Tax deal represents a missed opportunity
Gov. Walz and legislative leaders in the state House and Senate announced the outline of a budget deal Monday morning. Fox 9 reports: The agreement calls for $4 billion in…
The recent tax bill by the Minnesota Senate would, among other things, cut our state’s bottom rate of state income tax from 5.35 percent to 2.80 percent. Refreshingly in these politically fractured times, the bill received bipartisan backing: it got the votes of all the Republican senators, six from the DFL, and both independents.
Some of the reaction to the bill was utterly predictable. Education Minnesota, the state teachers’ union, denounced it as “tax cuts for the rich.” The Minnesota Budget Project, an initiative of the Minnesota Council of Nonprofits, claimed that “despite being described as being for all taxpayers, this proposal provides no benefit for about 1 in 5 Minnesota households.” The DFL, despite six of its Senators supporting the bill, claimed that “more than half of total tax cuts go to highest-income Minnesotans.”
It is true this measure would provide no direct benefit to the bottom 20 percent of Minnesota households by income. That is because, as the Department of Revenue’s most recent Tax Incidence Study shows, taken together these households pay no state income tax. Indeed, once tax credits are factored in, these households are actually net beneficiaries from the state income tax system. It isn’t possible to cut your income tax burden if you don’t have one.
It is also true that, in dollar terms, richer individuals will see their income tax burden fall the most as a result of this measure (specifically those in the $150,000 to $249,999 range). But that is because they pay a disproportionate amount of state income tax.
Looking again at the Tax Incidence Study, we see that every income decile of Minnesota households up to the eighth — that’s the bottom 80 percent of households by income — earned a share of total state household income larger than the share it contributed to total state individual income tax receipts. The ninth decile broke even, earning 15 percent of total state household income and paying 15 percent of total state individual income taxes. But the highest-earning 10 percent of Minnesota households earned 43 percent of the state’s total household income and contributed 59 percent of its total individual income tax revenues (these numbers have held pretty steady over time despite different tax rates).
This is the result of a progressive tax system and Minnesota has had one of the most progressive in the country for decades. But if you create a situation where A) the lowest-earning 20 percent of households pay nothing in income tax and B) the highest-earning 10 percent pay 59 percent of the income tax, you have created a situation where it becomes very hard to cut income tax rates even for lower earners without the “the rich” getting a chunk of that relief.
But only in dollar terms. By focusing the tax cut on the lowest bracket, it applies to a larger share of income for households at the bottom of the income scale than those at the top. As a result, effective tax rates (income tax payments/income) fall by more for households at the bottom of the income scale than for those at the top. So, while those in the $150,000 to $249,999 income range will see their tax burden fall by $1,161 annually according to Minnesota Senate Counsel, this is only a 12 percent fall in their effective tax rate. For households in the $20,000 to $29,999 income range, the effective income tax burden falls by 100 percent. It is totally eliminated. For households in the $30,000 to $49,999 income range, the effective tax rate falls by 56 percent. For individuals earning $500,000 or more, by contrast, the reduction is just 1 percent.
This bill’s reductions in effective tax rates are heavily skewed towards those further down the income scale. It is not a “tax cut for the rich.” That probably won’t stop people from saying that it is, but the facts say otherwise.
This op ed appeared in the Litchfield Independent Review on May 4, 2022