MN Tax Incidence Study

Nearly 60% of Minnesotans find themselves making the lowest quarter of incomes in the state.

Executive Summary

http://taxes.state.mn.us/legal_policy/Documents/other_supporting_content_2009_tax_incidence_study_links.pdf

This study reports the distribution of calendar year 2006 Minnesota state and local taxes in relation to taxpayer income, along with projections for calendar year 2011.  It answers the question, “Who pays Minnesota’s taxes?”  The major objective is to provide taxpayers and policymakers with important information on the equity or fairness of the overall distribution of Minnesota taxes.  

This is the tenth biennial tax incidence study prepared in response to the statutory requirement enacted in 1990.

The report estimates 1) how the total state and local tax burden on Minnesota households varies by income range, and 2) how the burden of each component of the overall state and local tax system is distributed across Minnesota households.   Aggregating the impact of each component yields an estimate of the distribution of the total tax burden.  The estimates include taxes with an initial impact on businesses, such as the corporate franchise tax and the sales tax on business purchases, as well as taxes imposed directly on households.  The initial impact of taxes imposed on Minnesota households and businesses is discussed first.  The analysis then proceeds to estimate the final incidence of taxes on Minnesota households, after taxes imposed on businesses have been shifted to those who 

bear the final burden.

The report:

 Analyzes  $22.1 billion in taxes collected in 2006, a total that represents over
99 percent of all state and local taxes.
 Identifies the shares paid initially by households (64.8 percent by Minnesota
residents and 2.8 percent by nonresidents) from the share paid initially by business
(32.5 percent).
 Estimates the extent to which the business taxes are shifted to consumers (in
higher prices) or labor (in lower wages), rather than being borne by owners of
capital (in lower rates of return).  Also estimates the extent to which the ultimate
burden is “exported” to nonresident owners of capital or nonresident consumers.
 Calculates average household tax burden by income range.  That burden consists
of taxes imposed directly on households, such as the income tax or consumer sales
tax, plus the household share of taxes initially imposed on business but shifted to
households, the ultimate payers.   Income is defined to include all forms of cash
income, both taxable and nontaxable.
 Presents results by population decile, each decile including one-tenth of all
households (the lowest-income 10 percent in decile 1 and highest-income
10 percent in decile 10).
 Projects the 2006 results forward to 2011, accounting for the effects of both law
changes and economic growth on the mix and level of state and local taxes.2

Conclusions of the research are:
 Of the total $22.1 billion in 2006 taxes, 83.9 percent of the burden ultimately falls on Minnesota residents ($18.5 billion).  The remaining $3.5 billion of the tax
burden is exported to nonresident consumers or nonresident owners of capital
 In 2006, the state and local tax burden on Minnesota households averaged
11.2 percent of income, down from 11.6 percent in 2004.  But half of that drop is
due to use of an expanded definition of income in this year’s study.
 The local tax share of tax revenue rose from 25.8 percent in 2004 to 26.7 percent
in 2006 and is projected to rise significantly to 31.7 percent in 2011.  The state tax
share fell from 74.2 percent in 2004 to 73.3 percent in 2006 and is projected to fall
to 68.3 percent in 2011.
 The share of state and local revenue derived from consumption taxes fell from
33.7 percent in 2004 to 31.8 percent in 2006 and is projected to fall to 30.3 percent
in 2011.  The share of income tax rises between 2004 and 2006, but falls in 2011.
The property tax share declines slightly between 2004 and 2006, but is projected
to increase substantially by 2011.
 The business tax share of total tax revenue falls from 33.2 percent in 2004 to 
32.5 percent in 2006 but is projected to rise to 32.7 percent in 2011.
 After allowing for the shifting of business taxes, the Minnesota tax system in 2006 was somewhat regressive (and significantly more so than in 2004).  In contrast to the results shown in recent studies, effective tax rates were above the 11.2 percent average for  all except the tenth decile. The Suits index, a measure of the progressivity or regressivity of a tax or tax system, fell from  -0.024 in 2004 to  -0.053 in 20061
. This change suggests a significant increase in overall regressivity,
in large part due to greater income inequality in the stronger economy.2
 Minnesota’s refundable income tax credits and property tax refunds for
homeowners and renters substantially reduce overall regressivity.  In their
absence, the 2006 Suits index would fall from -0.053 to -0.075.
 Incomes are expected to grow by only 15.5 percent between 2006 and 2011.  Tax receipts are forecast to grow at a slightly higher rate, raising the overall effective tax rate to 11.4 percent.
 The  population-decile  Suits index is projected to fall only slightly to -0.051 in
2011. Income growth is expected to outpace  tax  growth in  the  lowest three
deciles; the reverse is true in deciles 4 through 10