2009 Minnesota Tax Incidence Study: What does it mean?

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by Erica Mauter | March 11, 2009 • Via Noah Kunin comes word of the 2009 Minnesota Tax Incidence Study, “an analysis of Minnesota’s household and business taxes,” (pdf) published just this month (March 2009).

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This study reports the distribution of calendar year 2006 Minnesota state and local taxes in relation to taxpayer income, along with projections for calendar year 2011. It answers the question, “Who pays Minnesota’s taxes?” The major objective is to provide taxpayers and policymakers with important information on the equity or fairness of the overall distribution of Minnesota taxes. This is the tenth biennial tax incidence study prepared in response to the statutory requirement enacted in 1990.

The report estimates 1) how the total state and local tax burden on Minnesota households varies by income range, and 2) how the burden of each component of the overall state and local tax system is distributed across Minnesota households. Aggregating the impact of each component yields an estimate of the distribution of the total tax burden.

The estimates include taxes with an initial impact on businesses, such as the corporate franchise tax and the sales tax on business purchases, as well as taxes imposed directly on households. The initial impact of taxes imposed on Minnesota households and businesses is discussed first. The analysis then proceeds to estimate the final incidence of taxes on Minnesota households, after taxes imposed on businesses have been shifted to those who bear the final burden.

Conclusions of the research are:

* Of the total $22.1 billion in 2006 taxes, 83.9 percent of the burden ultimately falls on Minnesota residents ($18.5 billion). The remaining $3.5 billion of the tax burden is exported to nonresident consumers or nonresident owners of capital
* In 2006, the state and local tax burden on Minnesota households averaged 11.2 percent of income, down from 11.6 percent in 2004. But half of that drop is due to use of an expanded definition of income in this year’s study.
* The local tax share of tax revenue rose from 25.8 percent in 2004 to 26.7 percent in 2006 and is projected to rise significantly to 31.7 percent in 2011. The state tax share fell from 74.2 percent in 2004 to 73.3 percent in 2006 and is projected to fall to 68.3 percent in 2011.
* The share of state and local revenue derived from consumption taxes fell from 33.7 percent in 2004 to 31.8 percent in 2006 and is projected to fall to 30.3 percent in 2011. The share of income tax rises between 2004 and 2006, but falls in 2011. The property tax share declines slightly between 2004 and 2006, but is projected to increase substantially by 2011.
* The business tax share of total tax revenue falls from 33.2 percent in 2004 to 32.5 percent in 2006 but is projected to rise to 32.7 percent in 2011.
* After allowing for the shifting of business taxes, the Minnesota tax system in 2006 was somewhat regressive (and significantly more so than in 2004). In contrast to the results shown in recent studies, effective tax rates were above the 11.2 percent average for all except the tenth decile. The Suits index, a measure of the progressivity or regressivity of a tax or tax system, fell from -0.024 in 2004 to – 0.053 in 2006. This change suggests a significant increase in overall regressivity, in large part due to greater income inequality in the stronger economy.
* Minnesota’s refundable income tax credits and property tax refunds for homeowners and renters substantially reduce overall regressivity. In their absence, the 2006 Suits index would fall from -0.053 to -0.075.

* Incomes are expected to grow by only 15.5 percent between 2006 and 2011. Tax receipts are forecast to grow at a slightly higher rate, raising the overall effective tax rate to 11.4 percent.
* The population-decile Suits index is projected to fall only slightly to -0.051 in 2011. Income growth is expected to outpace tax growth in the lowest three deciles; the reverse is true in deciles 4 through 10.

Emphasis mine. Other things that stuck out:

* The effective tax rate in Minnesota has been regressive at least since 1990.
* The effective tax rate is the burden to both businesses and individual households after certain business taxes are shifted to consumers.
* As stated on page 13, “The only major progressive tax is the personal income tax. Consumption taxes are the most regressive category.”
* Business taxes are also quite regressive. If I read correctly, that means the relative tax burden on smaller businesses is way higher than on giant corporations.
* The 1st decile is the lowest-income population and the 10th decile is the highest-income population. As stated on page 14, “Minnesota’s state and local tax system is somewhat progressive between the lower and middle deciles and somewhat regressive between the middle and upper deciles… Between 2006 and 2011, effective tax rates are projected to fall in the first three deciles and rise in deciles 4 though 10. The largest increases are in deciles 5 through 7.”
* The overall effective tax rate on Minnesota households in 2006 was 11.2%.
* Starting in about 1996, the effective tax rate on the richest 10% of people in Minnesota (10th decile) was noticeably lower than the 2nd-richest 10% (9th decile). The discrepancy is even higher when you break out the richest 5% and higher again for the richest 1%. The effective tax rate on the poorest 10% of people in Minnesota has been significantly higher since 1988 and probably before that.
* As stated on page 34, “[T]his study estimates that a sizable portion of the 2006 gross rental property tax (65 percent) was borne by the investors who own rental housing; the remaining share (35 percent) was assumed to be shifted to renters in higher rents.”
* As stated on page 36, “Figure 2-3 clearly demonstrates the importance of the progressive income tax in offsetting most of the regressivity of other taxes.”
* Finally, Section G compares Minnesota’s effective tax rate to other states, noting that Minnesota is the 11th most progressive state (MN is slightly regressive, and only the top 6 states score non-negative on the Suits Index), and suggests the following reasons for that: Minnesota is more reliant on income tax than most states, Minnesota’s income tax is one of the most progressive, and Minnesota “has among the most generous refundable income tax credits for low-income households, along with one of the most generous income-conditioned property tax credits for homeowners and renters.”

I’m a little short on really grokking the details and the implications – I couldn’t even begin to dive into the chapter on demographics – but I think this is an important thing to be aware of. This is something that we all have opinions on, and I think we all have different perceptions of what the tax environment is actually like, depending on our individual economic situations. It’s completely fair to come to a different conclusion on whether the present tax environment in Minnesota is Good or Bad depending on your political philosophy and personal circumstances. Regardless, here are some numbers to work with, straight from the Minnesota Department of Revenue.