Minnesota in the Middle on Middle-Income Taxes

Minnesota conservatives work hard to portray Minnesota as a high tax state. In reality, state and local effective tax rates for middle-income families in Minnesota are fairly typical of the rates in other states. In addition, average effective tax rates for lower-income households in Minnesota are below the national average.

The state and local effective tax rate (or ETR) refers to state and local taxes as a percentage of income. The Institute on Taxation & Economic Policy (ITEP) calculates state and local ETRs within each state and the District of Columbia by income group, ranging from the first or bottom quintile (i.e., the 20% of households with the lowest incomes) to the fifth or top quintile (i.e., the 20% of households with the highest incomes). The top quintile is further broken out into the “next 15%” (i.e., the bottom three-quarters of the top quintile), the “next 4%,” and the “top 1%.” The most recent 50-state ETRs published by ITEP are based on state and local taxes paid in 2015.*

Based on ITEP data, the 2015 state and local ETR of middle-income taxpayers (defined as taxpayers in the middle quintile) in Minnesota is 9.6%—only slightly higher than the national average of 9.4%. Minnesota ranks 20th among all states† in terms of the middle-income ETRs—much closer to the middle of the pack than the top.


While middle-income households in Minnesota are slightly above the national average in state and local ETRs, the ETRs of lower income households are below it. The state’s lower income households—defined here as households in the first and second quintiles (i.e., the bottom 40%)—have an average state and local ETR of approximately 9.4%, which is modestly below the national average of 10.2%. The average ETR of lower- and middle-income households combined (i.e., the bottom 60%) is approximately 9.5%, slightly below the national average of 9.8%.


Minnesota is tied with Florida for 27th in terms of the bottom 60% ETR. In other words, 26 states have a higher state and local ETR for the bottom 60%, while 23 states and the District of Columbia have a lower ETR.

Higher income households in Minnesota do tend to have higher state and local ETRs than similar households in other states. For example, the top four income groups examined in the ITEP report (i.e., the fourth quintile, the “next 15%,” the “next 4%,” and the “top 1%”) rank no lower than twelfth relative to other states in terms of state and local ETRs. This is not surprising, given the low degree of tax regressivity in Minnesota relative to other states. According to 50-state data summarized in the 2017 Minnesota Tax Incidence Study (MTIS), Minnesota has the seventh least regressive state and local tax system in the nation.

However, there is no need to shed tears for high-income Minnesotans. Despite having higher ETRs than high-income taxpayers in most other states, high-income households in Minnesota have lower ETRs than other Minnesota taxpayers. For example, based on ITEP data the average ETR for the top 40% of Minnesota households is 8.5% and the average ETR for the top 1% is 7.5%, while the average ETR for the bottom 60% is 9.5%. Using more comprehensive tax data from a completely different data set, the 2017 MTIS confirms that high-income households in Minnesota generally have lower ETRs than low-income households. To make matters worse, tax incidence data compiled from conventional sources—such as the ITEP report and the MTIS—probably understate the degree of tax regressivity in all states, including Minnesota.

In the long run, it is unwise to only focus on state and local tax rankings over other important considerations, such as the quality of public services and infrastructure and the extent to which residents and businesses are getting a good return from the expenditure of tax dollars. To the extent we do focus on tax levels, it is important to note that middle- and lower-income households in Minnesota are not out-of-line compared to other states.

 

*In “Who Pays: A Distributional Analysis of Tax Systems in All 50 States,” ITEP estimates ETRs in each state by income group using 2012 income levels and incorporating all tax changes enacted through December 31, 2014. This report focuses exclusively on taxpayers under the age of 65 because “State tax structures are notorious for treating elderly families very differently from other families and these differences cloud the incidence of state tax structures.” The ETRs cited here take into account the “federal offset” (i.e., the reduction in federal taxes resulting from the ability of taxpayers to deduct state and local taxes from their federal tax liability). The ITEP report lists tax rates for each of the seven income groups described in the second paragraph; ETRs for other income groups (e.g., the bottom 60%, the top 40%) were calculated by North Star using ITEP data.

Rankings in this article are based on all fifty states and the District of Columbia. A ranking of “1” denotes the state with the highest ETR.