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Many Minnesotans to Pay Just Shy of the Highest 2016 Income Tax Rate in the Nation

Minnesota’s income tax rate on top earners moved up to the third highest rate in the nation for tax year 2016 after the expiration of a temporary tax increase in Hawaii.

The third highest rate on top earners is bad enough, but there are a great many Minnesotans who pay an income tax rate that is just a hair shy of the highest rate in the nation.

That’s because Minnesota starts applying the top rate at a much lower income level than some of the higher tax states.  Minnesota’s top rate for single filers starts at $155,650 and the top rate for joint filers starts at $259,420.  Though California boasts the top income tax rate in the nation, the Golden State doesn’t start applying a higher rate than Minnesota until a single filer’s income reaches $263,223 and joint filer’s income reaches $526,444.

As a result, for tax year 2016 Minnesota imposes nearly the highest income tax in the nation on single filers earning between $155,650 and $263,223 and joint filers earning between $259,420 and $526,444.  At these income levels, Minnesota’s income tax rate of 9.85 percent is just 0.05 percentage points less than Oregon’s 9.9 percent rate, a virtual tie for the highest rate.

The two charts below depict the income tax rates and brackets for the five states with the highest rates on top earners in 2016.  Each line shows how rates step up at various income levels in each state.   Minnesota is represented by the thicker green line.  As Minnesota rates take the substantial step up to the state’s top rate, a window of income—the green shaded area—opens where Minnesota imposes nearly the highest income tax rate in the nation on joint and single filers.  This shaded area provides an important perspective on just how large this window is, especially for joint filers.

joint-filer-rates

 

single-filer-rates

It’s no coincidence that Minnesota, on net, loses these higher-income households at a higher rate than most states.  According to the latest IRS data measuring state-to-state migration between 2014 and 2015, Minnesota’s net migration rate for households earning more than $200,000 ranked 41st in the country.  The net migration rate for households earning $100,000 to $200,000 also ranked 41st.  By contrast, Minnesota ranked 19th for households earning $1 to $10,000 and 21st for households earning $10,000 to $25,000.  (See also Minnesotans on the Move to Lower Tax States 2016 for more detailed analysis.)

This ongoing loss of high-earning households and gain of low-earning households is undermining Minnesota’s economy.  Reducing tax rates is one of the few policy levers available to help retain and attract the workers Minnesota needs to grow the economy.  With a $1.4 billion surplus going into the 2017 Legislative Session, tax cuts need to be a priority.

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