The Minnesota Tax Incidence Study (MTIS) looks at the impact of state and local taxes by income group, in an attempt ascertain who is paying Minnesota taxes. Since it was first published by the Minnesota Department of Revenue (MDOR) in 1991, the MTIS has been one of the best state tax incidence studies in the nation and an invaluable tool in measuring not only Minnesota tax levels, but tax fairness.
The fact the MTIS has consistently demonstrated that Minnesota’s state and local tax system is regressive—with low- and moderate-income households paying a higher percentage of their income in taxes than high-income households—has rankled some conservatives. They want to add federal taxes to the MTIS with the goal of demonstrating that the entire tax system—state, local, and federal—is progressive.
The notion of including federal taxes in the MTIS, however, seemed unnecessary in 1991, as state policymakers have no control over federal taxes. It is not without technical hurdles, as this would require redefining the income measure used in the MTIS. Federal payroll taxes for Social Security and Medicare are ultimately shifted onto workers; even the employer share of these taxes is presumed to be borne by workers in the form of reduced compensation. Taking into account the impact of federal payroll taxes would require increasing income levels in each income group by the employer share of the tax, since we cannot take into account the incidence of this tax without first recognizing that it is effectively paid in the form of foregone employee compensation.
The need to employ a new definition of “income” in the MTIS will complicate what has been a relatively straightforward policy report. In order to maintain comparability with earlier versions, the MTIS would have to employ separate measures of income within each income group—one including the employer share of payroll taxes and the other not. As a result, the households within each income group will change, with some households dropping a decile and other households moving up a decile. For example, the composition of the sixth decile will morph from the part of the study based on state and local taxes only to the part that includes federal taxes, with some households departing the sixth decile to the fifth and seventh—and others in the fifth and seventh deciles migrating to the sixth.
In addition, including federal taxes in the MTIS would still not show “the full impact on our citizens,” as proponents purport, because state and local taxes from other states that are shifted onto Minnesota residents would still be excluded. For example, most of the incidence of taxes imposed by energy producing states on commodities such as oil and gas (which tend to be regressive) are effectively shifted out of state in the form of higher commodity prices. Other taxes paid by Minnesotans to other states include taxes on income earned in other states, sales and excise taxes on purchases made in other states, and corporate and other non-Minnesota state business taxes effectively shifted onto Minnesota stockholders.
The feasibility of accurately measuring the incidence of these non-Minnesota state and local taxes upon Minnesota taxpayers is questionable. Furthermore, it is likely impossible to measure the incidence of all non-Minnesota state and local taxes with the same accuracy with which the MTIS currently measures Minnesota state and local taxes. Inclusion of federal taxes in the MTIS would still overlook the significant impact of these taxes and thus—contrary to proponents’ claims—still not provide a complete tax incidence picture.
Regardless of the incidence of federal taxes, it will not negate the fact that Minnesota state and local taxes are regressive—a fact once again established by the newly released 2017 MTIS. The degree of federal tax progressivity will not alter the fact that Minnesota state and local governments will have a hard time generating adequate revenue to fund public services and infrastructure if they are overly dependent on taxes derived from low- and moderate-income households, whose real earning power and ability to pay has been flat or declining for decades. State resources and the valuable time of MDOR staff is more properly dedicated to legitimate issues of state interest, such as state and local tax incidence, over which—unlike federal taxes—state policymakers can actually effectuate change.
