Minnesota’s reputation as a soak-the-rich state takes a hit in the latest Tax Incidence Study, the state Revenue Department research economists’ biennial answer to the politically charged question, “Who pays?”
Average effective tax rates — that is, the percentage of personal income taxed on average by state and local governments — projected for 2017 are down compared with 2012 at every income level, with one exception. Lower-income people are due for effective-rate cuts in the 0.6 to 0.8 percentage point range; middle-income Minnesotans will see effective rates fall in the 0.2 to 0.4 percentage point range. Rising incomes are the biggest reason, revenue Commissioner Cynthia Bauerly said.
The exception is the top 10 percent — those whose household incomes in 2012 exceeded $140,692. Their effective rates are due to climb modestly, from 10.5 percent to 10.7 percent.
The bulk of that change happens among the top 1 percent of earners, whose incomes exceeded $493,603 in 2012. Their tax bite is projected to grow from 9.8 percent in 2012 to 10.5 percent in 2017. That’s largely the result of the so-called “fourth tier” income tax increase for the top 2 percent of earners enacted in 2013, Bauerly said.
Before those fortunate few declare themselves abused, they should know that at 10.5 percent, their effective tax rate will still be about 1.5 percentage points lower than the rates paid by middle-income Minnesotans — that is, those with household incomes between $25,000 and $75,000 a year. Most middle earners will pay effective rates at or near 12 percent.
In fact, if any Minnesotans have just cause for complaint, it’s those at the low end, not the top, the study shows. The top 10 percent of Minnesota earners in 2017 are expected to bear 41.5 percent of the total tax burden while having 44.2 percent of total income. By contrast, the bottom 10 percent of earners will bear 1.9 percent of the total tax burden while receiving only 0.8 percent of total income.
Still, the 10.5 percent effective tax rate for top earners represents a partial reversal of the tax policy course set in the late 1990s, when big tax cuts were enacted. In the early 1990s, incidence studies found that affluent Minnesotans paid effective tax rates quite similar to the ones middle earners paid. But beginning in 1998, the top 10 percent caught a break that no other income category experienced. Effective rates for the top 1 percent went as low as 8.3 percent in the late 1990s, and rose in the 2000s only when high-end incomes fell during two recessions.
“Soak the rich” is not desirable tax policy. It’s anticompetitive and detrimental to growth in the long run. But neither was Minnesota well-served by tax policies that spared the rich and, as a result, overburdened middle-income earners, crimping their ability to contribute to economic activity. This page has long argued for tax policies that spread the burden evenly across income groups. The tax changes in 2013 moved in that direction.