The bad economy could be providing state and local taxpayers with an unexpected "fairness dividend." That's the projection of the state's 2009 Tax Incidence Study, the Revenue Department's biennial examination of how state and local tax burdens are shared by Minnesotans at various income levels.
As the housing bubble expanded from 2004 to 2006, the gap in effective tax rate borne by middle and upper-income earners widened until, in 2006, the top 1 percent of earners paid an effective rate of 8.9 percent, compared with middle-earner rates of about 12 percent. The top 1 percent of Minnesota earners paid an effective rate of 9.6 percent in 2004.
But now that the economic boom has turned to bust, the forecast for 2011 is that the effective rates for upper-income earners will be virtually unchanged from 2006. But rates for middle-income earners, between $35,000 and $97,000 a year, are projected to rise to about 12.5 percent.
That gap in effective rates is bound to be noticed at the Capitol. DFL legislative majorities in recent years have pinned their case for higher state income taxes for the wealthy, and more tax relief for low- and middle-income property taxpayers, on a desire for an equitable effective rate for all Minnesotans.
State tax research director Paul Wilson observed as the new study was released Monday that good times in this decade brought widening income inequality in Minnesota, and a more regressive tax burden followed. In a regressive system, taxes as a share of income are higher for low- and middle-income earners than for those at the top.
Wilson noted that the study is based on current state and local tax law, and current law may be changing soon in the face of government budget deficits. He also reported that even current law projects a "substantial" shift in the mix of state and local taxes, with the local share growing and the state's falling. Eliminating the state's deficit is likely to accelerate that trend. And since local governments rely heavily on the regressive property tax, more local taxes will mean a wider "fairness gap" in Minnesota's total tax burden. Only one tax -- the state income tax -- is progressive enough to counter that trend.