Two Decades of Growing Regressivity
Over the last twenty years, Minnesota’s total state and local effective tax rate has fallen. However, it has not fallen for everyone. In fact, average effective tax rates have increased for lower- and middle income Minnesotans and declined only for high-income households. These trends are indicative of a pattern of rising tax regressivity in Minnesota—a problem the 2013 tax act partially remedied.
The “effective tax rate” (ETR) refers to taxes as a percent of income. Because it takes into account both the level of taxation and the ability to pay as measured by income, ETRs are the preferred measure of variation in tax levels among income groups. The biennial Minnesota Tax Incidence Study (MTIS) from the Minnesota Department of Revenue presents the state and local ETR* for ten equally-sized groups—referred to as deciles—ranging from the lowest to highest income, with additional details for the tenth (highest income) decile. The earliest year for which final ETRs by decile are available is 1990† and the most recent is 2010.
The table below shows income range and ETRs by decile for 1990 and 2010 based on MTIS data, with the tenth (highest income) decile further broken down into the “bottom half 10th decile”, the “next 4%” (i.e., the top half of the tenth decile excluding the top 1%), and the “top 1%.” Information for the first (lowest income) decile is omitted from this table due to data anomalies described in the 2013 MTIS.
In 2010, the statewide average ETR was 11.5 percent, down from 11.8 percent in 1990. However, the ETR decline was concentrated at the high end of the income spectrum. Taxpayers in the ninth decile saw their average ETR drop slightly from 11.8 percent to 11.7 percent, while those in the tenth (highest income) decile saw it drop significantly from 11.7 percent to 10.3 percent. The largest declines were restricted to the top half of the tenth decile, with the ETR of the top one percent dropping from 11.2 percent to 9.6 percent.
Meanwhile, the average ETR for the eight lowest income deciles—including all low- and middle-income households in the state (i.e., all households with income under $89,747 based 2010 data)—increased over this 20 year period. The ETR increase ranged from a low of 0.1 percent in the eighth decile to 2.9 percent in the second decile.‡ The overall statewide ETR declined over this twenty year span—despite the fact that ETRs increased in the lowest eight deciles—because the majority of statewide income is concentrated in the top two deciles.
On a statewide basis, the average ETR for the eighty percent of Minnesota households with the lowest incomes increased by 0.7 percent over the twenty year span, while the ETRs of the top 20 percent fell by 1.0 percent. As a result, Minnesota’s state and local tax system went from nearly proportional in 1990 to significantly regressive in 2010.
Changes in state and local tax regressivity can be due to any of a number of factors. One factor that played a role in increased tax regressivity in Minnesota is an increase in income inequality. A recent report from Growth & Justice demonstrated that income inequality as measured by the Gini coefficient increased significantly from 1989 to 2009.
However, while an increase in income inequality can contribute to increased regressivity, a Minnesota 2020 analysis of 50-state tax incidence data demonstrates that the mix of taxes on which a state depends is generally more potent than income inequality in explaining changes in tax regressivity. An increased dependence on regressive property taxes and a reduced dependence on progressive income taxes is probably the major driver of the growth in tax regressivity in Minnesota from 1990 to 2010.
The expanding gap between the state and local effective tax rates of low- and moderate-income households on the one hand and high income households on the other resulted in a significant increase in tax regressivity in Minnesota from 1990 to 2010. Fortunately, progressive state policymakers made significant strides in reversing this trend during the 2013 legislative session. Part 2 of this series will examine the success of the 2013 tax act of stemming the tide of rising tax regressivity in Minnesota.
*As used in this article, the term “effective tax rate” will refer to the state and local effective tax rate as calculated by the Minnesota Department of Revenue.
†Technically, ETRs for 1988 are available from the 1991 MTIS. However, due to changes in methodology, the 1988 ETRs from the 1991 MTIS are not comparable to ETRs from subsequent Minnesota Tax Incidence Studies. The earliest year for which ETRs comparable to today’s ETRs is 1990. The 1990 ETRs cited here are from the 1993 MTIS.
‡The largest ETR increase (from 26.6 percent in 1990 to 31.5 percent in 2010) actually occurred in the first (lowest income) decile. However, because of data anomalies referenced above and described in the 2013 MTIS, information from the first decile is omitted from many analyses.