Friday, April 2, 2010

The overall tax revenue system of Minnesota

Minnesota unbalanced budget dates back to 2001 when the strong economy made the governor decide to cut the taxes and increased the spending of K-12 education. With the present floundering economy, the budget crisis is likely to continue in the coming several years. From the Senate Research, it is anticipated that the official FY 2010-2011 Budget deficit (spending exceeds resources) will be $1,203,000,000, and $8,095,000,000 for the FY 2012-2013. From the horizontal perspective, the overall tax revenue system of Minnesota is more regressive compared with other states; from the time series perspective, the demographic and economic factors will lead a volatile tax revenue in the next 25 years, which makes the long term budget instability even more difficult to manage.

An overlook of the tax structure of Minnesota, we can see the regressivity of the overall tax system: the top 1% income earners have the lowest income tax incidence, while the low income people pay the higher tax rate compared with the wealthier people. If we include fees into our consideration, the tax and fees burden that the low income people bear will become even larger because fees are more regressive and have grown faster than taxes. Except the individual income tax, all the other types of taxes are regressive.

2009 Minnesota Tax Incidence Studies

Income range

Effective tax rate

$35,005 & Under


$35,006 - $53,483


$53,484 - $72,133


$72,134 - $91,043


$91,044 - $113,259


$113,260 - $144,456


$144,457 - $201,166


$201,167 - $346,507


$346,508 - $951,731


$951,732 & Over


(Source: MN Department of Revenue)

Even though we have such a regressive revenue system, the current governor Pawlenty still ruled out a number of efforts to promote the tax progressivity, such as adding a fourth bracket of income tax and increase the tax rate of the wealthy class. It is a bad decision because it not only exaggerates the income inequality, but also blocks a way of increasing the government revenue to solve the imbalance budget.

Another budgetary problem has to do with the tax revenue instability in a long run. Several factors contribute to this phenomenon. First of all, demographic shift indicates that there will be a 30% jump in workers who turn into 62 beginning in 2008, while the worker population will become relatively fewer in the recent year. The ageing of population will strain the tax revenue as well as increases the expenditure to a large extent. Another reason is the slowdown growth of the tax revenue over the next 25 years. With the slower growth of the national and global economy in the coming years, it is expected that the growth rate of state revenue will become smaller too. Between 1996 to 2001, the growth rate of the state revenue was 6.8%, while between 2028 to 2033, the growth rate will decrease to 3.9%. The final concern is the volatility of the general fund tax. In the past decade, the general fund tax presented a very volatile pattern which becomes a threat to the tax sustainability. Among the three major revenue sources, corporate franchise tax is the most volatile and extremely sensitive to the economic change.

The current economic recession exerts such a devastating effect on the state and local public finance, causing all states to
explore other alternatives to balance the financial bills. For Minnesota, the future challenge will be decreasing the regressivity and increase the stability of the overall tax system.

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