Before you buy the story about Minnesota's high taxes, read this

One of my pastimes is following coverage of tax issues across Minnesota, which means every so often, a letter to the editor like this one pops up in my email. Here's the money paragraph:

[W]hen comparing states with similar geographic and economic profiles, Minnesota extracts substantially more taxes per capita than surrounding states like Wisconsin, Iowa and South Dakota. Total state taxes per capita in 2010 were as follows: Minnesota $3,245, Wisconsin $2,527, Iowa $2,235, South Dakota $1,602 and national average $2,282.

The author uses these "facts" to support his opinion that Minnesota is a “Business Hostile” state that is driving away companies and jobs.

Since the letter writers keep misusing the data Census Bureau data — let's be charitable and call them mistakes — I feel bound to keep pointing out why these comparisons are misleading. I hope you will apply these points when you see similar screeds against Minnesota's tax rankings.

1. The problems with per capita comparisons. The Census Bureau itself [PDF] cautions us not to use its  statistics on state tax revenues per capita to compare individual tax burdens. That's because their figures "reflect the taxes a state collects from activity within the state, not necessarily from the individuals within a state.”

States that rely on sales taxes (South Dakota, for example) collect revenues from every tourist who visits Wall Drug, rallies in Sturgis or visits the Black Hills.

States that benefit from severance taxes from mining and oil and gas (North Dakota, for example) collect from the companies doing the extraction, and those companies incorporate those fees in the prices they charge consumers across the country. That's why the letter writer left out North Dakota from his list. The state's per capita taxes were the highest in the region at $3934.

There's a second problem with per capita comparisons. If people make more money, they tend to pay higher taxes. Since Minnesotans make more money per capita, they also pay more.

The Minnesota Taxpayers Association publishes an excellent report called How Does Minnesota Compare? [PDF] that looks at total state and local taxes per capita and as a percent of income. Because of our higher average income, Minnesota ranks 12th per capita, but 23rd based on income. When federal revenues to the state are included, we rank 17th and 32nd, respectively.

2. What’s taxed differs by state. The Census Bureau again: “Different states use different approaches to taxation, and comparing only the total taxes collected by each state is not enough to understand the economic impact of those states’ taxes.”

If we've learned anything in Minnesota after the latest budget battle, we know that states can shift taxes or costs to local governments. The Census Bureau figures quoted above don't take into account local taxation.

Thus, a state like Wisconsin that has higher property taxes levied locally appears to have a lower state tax burden. But when local taxes are included, the gap closes. And when income is taken into account, Cheeseheads rank 15th highest to our 23rd.

3. State revenues are redistributed within the state. In the past year, I've seen the Census Bureau figures quoted in papers serving Park Rapids, Walker and Bemidji.

Guess what? Residents in those regions pay well below average in state income taxes, sales taxes and business taxes [PDF]. Park Rapids' Hubbard County, for example, averages less than $1,650 per capita in total state taxes (vs. $2434 on average statewide) while receiving more that $3,000 per capita in state aids and credits (vs. $2645 on average).

If taxpayers writing letters to those papers still feel they're getting a raw deal, at least now they know what the deal is.

4. Minnesota's taxes don't exactly drive away the wealthy. Before you buy the claim that Minnesota is unfriendly to high earners, look at how those neighboring states compare.

Minnesota has a higher ratio of millionaire households than any of those other states. Here are the rankings as of 2007 [PDF]:

MN 12th
WI 24th
IA 33rd
SD 47th
ND 48th

Yes, we even do better than Florida (18th) and Arizona (21st) where our wealthy snowbirds are supposed to be flocking.

Next time you see "facts" that purport to prove how terrible our tax climate is, take these points into account. And note, we haven't even touched the spending or quality and efficiency of state services.