A Better Way to Reduce Tax Regressivity


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Flag_of_Minnesota_(1957-1983).svgAccording to business lobbyists, one of the benefits of the elimination of the state business property tax is a reduction in Minnesota tax regressivity. In the long run, though, business property tax breaks are an inefficient way to do this, especially in comparison to homeowner tax relief.

Minnesota’s state and local tax system is regressive, meaning that low and moderate income households pay a higher percentage of their income in state and local taxes than do high income households. Policymakers of all political stripes have advocated—with varying degrees of enthusiasm—for a reduction in Minnesota tax regressivity on the grounds that it is better to more evenly distribute taxes so that all households are paying a more or less similar percentage of their income in state and local taxes.

The regressivity of a tax is measured by a statistic known as the Suits index. If the Suits index for a tax is less than zero, that tax is regressive; the further below zero, the more regressive the tax. So just how regressive are business taxes?

According to Minnesota Department of Revenue (MDOR), the Suits index associated with the elimination of the state business property tax is -0.160,* so the state business property tax is regressive and it follows that the elimination of a regressive tax will make the overall state and local tax system less regressive.

On the other hand, it is worth noting that the Suits indexes calculated by MDOR are based only on the share of state and local taxes borne by Minnesota taxpayers. A portion of the state business property tax is exported out-of-state; these exported taxes are largely borne by owners of capital (e.g., business owners, shareholders) and tend to be progressive (i.e., borne disproportionately by higher income households). While the portion of the state business property tax paid by Minnesota taxpayers is regressive, the overall incidence of this tax—including the exported portion—is very likely progressive.

However, the focus of Minnesota policymakers is understandably on Minnesota taxpayers. That being the case, is the elimination of the state business property tax an efficient way to reduce state and local tax regressivity?

Not really. Dollar for dollar, homeowner property tax relief will provide a much more dramatic reduction in tax regressivity than the state business property tax elimination for two reasons:

  • While the state business property tax is regressive, homeowner property taxes are even more regressive. The Suits index for homeowner property taxes is -0.202—somewhat more regressive than the state business property tax.
  • As noted in the previous installment in this series on the state business property tax, an estimated 53 percent of the tax relief resulting from the elimination of this tax will be exported out of state to non-Minnesota taxpayers or to the federal government through increased federal taxes and thus will have no impact on Minnesota state and local tax regressivity. However, only about 16 percent of homeowner tax reductions will be exported (entirely to the federal government).

Because homeowner property taxes are more regressive than business property taxes and because a much larger percentage of homeowner tax relief will stay within Minnesota, a reduction in homeowner taxes will do much more to reduce Minnesota state and local tax regressivity than will an equivalent reduction in the state business property tax. A rough approximation based on the 2015 MTIS and supplemental information provided by MDOR indicates that, dollar for dollar, a reduction in homeowner property taxes will be more than twice as effective in reducing Minnesota tax regressivity as a reduction in state business property taxes.

This conclusion assumes that homeowner tax relief is distributed uniformly across all Minnesota homeowners (i.e., the property tax bill of each homeowner is reduced by the same percentage). If, instead, homeowner tax relief is targeted through an income-sensitive program such as the homeowner property tax refund, the resulting reduction in tax regressivity per dollar of tax relief would be much greater. For example, on a dollar-for-dollar basis, an increase in homeowner property tax refunds targeted to households with incomes under $20,000 will be about ten times more efficient in reducing tax regressivity than cuts in the state business property tax.

The phase-out of the state business property tax, as well as other business tax break proposals, are generally inefficient ways of reducing state and local tax regressivity. To the extent that Minnesotans are truly interested in reducing tax regressivity through tax cuts, they would be well advised to look to homeowner tax relief or toward programs that target tax relief to low and moderate income households.

 

 

*Suits indexes cited in this article are from the 2015 Minnesota Tax Incidence Study or other MDOR sources.