Minnesota in the Middle on Middle-Income Taxes

In conservative quarters, it is accepted as gospel truth that Minnesota is a high tax state. However, to some extent Minnesota’s high tax reputation is undeserved. While state and local taxes on high income households in Minnesota are above average, taxes paid by Minnesota middle income households are about equal to the national norm.

The Institute on Taxation & Economic Policy (ITEP) periodically publishes a report entitled Who Pays? A Distributional Analysis of the Tax Systems in All 50 States. The most recent version of this report was published in January 2015 and includes permanent tax changes enacted through December 31, 2014. Thus, the impact of Minnesota’s fourth tier income tax increase and other changes enacted during the 2013 and 2014 legislative sessions are included in this analysis. While the analysis in this report is not as exhaustive and precise as that contained in the Minnesota Tax Incidence Study (MTIS) from the Minnesota Department of Revenue (MDOR), it does provide the only source of state and local effective tax rates (i.e., state and local taxes as a percent of personal income) by income group for all fifty states.

The ITEP report groups households into quintiles (groups of 20 percent) by income, with the top (highest income) quintile further broken down into sub-groups, including the “top one percent” (i.e., the one percent of households with the highest income). The effective tax rate (ETR) for the middle quintile in Minnesota—which includes households with annual income from $44,000 to $66,000—is 9.6 percent, almost equal to the national average for the middle quintile (9.5 percent). Among the fifty states, Minnesota ranks 20th in terms of the middle quintile ETR.* In short, Minnesota resides near the middle of the pack in terms of state and local taxes paid by middle-income households.

MN in the Middle

Despite much handwringing and predictions of doom from conservatives, the tax provisions passed in 2013 and 2014 resulted in no significant increase in taxes on middle-income households in Minnesota. Minnesota’s current middle quintile ETR, as well as Minnesota’s rank relative to other states, is virtually the same based on 2015 ITEP data as it was two years earlier—prior to passage of the 2013 and 2014 tax acts.  This conclusion is consistent with a North Star examination of the 2013 and 2014 tax acts based on MDOR tax incidence analyses, which showed that the 2013 and 2014 tax acts likely resulted in modest tax reductions for most middle income households.

Minnesota is above average in terms of taxes on high income households. For example, the state and local ETR for the top one percent in Minnesota is 7.5 percent, according to data from the 2015 ITEP Who Pays report, which places Minnesota in a tie with Maine for the fourth highest top one percent ETR in the nation. However, the top one percent in Minnesota still enjoys the lowest state and local ETR of any other income group in the state—a finding confirmed by data from the 2015 MTIS. Since 2013, Minnesota has made more progress in reducing tax regressivity than any other state in the nation, thanks to the 2013 and 2014 tax acts; nonetheless, Minnesota’s tax system remains regressive, with a disproportionate share of state and local taxes borne by low and moderate income households.

The bottom line is that Minnesota is typical relative to other states in terms of the level of state and local taxes paid by middle-income households. Minnesota is also typical of other states in that middle (and low) income households pay a larger percentage of their income in state and local taxes than do high income households. In 2013 and 2014, state policymakers succeeded in holding down taxes on the middle class while simultaneously reducing tax regressivity and restoring critical public investments. The challenge for today’s policymakers will be to maintain and improve upon these accomplishments.

 

 

*These findings, as well as the fifty state data presented in the chart, are based upon ETRs reported in appendix A of the 2015 ITEP Who Pays report.