Income inequality shapes Minnesota tax debate

  • Article by: LORI STURDEVANT , Star Tribune
  • Updated: March 16, 2013 - 6:47 PM

Even in middle-class, middle-American Minnesota, income inequality is rising. It’s not a new phenomenon.

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Photo: Non-perishable food donated to a food shelf.

At Thursday’s rollout of the new and — some would say — improved version of Gov. Mark Dayton’s 2014-15 proposed state budget, one of my eagle-eyed Star Tribune colleagues spotted a slight discrepancy in the new numbers vs. January’s version.

Why is the governor’s proposed new top income tax bracket forecast to generate more revenue than the same proposal was pegged to yield two months ago? Rachel Stassen-Berger asked.

“The forecast changed,” said Revenue Commissioner Myron Frans, explaining a $20 million increase.

“Here’s what’s happening: In 2011-12, the top 1 percent of incomes in the country grew by 11 percent, and the other 99 percent went down, a negative 0.7 percent. After the recession, we are seeing recovery in incomes at the high end.”

Make that the high end — only.

Frans steered me to a New York Times report last October that said that in the first full year of recovery from the Great Recession, the top 1 percent of earners captured 93 percent of all U.S. economic growth.

He could have pointed to numbers closer to home. His own department’s latest Tax Incidence Study projects that in 2015, the top 1 percent of Minnesota’s earners will take home 16.3 percent of the state’s total household income, up from 13.9 percent in 2002. Meanwhile, the bottom 40 percent’s share in 2015 will be 9.6 percent, down from 10.7 percent 11 years ago.

Even in middle-class, middle-American Minnesota, income inequality is rising. It’s not a new phenomenon.

State demographer Susan Brower made that point before a House panel last month. Her graphs show that in all but the lowest-earning quintile of Minnesotans, mean incomes (in real terms, after adjusting for inflation) rose nicely between 1950 and 1970. Then the raises stopped for the bottom 80 percent. To be sure, individuals moved from one quintile trend line to another. But the state’s overall income pattern has held steady — or shrunk slightly — for more than 40 years.

Not so for the top 20 percent, however. The mean wage income within the top quintile kept rising after 1970. Mean household income in that quintile leveled off after 1990 at about $170,000 (in 2010 dollars), but it soared before that.

Meanwhile, in both the state and nation, poverty is on the rise. The share of the Minnesota population living with incomes below the federal poverty line ($15,130 for a two-person household in 2012) is 12 percent, Brower said. That’s a 30-year high, and up from a low of 8 percent in 2000.

It’s fair to conclude that the modern Minnesota economy, like the nation’s, is a robust engine for making the rich richer and the poor more numerous.

That phenomenon is salient context for the debate over taxing and spending that will dominate the remainder of the 2013 legislative session. It’s a lens through with Minnesotans will view and judge Dayton’s plan to raise the state income tax rate that applies to that portion of taxable incomes in excess of $250,000 for joint married tax filers and $150,000 for single filers.

The average taxable incomes of the 2 percent of state taxpayers who would pay such a tax is $617,000, derived from total incomes in the $650,000 range. Those are numbers that make populist eyes pop.

Minnesota politics has exhibited a populist streak for more than 100 years. But my impression is that most Minnesotans don’t begrudge high-income people their success. They wouldn’t favor a state tax scheme that’s punitive to those who’ve succeeded.

But they’d like to see successful folks pay the same share of their incomes in state and local taxes that middle-income people do. They don’t, and they haven’t for more than a decade. The latest Tax Incidence Study reported a state-plus-local effective tax rate of 9.6 percent for Minnesotans making more than $446,961 per year. By comparison, households with incomes between $41,102 and $53,071 pay 12.3 percent.

Dayton frequently cites those figures as he argues for the upper-income tax increase he’s touted consistently since he started running for governor in 2009. He doesn’t as often mention growing income inequality, and when he does, it’s to suggest that those at the top appear able to afford a little extra tax bite.

More could be said from the gubernatorial bully pulpit about the aspect of income inequality that I think most troubles Minnesotans. It’s declining opportunity for those in the lower quintiles to prosper at any time in their lives.

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