Unpacking the income tax

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Now that the dust has settled from this year’s legislative session, we can begin to unpack the accomplishments. Marriage Equality will be remembered as an historic expansion of civil liberties. We’ll also be generating an additional $2.1 billion in progressive revenue, which will go a long way to structurally balancing the budget, making critical education investments and providing property tax relief.

Today, I want to try to understand the new higher income tax tier. Individuals and families who are fortunate enough to be among the 2% of income earners in the state will pay more taxes. Married joint filers with taxable income above $250,000, heads of households with $200,000, and single filers making $150,000 will see their top marginal rate increase from 7.85 percent to 9.85 percent.

First, let’s unpack the term “taxable income.” According to the Minnesota Department of Revenue, a typical family that owns a home and had taxable income of $250,000 in 2013 actually had a gross income of about $321,000. This means that those families were able to shelter, through legal deductions, about $71,000 from state income taxes. Put another way, these families sheltered more income than about 70% of Minnesota families earn in a year. What’s the take away here? Taxable income is not the same as total income.

The second issue I want to unpack is the nature of marginal tax increases. The reason progressives like the income tax is because it is fair. First, it only taxes people with income (unlike property and sales taxes). Second, it taxes in proportion to income (those with larger pay checks contribute a larger percentage of their income than do those who earn less).

The other thing you need to know about marginal tax rates is that they only apply to the income earned in each tax bracket. Meaning, all Minnesotans pay the same rates as they go up the income ladder. For the top 2%, they will pay the new rate only on the dollars they earn above the new thresholds.

So let’s go back to our typical family with “taxable income” of $250,000 and see what this means in practical terms. Should this family be lucky enough to get a raise or lose deductions and its “taxable income” increases to $260,000, it would pay about $200 more in taxes. That’s right Minnesotans, the new “job killing” tax increase will mean that for every $10,000 in income wealthy Minnesotans make above the new thresholds that will pay an additional $200 of that to the state.

I don’t know about you, but to me, that seems like a heck of a deal. In exchange for that, the state will be able to invest in all day Kindergarten for nearly every Minnesota child, provide property tax relief for most Minnesotans, reinvest in communities, and balance its budget.

By way of conclusion, I want to thank those who fought for a fairer more progressive tax policy. I also want to thank those in the top 2% for their generous contributions to the common good. With your help we are about to embark on a new Minnesota Miracle.