Tag Archives: tax incidence

Minnesota Continues to Soak The Poor

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Minnesota Republicans love to portray Minnesota as a liberal la-la land that unfairly victimizes their oppressed wealthy donors by “soaking them” with high taxes. 

Not true.  The reality is, Minnesota’s state and local taxes remain regressive, meaning that the rate of taxation actually decreases as incomes increase. 

This is wrong. Those with higher incomes should pay a larger proportion of their income in taxes, because they can afford to do so without suffering as much of a blow, proportionally speaking, to their quality of life.  

Conservatives typically point to state income tax rates to make their case, because that tax is indeed progressive.  The problem with that tired old spin is that the income tax is far from the only tax.  Minnesotans also pay sales, property, and excise (on alcohol, tobacco, and motor fuels) taxes, and those taxes are all very regressive.  That is, those types of taxes all hit people with lower incomes much harder, as a percent of income, than they hit people with higher incomes.

So the most relevant measure of whether Minnesota’s overall tax system is based on the ability-to-pay is the effective tax rate for all state and local taxes combined.  Every year, the Minnesota Department of Revenue calculates this amount.  Here is what the most recent version looks like.

Here are a few important things to note:

  • Tax Burdens Are Decreasing, Not Increasing.  Between 2018 and 2023 (projected), tax burdens are decreasing at every level of income.  Remember this the next time you hear conservatives whining about “skyrocketing taxes.”
  • Progressivity Is Improving, But Not Enough.  Between 2018 and 2023 (projected), the gap between the effective rate for the poorest and wealthiest Minnesota pay is narrowing , but it’s not a large or sufficient improvement.  The arc of the moral universe is bending towards justice, but it’s a painfully slow rate-of-change.
  • Minnesota’s Taxes Remain Very Regressive.  This is the most important thing to take away from this chart. Minnesota still has a very regressive tax system that hits poor people much harder than rich people.  Minnesota’s poorest taxpayers pay a 24.7% state and local tax rate, while our wealthiest taxpayers only pay 11.6%.

Before you shrug this off, stop and really think about it. The wealthiest Minnesotans are required to pay less than half the tax burden the poorest Minnesotans are required to pay.  For those who want Minnesota to be a more just and equitable place, the work is far from done.

Yes, stalwart conservative protectors of the wealthy will be quick to say, but the wealthy pay much larger tax bills than the poor! This is true. But it’s also true that when someone at the bottom of the income heap has to pay 24.7% for taxes out of their nearly empty wallet, that takes leaves a lot less to provide for their family than when the wealthiest Minnesotans only have to pay 11.6% for taxes out of their much fatter wallets and investment portfolios.   The poor person may not be able to pay rent, while the rich person may only need to leave ever so slightly less to their already well-pampered scions.

Every time someone proposes asking the wealthy to pay more in taxes, wealthy news anchors, pundits, and politicians breathlessly characterize the proposal as “controversial” and “unrealistic.”

For what it’s worth, Americans disagree. For instance, a POLITICO/Morning Consult poll found an overwhelming 76 percent of registered voters believe the wealthiest Americans should pay more in taxes. It might be controversial at the large donor soirees, but not most other places in America.

So when Minnesota DFL legislators propose, as they did this year, to create a new fifth tier state income tax rate of 11.15% on income above $1 million (or $500,000 for single filers), don’t fall into the trap of repeating the conservatives’ well-focus grouped “it’s soaking the rich” narrative.

Instead, look at these data and say “it’s a start.”

Why Have DFL Progressives Stopped Pushing For Progressive Tax Reform?

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Every year, we hear the State Legislature endlessly debate “water cooler” issues, such as Sunday liquor sales and legislator pay. Meanwhile, we hear almost nothing about more fundamental issues of governance, such as whether we have a taxation system that treats Minnesotans fairly.

When you look at Minnesotans’ effective state and local tax rate — the proportion of income paid in combined state and local taxes – it’s clear that we don’t have a progressive system. That is, we don’t a tax system where the rate of taxation increases, or “progresses,” as income increases.  This chart based on Minnesota Department of Revenue data paints a pretty clear picture:

Note: Department of Revenue study authors point out that “effective tax rates in the 1st decile are overstated by an unknown but possibly significant amount.” If you want to know why, there’s an explanation on page seventeen of the study.

However, even disregarding that first bar for the purposes of this discussion, we can certainly say that Minnesota has a state and local tax system that is not very progressive. That is, it is not taxing Minnesotans according to relative ability to pay.

As you can see in this chart, local taxes in Minnesota are particularly regressive.   Compared to other income groups, the wealthiest Minnesotans are paying the smallest share of their income in local taxes.  So if state lawmakers want tax fairness for Minnesotans, and they can’t rely on local officials to reform local taxes, then they need state taxes to be more progressive to offset those regressive local taxes.

Before my conservative friends trot out their tired old “socialism” rhetoric, they should read the words of Adam Smith, the father of free market economic theory who conservatives worship, on the subject of progressive taxation:

“The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess … It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.”

Republicans should also keep in mind that the nation’s first progressive income tax was enacted when the revered father of the Republican Party, Abraham Lincoln signed the Revenue Act of 1862.  A few decades later, Teddy Roosevelt carried on this Republican tradition when he strongly advocated for progressive taxation:

I believe in a graduated income tax on big fortunes, and in . . . a graduated inheritance tax on big fortunes, . . . increasing rapidly in amount with the size of the estate.

The fact is, until relatively recently Republicans were comfortable with much higher top income tax rates than they are today. While the top rate under Democratic Presidents Obama and Clinton was 40%, the top rates were 91% under Republican President Eisenhower, 70% under Republican President Nixon and 70% under Republican President Ford.

So, to my right wing friends, you’re embarrassing yourselves when you call progressive taxation “Marxism.”  For more than a century, progressive taxation was mainstream Republican thought.  Don’t let the uber-wealthy interests who seized control of the Republican Party in more recent years blind you to that fact.

To my friends in the center, spare me the “be reasonable” lectures you deliver every time progressive taxation is proposed.  Unless moderates also view Presidents Eisenhower, Nixon and Ford as wild-eyed extremists, you need to stop characterizing progressive taxation proposals as being somehow “radical.”

Finally, to my progressive friends, show some courage and leadership.  Don’t get so obsessed with shiny objects, like the Sunday liquor sales issue.  Don’t shy away from fighting to make our state and local taxation system more fair.  It’s time for DFLers who are “progressives” in name to become more progressive when it comes to substance.

About That “Soaking” Of Minnesota’s Rich

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For a long time, we’ve been hearing about how Governor Mark Dayton and DFL legislators “soaked the rich” back in 2013. That’s become the conventional wisdom at both the state and national levels, from both liberals and conservatives.

For example, at the national level, Patrick Caldwell from liberal Mother Jones magazine reported that Dayton ran on a “soak-the-rich platform of massively hiking income taxes on the wealthiest people in the state.”

Locally, conservative columnists Joe Soucheray and Katherine Kersten have long been beating the “soak the rich” rhetoricial drum, as has the conservative Pioneer Press editorial board:

“What’s the plan? Tax the rich, then tax the rich again, then tax the rich again?”

Finally, the Chair of the Minnesota House Tax Committee, Greg Davids, is among many conservative state legislators who have used “soak-the-rich” rhetoric to full effect.

Is the “Soak” Rhetoric True?

But did Governor Dayton’s 2013 tax increase on individuals earning over $150,000 and couples earning over $250,000 actually “soak” them in any meaningful way. This chart, derived from the Minnesota Department of Revenue’s 2015 Tax Incidence Study, calls that conventional wisdom into question:

MN_Soak_the_Rich_chart

This chart shows that the highest earning Minnesotans will only be paying a slightly higher proportion of their income in state and local taxes in 2017 than they did in 2012, under the rates in place before the 2013 tax increase. In 2012, the highest income Minnesotans were paying 10.5 percent of their income in state and local taxes. By 2017, the projection is that the highest income Minnesotans will see their state and local tax burden inch up to 10.7 percent.  This 0.2 percent increase hardly represents punitive “soaking.”

On a somewhat related issue, the chart also shows that the 10 percent of Minnesotans with the highest incomes look to be paying a much smaller share of their income in state and local taxes (10.7 percent) than the decile with the lowest incomes  (26.4 percent). However, on this point, the report contains an important caveat about the first decile data (page 17):

“…effective tax rates in the first decile are overstated by an unknown but possibly significant amount.”

But back to my original and primary point, which is not impacted by this caveat:  Despite all of the wailing and gnashing about the alleged mistreatment of the highest income Minnesotans, the impact of the Dayton-era tax increase on top earners’ overall state and local tax will be negligible.  Higher taxes on top earners didn’t cause the massive job losses that conservatives promised — Minnesota currently has the fifth lowest unemployment in the nation — and they didn’t soak anyone.

Don’t Forget About Local Taxes

How is it that Minnesota’s top earners are paying higher taxes, yet still are paying a lower share of state and local taxes than any other income grouping? Part of the reason is that the top 10 percent will only be paying only 2.2 percent of their income in local taxes in 2017, which is much less than the 3.1 percent share of local taxes that will be paid by the average Minnesotans, and less still than the share of local taxes paid by the lowest-income Minnesotans.

Impact_of_local_taxes_on_tax_burden_by_decileThis is a point that is frequently missed, or intentionally ignored, by people who focus solely on state tax burdens, without also taking local tax burdens into consideration.

So, did Mark Dayton really “soak-the-rich” when he increased taxes by $2.1 billion in 2013?   Inflated rhetoric aside, it turns out that the Dayton tax increase was more akin to a light misting than the predicted soaking.

Note:  This post was also published in MinnPost.