Of all the legislation enacted in recent years, few have aroused as much passion as chapter 147 of the 88th legislative session: the 2013 omnibus tax act. Thus, it is fitting that North Star’s inaugural fiscal policy article should focus on this historic law. To some, the 2013 tax act represents confiscatory taxation and excessive government expansion. To others, it represents a milestone achievement of progressive taxation in support of intelligent public investment. I fall into the latter camp.
The 2013 tax act substantially reduced the degree of Minnesota state and local tax regressivity. A regressive tax system is one in which low and moderate income households pay a higher percentage of their income in taxes than do high income households. Over the years, legislators of all political persuasions have paid lip service to the notion of reducing tax regressivity, but the 2013 tax act actually did something about it. From 2013 to 2015, Minnesota made more progress than any other state in the nation in reducing tax regressivity, according to a 2014 Growth & Justice report. This large reduction in regressivity was undoubtedly driven by the powerfully progressive features of the 2013 tax act.
Two features of the 2013 act were primarily responsible for this large reduction in state and local tax regressivity. The first of these was an increase in the income tax rate from 7.85 percent to 9.85 percent on the portion of taxable income in excess of $250,000 for married joint filters, $200,000 for heads of households, and $150,000 for single filers. The high income households affected by the income tax increase continue to enjoy the lowest combined state and local effective tax rates (i.e., state and local taxes as a percent of income) in Minnesota, so there is no need to shed tears for them. The 2013 tax act merely reduced, but did not eliminate, the advantage enjoyed by the top one percent relative to other state and local taxpayers.
The second most potent feature of the 2013 tax act in terms of reducing tax regressivity was the expansion of the homeowners’ property tax refund (rechristened the “homestead credit refund”) and the renters’ property tax refund. These two programs have long been touted by policymakers and policy wonks as extremely efficient ways to target tax relief to households that have high property taxes (or high rents attributable to property taxes) relative to their incomes. Dollar for dollar, no programs in state law do more to reduce tax regressivity than the homeowners’ and renters’ property tax refunds (PTRs). The changes in the homeowners’ PTR in particular provided refunds to many middle-income homeowners who had not previously been eligible.
One feature of the 2013 tax act that increased tax regressivity rather than reduce it was the $1.60 per pack increase in cigarette taxes.* Increases in tobacco taxes fall disproportionately on low income households. However, a reduction in tax regressivity is not the only goal of tax policy; another objective is to reduce activity that harms Minnesota’s economy and quality of life and to generate revenue to offset the costs of that activity. A 2010 Penn State study found that “the combined medical costs and productivity losses attributable to each pack of cigarettes sold [in Minnesota] are approximately $20.83 per pack.” In light of this, a $3 per pack tax is not excessive. Apart from generating revenue to offset the cost of smoking, the 2013 cigarette tax increase incentivized a significant number of smokers to “quit the habit,” as noted in a 2015 MinnPost article.
Among the other achievements of the 2013 tax act were:
- Reforms to the city Local Government Aid (LGA) program that more effectively targeted aid to cities with the greatest need;
- Increases in funding for LGA and County Program Aid to replace a portion of what was cut over the preceding decade;
- The closing of several inefficient corporate tax loopholes, including the foreign source royalty deduction;
- An increase in the corporate minimum fee, which had not been adjusted for inflation since 1990;
- The imposition of the state sales tax on purchases made over the internet, which helped to level the playing field between on-line retailers and local brick-and-mortar retailers;
- The expansion of the cigarette tax to include “little cigars,” which are the functional equivalent of cigarettes.
In addition to reforming state tax policy, the 2013 tax act provided revenue to fund a number of critical state investments. For example, the revenue generated by the 2013 tax act:
- Provided the first biennium to biennium increase in real (i.e., inflation-adjusted)† per pupil state aid to school districts since FY 2002-03, allowing districts to recover a portion of the real per pupil operating revenue decline that had occurred over the preceding decade;
- Through the increases in school aid combined with the expansion of the PTR programs and increases in state aid to counties and cities, produced the first statewide reduction in property taxes since 2002;
- Provided increased funding for higher education, thereby allowing for a temporary tuition freeze, ending a 15-year trend of escalating tuition at state higher education institutions;
- Funded statewide all-day kindergarten, which will provide a strong return on investment over the long term;
- Allowed for increased state investments in infrastructure, workforce development, and affordable healthcare and housing;
- Helped to end the perennial cycle of funding shifts and other accounting gimmicks that had been a hallmark of state fiscal management over the preceding decade.
No discussion of the 2013 tax act would be complete without reference to conservative criticisms of the act. These will be considered in part 2 of this series.
*The achievement of the 2013 tax act in reducing state and local tax regressivity in Minnesota cited above takes into account the impact of the cigarette tax increase. Even after factoring in the impact of the regressive cigarette tax increase, the overall impact of the 2013 tax act was still overwhelming progressive.
†Inflation adjustments in this article are based on the Implicit Price Deflator for State & Local Government Purchases.