Minnesota Illustrated, a new report from the conservative Tax Foundation and the Minnesota Chamber of Commerce, makes some startling claims regarding taxes in Minnesota. Parts one and two of this series examined some of the Tax Foundation and Chamber claims regarding the state of Minnesota’s economy, which we found to be overstated in their pessimism. This article will examine some of the tax claims.
The report’s discussion of Minnesota taxes begins with the claim that “inflation-adjusted state [tax] collections are up 69 percent over the past 20 years.” North Star could not replicate this finding using the most current tax information available. Based on actual and projected data from the most recent Price of Government report from Minnesota Management & Budget, adjusted for inflation using the Consumer Price Index (CPI)—which the Minnesota Illustrated uses as its barometer of inflation, but which is not an appropriate index for gauging real (i.e., inflation-adjusted) growth in state and local government revenues and spending because it measures inflation in consumer purchases, not in the goods and services purchased by governments—total Minnesota state and local government taxes have increased by 38.4 percent over the twenty year period ending with the current fiscal year.
If we adjust for inflation using the Implicit Price Deflator for State and Local Government purchases—which is a more appropriate index for this purpose because it measures inflation for things that state and local governments actually must purchase—Minnesota taxes grew by 16.1 percent. Over this same period, Minnesota’s population grew by an estimated 16.7 percent. After adjusting for growth in the number of people that pay taxes to and receive services from state and local governments, real per capita taxes in Minnesota have declined by 0.5 percent over the last twenty years.
The slight decline in real per capita taxes in Minnesota over the last twenty years is notable, given the aging state population—which results in increased health and human service expenses, increased homeland security costs, and an increased concentration of special needs students in our schools, to name just a few escalating cost drivers. In any account, the Tax Foundation and Chamber claim of 69 percent tax growth is not accurate based on the best information currently available.*
The report further contends that Minnesota is eighth highest in the nation in state and local taxes as a percent of income; however, high per capita income states like Minnesota tend to receive less federal assistance than other low per capita income states and thus must rely more heavily on state and local taxes and other own-source revenue to fund public services and infrastructure. Based on a broader measure of revenue—that includes not only taxes, but fees, charges, federal transfers, and all of the other revenues on which state and local governments depend—Minnesota ranks 23rd among the fifty states and the District of Columbia. In terms of total state and local revenue per $1,000 of personal income, Minnesota is a scant 2.7 percent above the national average. These findings are based on fiscal year 2014 data and include the impact of tax increases enacted in 2013.
The Tax Foundation and Chamber also argue that Minnesota has the fifth worst business tax climate in the nation, based on the Foundation’s Small Business Tax Climate Index. That index, however, is not a meaningful barometer of tax climate, for reasons noted in a September 2016 North Star article and elsewhere, but rather an elaborate system for harshly grading states that have the least regressive tax systems. Absent from the report are the more direct and meaningful measures of business taxes prepared by Ernst & Young for the Council on State Taxation (COST), which show that Minnesota ranks 25th in total business effective tax rates (equal to the national average), 23rd in state and local business taxes per private sector employee (8 percent below the U.S. average), 37th in business taxes as a percent tax funded spending that benefits business (10 percent below the U.S. average)†, and 43rd in terms of business taxes as a percent of total state and local taxes (11 percent below the U.S. average).
There are several other noteworthy statements and omissions from Minnesota Illustrated, some of which are briefly described below:
- While the report emphasizes the progressivity of Minnesota’s income tax, it neglects to mention that Minnesota’s overall state and local tax system is regressive, with middle-income households paying thirteen percent more per dollar of income in state and local taxes than the top one percent.‡
- The claim that Minnesota’s state business property tax has grown faster than inflation is based on the CPI—which, as noted above, is not designed to measure the rate of inflation in state and local government purchases. Based on the appropriate measure of inflation, the state business property tax has declined slightly in real dollars and declined significantly in real dollars per capita since its inception in 2002. In fact, the state business property tax helps to explain why business property taxes have grown far less rapidly than homeowner taxes since 2002, despite more rapid growth in business taxable value.
- The report contends that estate taxes tend to burden the less wealthy, who are less likely to practice tax avoidance. To be clear, Minnesota’s $1.8 million exemption (which is calculated after a lengthy list of subtractions and which will be further increased to $2 million next year) ensures that no estate with a “lower level of wealth” pays any estate tax. Furthermore, a 2014 Minnesota Revenue Department estate tax study shows that estates with gross value in excess of $5 million have a higher effective estate tax rate (i.e., Minnesota estate taxes as a percent of gross estate) than do those with gross estate values from $2 to $5 million. These findings do not reflect the significant estate tax reductions enacted in 2014.
The Foundation and Chamber report’s purported purpose to help the public “understand Minnesota’s overall economy and tax system” is a bit disingenuous. Through a process of selective presentation, omission, and outright error, the Minnesota Illustrated attempts to paint a gloomy picture of Minnesota in order to promote a tax cutting agenda.
*Even using data from other sources, the 69 percent tax growth claim could not be replicated. For example, based on the most recent data from the U.S. Census Bureau available for FY 2014, real per capita state and local government taxes in Minnesota increased by 53 percent over the last twenty years—and this is based on the CPI, which understates the rate of inflation in state and local government purchases, and does not take into account growth in the state’s population over this period.
†The COST report measures business taxes relative to tax funded spending that benefit business under three different assumptions: zero percent of education spending benefits business, 25 percent of education spending benefits business, and 50 percent of education spending benefits business. The information cited above is based on the zero percent assumption. Based on the 25 percent assumption, Minnesota ranks 34th (11 percent below the U.S. average). Based on the 50 percent assumption, Minnesota ranks 31st (11 percent below the U.S. average).
‡This is based on projected 2017 data from the 2015 Minnesota Tax Incidence Study. “Middle-income households” are defined as those households in the middle quintile (the fifth and sixth deciles), with annual income from $39,055 to $66,362.