Who Pays What In Minnesota

Who Pays What In Minnesota?

In response to the statutory requirement enacted in 1990 the Minnesota Department of Revenue has prepared and issued the tenth biennial tax incidence study prepared – The 2009 Minnesota Tax Incidence Study. The study analysis who pays what or how the burden of state and local taxes was distributed across income groups in 2006 and estimates the tax incidence in the state and local taxes for the year 2011.

The major objective is to provide taxpayers and policymakers with important information on the equity or fairness of the overall distribution of Minnesota taxes. 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.

Defining Tax Incidence: Tax incidence is the study of who ultimately bears the economic burden of a tax. Broadly speaking, tax incidence analysis examines the impact of taxes on the distribution of income within a society. To compare the tax burden of one set of the population to another, it is useful to measure the tax burden as a percentage of household income: Tax Incidence = Tax Burden / Household Income. Thus, the task of a tax incidence study is to estimate: (1) the tax burden for a particular household or group of households; and (2) household income for that household or group (Wisconsin Tax Incidence Study, 2004).

This study also highlights the distinction between taxes on households and taxes on business. Taxes on households include taxes paid directly by households (such as the individual income tax, homeowner property tax, vehicle registration tax, and the sales tax). Household taxes also include taxes paid by business if the full tax is assumed to be passed on to households in higher prices, like, excise taxes on cigarettes and alcohol, fuel taxes on fuel purchased by households, insurance taxes on homeowner insurance policies, etc. “Taxes on business” include any tax paid by business that is not expected to be fully reflected in the price paid by consumers, such as the corporate franchise tax, business property taxes (including property taxes on rental housing), the sales tax on business purchases, and insurance taxes on business insurance.

The tax incidence occurs in three steps:

STEP 1: IMPACT i.e., initial imposition of tax; the actual revenues collected under the heads of Income, Consumption, and Property. The IMPACT then shifts and

STEP 2: INCIDENCE on (resident and nonresident) consumers, capital, labor, and land (the actual burden of the tax); which is then allocated and

STEP 3: INCIDENCE on specific Minnesota households is assessed. This is actual burden on the households.

MN Tax System Impacts by Tax Area
	2004	2006	2011 (Proj.)
Income	35.6	37.7	35.5
Consumption	33.7	31.8	30.3
Property	30.7	30.4	34.2

While the share of consumption taxes is falling, that of Income is on the rise, and the share of property tax is projected to rise by 3.5% by 2011.

In the year the total state and local taxes were $22.11 bn. Of these 2.8% were contributed by non-residents of the state, whereas the proportion contributed by the MN households and the MN business was 64.8% and 32.7% respectively. In the year 2011, it is projected that the share of non-residents would be the same, but the business would contribute 0.2% higher and the households’ contribution would come down by 0.2%. (I don’t know from where the remaining 0.1% would come from. There must be some typo).

Household Incidence after Shifting

Households Incidence After Shifting
	2006	2011 (Proj.)
Individual Income	36.4	36.2
Property	24.7	28.6
Sales	22	20.3
Corporate Franchise	3.7	2.4
Other	13.3	12.6

In 2006 Minnesota households paid (either directly or indirectly through shifted business tax) a total of $18.5 billion in Minnesota state and local taxes. This equals 83.9 percent of total state and local tax collections ($22.1 billion). The other $3.5 billion (16.1 percent) is “exported” to nonresidents or visitors to the state. The share exported to nonresidents is expected to remain at 16.1 percent in 2011. The total burden on Minnesotans will rise by almost 17.0 percent (to $21.7 billion), increasing slightly faster than income growth (at 15.5 percent).

Between 2006 and 2011, the share of the property tax (after PTR) in the burden on Minnesota households increases. The share of sales taxes, corporate franchise tax, and other taxes falls, and the individual income tax share remains almost unchanged.

Whether the Tax Structure is Progressive, or Regressive?

The study probes this and calculates the Suits Index (-1 < x =" 0,">

The following table of Population-Decile Suits indexes for selected Minnesota state and local tax groups in 2006 and 2011 explains the whole taxation scenario. The only major progressive tax is the personal income tax. Consumption taxes are the most regressive category. Taken as a whole, the system of Minnesota taxes was regressive in 2006 (a population-decile Suits index of -0.053). State taxes were roughly proportional (+0.002), and local taxes were regressive (-0.208). Between 2006 and 2011, Minnesota’s overall population-decile Suits index is expected to remain essentially unchanged.

Population-Decile Suits Index for Selected Minnesota State and Local Taxes
Tax Category	2006 Suits Index	2011 Suits Index
Personal Income Tax	0.194	0.181
Sales Taxes (State & Local)	-0.184	-0.177
Business Taxes	-0.21	-0.21
Individual Taxes	-0.006	-0.003
All State Taxes	0.002	0.016
All Local Taxes	-0.208	-0.201
Total Taxes	-0.053	-0.051

How fair is the State & Local Taxes Structure:

Effective tax rates are calculated by comparing the tax burden to the household’s income. The effective tax rate – that is, the ratio of taxes paid to income – can be used to compare tax burdens across income categories. The report observes that Minnesota’s state and local tax system is somewhat progressive for the lower and middle deciles and somewhat regressive between the middle and upper deciles. For 2006, effective tax rates rose from 11.5 percent of income in the third decile to 12.4 percent in the fifth decile, and then fell significantly to 10 percent of income in the tenth decile. For 2006, the effective tax rate was 8.3 percent for state taxes and 2.9 percent for local taxes. By 2011, the effective state rate is projected to fall to 7.9 percent, but the effective local tax rate is projected to rise to 3.5 percent. Besides the burden of state taxes is projected to increase by only 9.7 percent – more slowly than income growth (15.5 percent). The local tax burden is projected to grow by 37.5 percent – two and one-half times as fast as income.

Also it is noted that patterns of effective rates for taxes paid by individuals versus businesses are also quite different. For 2006, effective rates for taxes paid by individuals increased from 6.5 percent in the second decile to 9.4 percent in the eighth decile, and then declined to 8.3 percent in the tenth decile. In contrast, Minnesota state and local taxes on businesses (after shifting) are regressive, with effective tax rates for 2006 falling from 6.0 to 1.7 percent between the second and tenth deciles. The overall effective rate for taxes on businesses after shifting was 2.6 percent and on individuals was 8.7 percent in 2006.

What the State Senate has to say on the report:

1. “This year’s study reaffirmed what previous reports have proved: Minnesotans with the highest incomes continue to pay less of their income in taxes than middle- and low-income Minnesota families. Minnesota is moving away from a progressive tax system and toward a regressive system that disproportionately impacts middle-class families”.

2. To compare tax burdens: average Minnesota families, earning less than $124,000 a year, have an effective tax rate between 11.7% and 12.5%. Effective tax rates represent the percentage of income paid toward state and local taxes. In contrast, Minnesota families making more than $124,000 a year pay about 10% of their income in taxes, households making more than $176,000 have an effective tax rate of 9.7%, and those making more than $448,000 – the top 1% of earners in Minnesota – pay 8.9% of their income toward state and local taxes. The effective tax rate for middle- and low-income Minnesotans is at least 3% higher than the wealthiest earners.

( State Senate Legislature’s “2009 Week in Review”, 03/20/2009) .

Note:

1. All the figures and most of the observations are taken from the Minnesota Tax Incidence Report – 2009.

2. For statistical purpose the population was divided into ten deciles. I think the deciles are based on various income brackets, though I could not find this mentioned explicitly in the report.

Blog posted by Sheikh, Abdul Qadir.