Minnesota among highest-ranked states for tax ‘fairness’

Some people are going to want to sit down for this.

Minnesota has one of the least regressive tax structures in the country, according to the Institute on Taxation and Economic Policy, which has released a study of individual state’s tax policies to determine whether middle- and lower-income residents are shouldering more of the burden.

For the record, Minnesota’s tax system isn’t fair. But neither is any other state’s, according to the research.

When including all local tax burdens, 10 states stand out as localities that tax the bottom 20 percent of residents at rates that are up to seven times higher than the wealthy. ITEP singled out Washington state as the worst offender, with the poorest fifth of taxpayers paying 16.8 percent of their income in local taxes. The top 1 percent of filers paid 2.4 percent of their income in local taxes.

Washington and three other states in this group of 10 lack a personal income tax. As a result, these states often rely on higher sales and excise taxes, which take a larger burden of income from low- and middle-class families because they aren’t adjusted for income. Everyone, regardless of their wealth, pays a 6.5 percent sales tax in Washington.

South Dakota is also in the “terrible 10” along with Florida, Texas, Illinois, Pennsylvania, Tennessee, Arizona, Kansas and Indiana.

“The vast majority of states allow their very best-off residents to pay much lower effective tax rates than their middle- and low-income families must pay — so when the richest taxpayers grow even richer, these exploding incomes hardly make a ripple in state tax collections,” the authors of the research wrote. “And when the same states see incomes stagnate or even decline at the bottom of the income distribution it has a palpable, devastating effect on state revenue.”

Minnesota, on the other hand, ranks 45th in tax unfairness, mostly because it has a graduated income tax, has a property tax credit, and the sales tax excludes groceries. It gets dinged, however, for having a high cigarette tax and a high sales tax. That, as you may have word, could get worse if another increase in the metro-area sales tax is authorized as part of a transportation funding solution.

According to the group, which describes itself as non-partisan, Minnesotans with adjusted incomes above $500,000 pay the least percentage of state taxes.

Other states besides Minnesota singled out for progressive tax structures are Delaware, Washington, D.C., Montana, Oregon and Vermont.

Here’s the full report.

  • boB from WA

    Not surprising WA is listed as the worst re regressive tax rates. In addition to the 6.5% state sales tax, counties and cities also pile on to the sales tax. In King CO the tax is well above 10%. Down here in SW WA were at about 8.5%. If there is to be any good news in this we too are like MN in that groceries are not taxed.

  • BJ

    I’ve never really understood this.

    So
    I make 10,000 I pay 16% – $1600
    I make 50,000 I pay 8% – $4000 – almost 2.5 times as much the previous person
    I make 150,000 I pay 4% – $6000 – 50% more than 50,000 and over 300% more that someone paying $1600

    Person that makes the least pays the least, makes the most pays the most.

    • I assume your percentages are based on the amount paid, comparing the two rather than the percentage of income, right?

      If I follow you correctly — and I’m not sure I do — your saying the system makes sense because the person making the least is paying $1600 which is < the $6000 the person making the most is paying.

      The answer is in your second column, not your third.

    • Kassie

      Looking at the actual numbers from the chart above, the person who is in the bottom 20%, most of who are at or below the poverty level, pay on average 8.8% of their income to taxes. So, society says “you are at a level where you can’t realistically provide for your own basic needs” and yet they are still paying almost 9% of their income in taxes. And then we look at people who can afford luxury homes and goods and they pay 7.5% of their income in taxes. And you think this is fair because they pay more actual dollars?

      • >>And you think this is fair because they pay more actual dollars?<<

        That's what s/he appears to be saying…

        • BJ

          Actually you don’t have to guess I clearly state I don’t understand.

          Everyone else seems pretty sure about motives of my question.

      • kevinfromminneapolis

        Yes, actually.

    • kevinfromminneapolis

      I don’t know that tax brackets work that way. But in straight numbers, yes.

    • David P.

      So if I understand you correctly, this is fair to you:

      You make $20,000 per year and are taxed at 10%, paying $2,000 in taxes.
      I make $200,000 per year and am taxed at 2%, paying $4,000 in taxes.
      Bob makes $2,000,000 and is taxed at 1%, paying $20,000 in taxes.
      (Those fund drives are gold!)

      I paid twice as much tax $ as you did (even though I earned 10 X as much).
      Bob payed 10 x as much as you did (even though he earned 100 X as much).

      Huh.

      • BJ

        I don’t agree that it is fair or unfair. Like I said “I’ve never really understood this.”

        I don’t understand the argument that the person who earns more AND pays more ‘real dollars’ is getting some kind of ‘deal’. Or that the person who earns less and pays less is being taxed ‘unfairly’.

        By the way income taxes actually work in reverse, lowest earners pay about 5% in minnesota and highest pay about 9.5%, same with federal except that is 10% to almost 40% for the highest earners.

        Washington was one example of a state that doesn’t have income tax, just sales tax.

        Sales tax and user fees the assumption is that people who earn less pay a larger percent of income on things they buy – thus more tax dollars. This assumes that each person spends the same amount of money on things – food and clothing spending is the same for everyone.

        If I earn 150,000 and I spend all of it every year on things that are taxed on consumption (sales tax) – I will have the same ‘effective’ tax rate as someone who earns 50,000 and does the same. Is that fair? We all use roads, schools, police and fire equally.

        Here is where it gets tricky – if I only spend 140,000 and I put 10,000 into saving THEN I have not been taxed at the same rate as my income. Because I didn’t spend at the same rate. I still paid way more in total ‘real’ dollars in taxes. Again we all use roads, schools, police and fire equally – I’m still paying more ‘real’ dollars, just less ‘effective’ tax rate.

        Is it fair, unfair?

        The Advocates of the ‘fair’ tax – a consumption (sales tax) group propose that we give everyone a prebate to start. I’m not saying that isn’t fair or unfair – you can look at their prebate info site http://fairtax-psyclone.netdna-ssl.com/media/attachments/549999512017a86464000320.pdf?1419352401

        I’ve thought about this a lot more than most. I’m still confused and don’t understand how to decide what is fair.

        • kevinfromminneapolis

          If I remember correctly in Minnesota or maybe it’s nationally some bottom decile “payers” actually make money on taxes through refunds and rebates. As in, they get out of the system more than they put in.

          • Brian

            Yes, I’m sure this is true. It would be silly to provide social programs to people that could afford to pay for them.
            I don’t consider this unfair. The earned income tax credit is actually considered one of the more effective social and economic programs the government does.

        • David P.

          I apologize if my earlier post was snarky. This is a complicated subject with passionate arguments made for progressive, flat and regressive tax rates. I suggest you search those terms and select relatively neutral sites (various schools of economics, for example).
          In a nutshell, a progressive tax could be summarized as based on ability to pay. The more I make, the more I can afford. The balance is the tax rate has to low enough for me to want to earn another $, but high enough to provide our government the ability to function.
          A flat tax is just as the name implies – everyone pays the same rate, regardless of income. A sales tax is a good example. No matter my income, the tax on purchases is at the same rate.
          A regressive tax is the opposite of a progressive tax, and was used as an example in your earlier post and mine. Until recently, this type of tax rate was almost never used, being seen as socially unfair by most governments, but it is favored by many of the top tier earners, for obvious reasons.
          Social Security is taxed at a flat rate with a cap on taxable earnings. Once that cap (currently $118,500) has been passed, it becomes a regressive tax. The more one earns over the cap, the lower one’s effective tax rate.
          I hope you found my comments useful.

          • BJ

            >A sales tax is a good example.

            Actually pretty much everyone says that sales tax is regressive.

          • David P.

            In my example, I was using sales tax as a flat tax compared to spending. If I buy a $500 TV or you buy a $1000 TV, we both pay the same tax rate, though different total tax dollars.
            Conversely, a flat tax based on income essentially is a regressive tax in the manner it affects disposable income.

          • BJ

            See here is where the fair or unfair thing kind of gets me. If I’m the person making 150,000 and I buy the $500 tv (lets say tax is 50) my effective tax rate compared to my income is a lot smaller than the person making 50,000 that buys the $1000 tv (tax 100). So is it fair that the person with the lower income paid MORE in taxes? This is also why sales tax is considered regressive and not flat.

  • Nick K

    After reading the report and looking at the table I am a bit confused. If the average tax payer in the lowest 20% makes $13,200 and spends 6.5% of their income on sales taxes that amount comes to $858. Right? A good approximation of the sales tax rate in Minnesota is 7%. To end up paying $858 in sales taxes, wouldn’t you have to purchase $12,200 in taxable goods? That hardly seems possible.

    • A little bit hard to say but if you were to buy a car and financed, you’re paying taxes on money not yet spent (assuming a loan). That might have something to do yet.

      • Nick K

        Well 2/3 of the total for the Sales & Excise tax seems to be something else other then “general sales tax”. Did anyone find in the report what they are including? I think of gasoline tax and license tabs, not sure what else. Maybe the Sales & Excise on business gets counted because the cost of those are rolled in the overall costs of various goods and services?

        • Excise tax includes the gas tax and also the cigarette tax. I assume also the tax on booze.

    • kennedy

      The table actually shows sales tax for the lowest income bracket as 2.7%, which would be $356. With a 7% sales tax rate, this would require $5,091 spending on taxable goods. The balance (3.8% or $514) comes from excise taxes which are described in comments below.

      • Nick K

        You can’t actually tell that from the table. I agree there is a clear line item of 2.7% for sales tax. However, the next line lists 1.7% for “Sales and Excise” and the line after that lists “Sales and Excise on business” so it is not clear how much is sales and how much isn’t. Even if we take the lowest number, I thne start to wonder how someone making $13,200 a year would have $5000 to spend on taxable goods. Something is being left out of both the table and the report.

    • Kassie

      I’d also guess that a lot of people who make $13,200 a year also make a fair amount of money from other untaxable sources like welfare, financial aid, allowances, SSI, etc. which would put their actual income above their taxable income.

      • Nick K

        Where do you see that the table is listing only taxable income? I’m sure it isn’t (since the average income tax for the lowest 20% shows a negative number, it would not make any sense for the incomes shown to be taxable).

        • Kassie

          The negative number would make sense because of the Earned Income Tax Credit. People can get money from the government if they are very poor when they file their taxes.

          • Nick K

            I get how they got the negative number. I’m just using that to illustrate that the table is almost certainly showing ALL income, not just taxable income. If it was only showing taxable income, the income tax portion could not be negative

  • kennedy

    Looking at this, a flat tax on income is not really a flat tax unless sales taxes are eliminated.

    • jon

      Yes.

      Sales tax is a regressive tax when compared to income.
      It is, however, a flat tax when compared to spending.
      No matter how much I make I still pay 5 cents sales tax on my $5 socks.

      But so long as elected officials are able to look for new and creative ways to separate you from your money with out making it look like that is what they are doing (it’s not a tax it’s a fee!) they’ll tax as lower rates across more things until they can pay for what they feel they need to pay for…

    • Did someone say “flat tax?”

  • CHS

    The problem with these types of analysis is that they simplify things to the point of being disingenuous. The authors clearly had a mindset going in that a ‘fair’ tax strategy involves making sure that the EFFECTIVE tax rate is always progressive. The presumption ignores the reality that taxes do (intentionally and unintentionally) two completely separate things in this country; raise revenue, and influence behavior. Take the mortgage tax credit for example. It’s designed to promote stable home ownership, which has been proven to benefit family stability and have lifelong benefits to the owners and kids growing up in stable homes. Great thing for our society right? Sure, but it directly leads to people with greater incomes paying lower effective tax rates. How about retirement savings? The more the individual can save for retirement the less risk there is of that person requiring assistance in later life. Benefits us all right? That’s another thing that lowers a person’s effective tax rate as you make more money. How about tax deferred college savings plans? The list goes on and on.

    Now let’s go to the other side of the equation. So called sin taxes such as tobacco taxes were originally designed to help raise money for the added cost to society of tobacco use, and are now used to try to influence people to quit. Turns out smoking is an addiction and the people most likely to be addicted and lack resources to help them quit are the ones least able to pay the added tax burden.

    You can’t simultaneously have a system that tries to influence behavior and then try to have an always progressive effective tax rate. If we as a state and nation want to continue using the tax code to promote or discourage certain behaviors, then we need to accept that the effective tax rate will not always be progressive, or as progressive as some people want to make it ‘fair’.