In 1985, DFL Gov. Rudy Perpich surprised many members of his own political party when he established the twin goals of simplifying Minnesota’s income tax and getting Minnesota out of the top rankings in taxes in all income categories.
For Perpich, it was all about “jobs, jobs, jobs,” his political mantra for most of his tenure as governor. And he largely succeeded in his goals, achieving the passage of legislation that closed tax loopholes, reduced rates and provided for a simplified, one-page tax form.
DFL Gov. Mark Dayton, a protégé of Perpich, would move in the opposite direction. Dayton would establish a new fourth-tier income tax rate that would send Minnesota back to the top of the national rankings in taxes on upper-income taxpayers.
Dayton would impose a tax of 9.85 percent on taxable income over $150,000 for single filers and $250,000 for married joint filers. The tax rate for the current top bracket is 7.85 percent. Dayton’s proposal would give Minnesota the fourth highest rate in the nation behind California, Hawaii and Oregon.
The increased levy would raise $1.1 billion in new revenue in the coming biennium, enough to erase a projected $627 million state budget shortfall and help fund Dayton’s initiatives.
The governor repeatedly has argued that the top 2 percent of Minnesotans aren’t paying their share of state taxes. For 2013, an estimated 54,000 Minnesotans would pay an average of $7,240 in additional taxes under his proposal.
Fair share
"My feeling is, everybody ought to pay their fair share of taxes,” he told an audience in Duluth. “If you make more, you pay more; if you make less, you pay less. That's what keeps this society functional.”
According to the Minnesota Department of Revenue’s most recent tax incidence study, most low- and middle-income earners in Minnesota pay about 20 percent more as a share of their income in total state and local taxes than the wealthiest Minnesotans.
However, the same study indicates that Minnesota’s income tax is “very progressive” – that is, it imposes taxes at progressively higher rates as a taxpayer’s income rises. It helps compensate for the regressive nature of the sales and property taxes, as well as the business taxes that people pay indirectly through consumer purchases.
Minnesota effective tax rates (2010)
| Population decile | Personal income tax | Business taxes | Consumer sales tax1 | Homeowner property tax (before PTR) |
|---|---|---|---|---|
| First | -1.3% | 14.3% | 7.6% | 5.7% |
| Second | -0.7% | 5.8% | 4.3% | 2.0% |
| Third | 0.0% | 4.8% | 3.4% | 2.4% |
| Fourth | 0.8% | 4.1% | 2.8% | 2.3% |
| Fifth | 1.9% | 3.6% | 2.4% | 2.5% |
| Sixth | 2.7% | 3.3% | 2.2% | 2.7% |
| Seventh | 3.1% | 2.9% | 2.0% | 2.7% |
| Eighth | 3.7% | 2.6% | 1.8% | 2.6% |
| Ninth | 4.2% | 2.4% | 1.6% | 2.3% |
| Tenth | 5.1% | 2.0% | 1.1% | 1.4% |
| Total | 3.8% | 2.7% | 1.7% | 2.0% |
This study shows the effective income-tax rate for Minnesotans in the three lowest deciles of income is zero or less, with many lower income residents receiving cash back through the refundable Working Family Credit (similar to the federal Earned Income Tax Credit). The effective income-tax rate gradually rises to 5.1 percent for Minnesotans in the top decile.
A study completed recently by the Minnesota Center for Fiscal Excellence (formerly the Minnesota Taxpayers Association) compared the 2010 income tax burdens in 41 states and the District of Columbia that have income taxes.
It found that Minnesota ranks 37th, or lower, in taxes for married filers on incomes of $35,000 or less. In contrast, Minnesota ranks 15th , or higher, for married filers on incomes of $100,000 or more. The same pattern was found for taxes on single filers, though Minnesota’s ranking tended to be somewhat higher in most income brackets.
Comparing the tax burden of households with $35,000 in annual income and those in higher income brackets, the study found that Minnesota is second only to New York state in the progressivity of its income tax.
For purposes of the study, the center says it employed the same assumptions about the mix of income and deductions claimed by tax filers at various income levels as those used in the Revenue Department’s tax incidence study. This marked the sixth such study the group has completed since 1997.
Upper-income taxpayers
The center also examined the impact of Dayton’s proposal on the national ranking of Minnesota’s income taxes on upper-income taxpayers.
Mark Haveman, executive director of the business-oriented group, says Minnesota’s ranking would rise from 11th to fourth for taxes on single taxpayers with $250,000 of income, from 12th to fifth for married taxpayers with $500,000 of income, 11th to fourth for married taxpayers with $1 million in income and seventh to fourth for single seniors with $250,000 in income.
Impact of Dayton tax plan on higher-income taxpayers
| Filer type /household income level | 2010 Burden /Rank (of 42 states) | Burden with Fourth Tier /Rank (of 42) | Tax Increase |
|---|---|---|---|
| Single $250,000 | $15,336 / 11th | $16,494 / 4th | $1,158 |
| Married Joint $500,000 | $31,348 / 12th | $34,826 / 5th | $3,478 |
| Married Joint $1,000,000 | $64,828 / 11th | $76,846 / 4th | $12,018 |
| Single Senior $250,000 | $13,915 / 7th | $14,711 / 4th | $796 |
House DFLers would like to add a temporary surcharge on the wealthy on top of the governor’s proposal to help reverse the school-aid shift, a budget gimmick used to help balance previous state budgets. While House DFLers have not provided any specifics, the surcharge would likely nudge Minnesota up another spot or two in the national tax rankings.
Leaders of the state’s business community say they are concerned about the impact of Dayton’s proposal on businesses, both small and large.
The Minnesota Chamber of Commerce says the proposed fourth-tier tax rate will “threatens Minnesota’s competitiveness.” It will harm some 21,000 small business owners who pay individual income taxes on their business income, the chamber says.
Charlie Weaver, executive director of the Minnesota Business Partnership, says the impact will be “just devastating” for small businesses, while making it less likely that larger businesses “will stay and expand and grow in Minnesota.”
“Our companies already have to pay a premium to lure talent to Minnesota,” Weaver says. “They have to pay talent more to come here than they would pay that same person to work in one of their offices in another state. The governor’s proposal would add to these problems.”
Weaver also rejects the argument that upper-income tax payers aren’t paying their fair share of taxes.
“Right now in Minnesota, the top 5 percent pay 41 percent of the income taxes,” he says. “The top 1 percent pay 24 percent of the income taxes collected. By any objective measure, our system is fair – more than fair.”
Benefit for businesses
Dane Smith, president of Growth & Justice, a left-leaning research and advocacy group, argues that business actually will benefit from the Dayton budget and its increased investments in government programs such as education, health care and transportation.
“Meanwhile, a mountain of evidence shows that the top percentiles are capturing a larger share of total income and wealth than at any time since the Great Depression, while the effective tax rate for those top households is actually declining,” Smith says. “Asking those top households to pay a little larger percentage from their windfall … just makes business sense.”
Smith adds that “a growing percentage of 1 percenters agree they should pay more” taxes, including investment mogul Warren Buffett and many members of the Fix the Debt group.
Whatever you may believe, it seems likely that the Dayton income tax proposal will pass in some form. It’s not difficult for most DFLers to vote for a plan to increase taxes on the wealthy.
“The polling [in support of the plan], I’m sure, is great,” Weaver says. “Some DFLers have told us that directly – that Minnesotans are fine with the ‘tax the rich’ mentality. I think they are clearly going to go down this road to some extent, but they will do so at their own peril and at the peril of Minnesota job growth.”