By Jeff Van Wychen and Dane Smith
ST. PAUL (April 2, 2015) — News reports since the release of the highly regarded 2015 Minnesota Tax Incidence Study have focused on the facts showing that our total state-local tax system has become less regressive. This has been correctly attributed to restoration of higher top-tier state income tax rates in 2013, property tax refund increases, and other changes that contributed to a modest decline in taxes paid by most Minnesotans.
Digging further into the numbers, it gets even better, from a national fairness perspective.
Over the last two years Minnesota has made more progress than any other state in reducing state-local tax regressivity, according to our analysis of both the Tax Incidence Study, prepared by the Minnesota Department of Revenue, and similar data from other states.
Our report, “Minnesota’s Progress Against Regressivity,” shows what experts have known for a long time—that almost all states have slightly to woefully regressive tax systems. This means those at the top pay a smaller percentage of their income in state-local taxes than those in the middle and at the bottom. And despite the widely acknowledged crisis of growing overall economic inequality, tax regressivity in most states worsened over the last two years. Minnesota was one of just 10 states that bucked this trend, reducing regressivity and climbing from the 16th to 7th least regressive state, the Growth & Justice report shows.
The sobering context, as many have observed, is that Minnesota’s tax system remains regressive, even as households in the very top income brackets continue to capture a disproportionate share of economic growth and an even more lopsided share of assets and wealth. Recent national reports document that this pattern, underway since the 1970s, is not relenting.
To be sure, the overlay of an overall progressive federal tax system lessens this unfairness; however, a progressive federal tax system does not justify a regressive state-local system. Decades of growing income inequality and declining real wages have severely pinched the budgets of low and moderate income families, which in turn have eroded consumer purchasing power, thereby contributing to severe recessions and anemic recoveries for average families, and threatening long-term economic health.
State tax policy alone cannot solve this inequality crisis, which is generally attributed to the dynamics of global capitalism and a technology revolution. But one thing local policymakers can do to reduce the severity of these trends is to enhance the purchasing power of low and moderate income households by reducing regressivity. In addition, state and local governments will be better able to generate the revenue needed to adequately fund schools, roads, and other public services if they are not relying on tax dollars generated disproportionately from families who have fewer dollars to spare, and who are increasingly resentful of perceived unfairness in our tax system.
By concentrating tax increases over the last two years on those households with the greatest ability to pay, Minnesota was able to generate sufficient revenue to restore investments in K-12 and higher education, roads and physical infrastructure, workforce development, and affordable healthcare and housing care, while at the same time reducing the effective tax rate paid by the majority of middle class Minnesotans.
Minnesota’s marginal rates on top incomes still are not as high as they were as recently as the 1970s. The Tax Incidence Study shows that even after the progress in reducing tax regressivity resulting from the 2013 and 2014, tax legislation state and local taxes per dollar of income for the top one percent of Minnesota households are 12 percent lower than they are for middle income families.
The wealthiest Minnesotans thus are still paying less in state and local taxes per dollar of income than any other group in the state, while their income and wealth is growing in part due to an enviable system of public investments that puts Minnesota near the top on most measures of business growth, quality of life, and socioeconomic health.
Numerous bills currently pending in the Minnesota Legislature could erase this progress. These include proposals to dramatically reduce the state’s progressive estate tax, provide state income tax breaks on Social Security income that would primarily benefit high-income households, and cut the highly progressive renter’s property tax refund.
Tax fairness can’t be the only goal of state policymakers. Stability, revenue sufficiency, and economic competitiveness must also be factored in. But Minnesota, which has long had a more progressive tax system than the average state, has fared better than most of those other states on most measures of economic well-being. In 2015 the legislature should not undo the progress made over the last two years by backsliding toward increased regressivity.
Dane Smith is the president of Growth & Justice, a research and policy organization that seeks a broader prosperity for Minnesota.
Jeff Van Wychen is a veteran fiscal analyst for state and local governments, and is a Policy Fellow for Growth & Justice.