Study shows who bears Minnesota's biggest tax burden

The high-octane political fight over taxes at the Capitol got a new source of fuel Wednesday: a statewide study that finds lower- and middle-income households are hit hardest by Minnesota's tax system.

"Minnesota's tax system is more regressive than it was a decade ago," acting Revenue Commissioner Dan Salomone said Wednesday. "Despite a slight improvement over the last study, the system remains notably more regressive than the historical average since 1991."

The study found that 90 percent of the state's earners paid an average of 12.3 percent of their income in state and local taxes in 2008. The wealthiest 10 percent of households earning more than $130,000 paid an average of 10.3 percent.

The study also found the gap between top earners and the rest of the population has widened over the past decade and that local property taxes -- a highly regressive tax -- make up a larger share of the overall tax mix.

Minnesota House Speaker Kurt Zellers said the message to him is that elected leaders unwisely raised sales and gas taxes in recent years. He said it also strengthens Republicans' call to cut income tax rates.

Zellers, R-Maple Grove, said the answer is to lower taxes on those shouldering most of the burden rather than raising them at the high end.

The findings come just as the Republican-controlled Legislature is preparing steep cuts to local government aid, which DFL Gov. Mark Dayton says will trigger further property tax increases.

But in a sign that they can only go so far, Republicans appeared Wednesday to be caving to pressure from suburban leaders upset about proposed aid cuts.

At a jammed committee meeting Wednesday, Rep. Linda Runbeck, chairwoman of the property and local taxes division, backed off an earlier House proposal to cut aid to suburbs. She asked to delay that provision for a year, deciding that the cuts might be too drastic after hearing from representatives of older suburban cities. But Runbeck stood firm on winding down aid for Minneapolis, St. Paul and Duluth.

"What we are trying to do is give a warning about the future," she said. "The future indicates there just won't be these kinds of sizable subsidies available to cities."

Why the change of heart? Runbeck said suburban leaders told them they needed more time to find reductions in their budgets. Several of those cities, like Anoka, Osseo and White Bear Lake, are Republican strongholds.

In another concession to budget-rattled local leaders, Runbeck also ditched a widely criticized proposal to freeze local property taxes for two years. The move would have left many communities with starkly lower state aid payments and no way to recoup the money through higher property taxes.

"That's probably going a little further than we should go," said Runbeck, R-Circle Pines. "We need to trust our local leaders."

Research by House analysts estimated the proposed Republican aid cuts would result in a $391 million rise in property taxes, averaging nearly 5 percent statewide.

"Sure, they are going to be upset," Runbeck said of cities bracing for cuts. "But I argue they built a more costly model of government than had they not had 40 years of subsidy."

DFL legislators were furious that Republicans weren't similarly delaying reductions for Minneapolis, St. Paul and Duluth, which are dominated by Democrats.

"Where was the rationale behind these tax increases for my homeowners?" asked state Rep. Tim Mahoney, DFL-St. Paul.

He got no answer.

Minneapolis Mayor R.T. Rybak and St. Paul Mayor Chris Coleman asked committee members to rethink the aid cuts.

The mayors said they'd need to look at reductions in every corner of their budgets, including public safety, which gobbles up a giant chunk of city revenue.

The mayor of Eagan, a comparatively wealthy city that doesn't get state aid, urged legislators not to cut funding for Minneapolis and St. Paul. Mayor Mike Maguire said most Eagan residents earn a living in the Twin Cities and don't pay for many of the amenities they rely on during the week, like good roads and police protection.

"The city of Eagan can't succeed if our core cities don't," Maguire said.

The argument over government aid highlights what has become a central debate at the Capitol -- the issue of fairness. Of course, the answer is often intensely partisan.

Despite a $5 billion projected shortfall, Republicans want to slightly lower income taxes across the board and cut aid to cities. Dayton has stood solidly behind his proposal to raise taxes on high earners and protect local governments from further aid reductions.

The new tax report bolstered much of what Dayton has been saying since the campaign: The rich are not paying the same percentage of taxes as other residents.

But Democrats aren't entirely blameless.

Years of increases to gas, sales and property taxes that occurred at least partially under DFL rule in the Legislature means "Minnesota is not following a pattern of other states," said Paul Wilson, tax research director for the Minnesota Department of Revenue.

Minnesota, however, is not a bottom-dweller in tax structure.

In terms of tax progressiveness, the state ranks 14th. California holds the top slot and Florida, which has no state income tax, is dead last.

Wilson also described a "growth in inequality" in Minnesota's economy.

To assign blame, Wilson said, elected leaders should look to themselves.

"To move that much tax burden takes a lot of policy," Wilson said.

Baird Helgeson • 651-222-1288