of the 2013 and 2014 legislative sessions not only enhanced fairness in Minnesota tax system and reduced taxes for the majority of Minnesota taxpayers, but it also generated sufficient revenue to increase funding for education, infrastructure, workforce development, and affordable housing and healthcare—all things considered, an impressive string of progressive accomplishments.
*“Middle-income households,” as used here, refers to the fifth and sixth deciles (middle fifth of all households by income), which encompasses incomes from $35,601 to $59,998.