Minnesota seeing a shift away from state income taxes and towards local property taxes

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The state’s most affluent residents pay a smaller share of their incomes in state and local taxes than the average Minnesotan, according to the 2011 Minnesota Tax Incidence Study released today by the Minnesota Department of Revenue. This comes as Minnesota continues to shift away from using state income taxes to pay for public services, and towards using local property taxes.

The Department of Revenue puts out the Tax Incidence Study every two years. This year’s study covers 2008 taxes, the most current available for a comprehensive analysis. It found 2008 was the second most regressive year since 1990, with a slight improvement from 2006. A regressive tax system is one in which low- and middle-income people pay a larger share of their income in taxes than those with higher incomes.

Minnesotans paid slightly more of their incomes in state and local taxes in 2008 than in 2006, but they make up a smaller share of household budgets than in the past. On average, Minnesota households paid 11.5 of their incomes in state and local taxes in 2008. That is up a tick from 11.4 percent in 2006, and down considerably from the high of 13.0 percent in 1994.

The wealthiest ten percent of Minnesota households (those with incomes $129,567 and up) were the only income group that pays a smaller share of their income in total state and local taxes than the statewide average. The wealthiest ten percent of households paid 10.3 percent of their incomes in state and local taxes, and the wealthiest one percent (those with incomes more than $429,354) paid 9.7 percent.

This is related to the trend of Minnesota relying less on the state’s income tax, which is based on the taxpayers’ ability to pay, and more on property taxes.

  • Property taxes rose to 32.1 percent of total state and local taxes in 2008, up from 30.1 in 2006. They are projected to increase further to 33.1 percent in 2013.
  • State income taxes fell as a share of total state and local taxes from 37.4 in 2006 to 35.2 percent in 2008. They are projected to drop to 35.0 percent by 2013.

Governor Dayton’s budget proposal seeks to address these trends by proposing income tax increases that would make the state’s tax system more related to the taxpayers’ ability to pay, and by avoiding cuts in state aids to local governments, which puts pressure on local property taxes, and protecting state property tax refunds.

The Tax Incidence Study notes the important role of tax credits in ensuring that the gap between the share of income that the average Minnesotan pays and the share that the wealthiest Minnesotans pay is not greater. The study concluded that, “Minnesota’s refundable income tax credits and property tax refunds for homeowners and renters substantially reduce overall regressivity.”

The ability of these credits to effectively do their job is at risk. On Saturday, the draft House Property Tax Division Report proposed cutting the Renters’ Credit by $119 million for FY 2012-13, or 30 percent from its base funding. Today, the division report was amended to cut the credit by 45 percent compared to base, or $180 million. Such cuts would move the state in the wrong direction, making tax policies even more regressive.