The tax fairness gap is gone in Minnesota

An obscure report produced every two years by the state Department of Revenue became a political weapon in gubernatorial candidate Mark Dayton's hands eight years ago. The 2009 Minnesota Tax Incidence Study showed that well off Minnesotans were paying a significantly smaller share of their incomes in state and local taxes than were people with incomes between $50,000 and $100,000 a year.

DFLer Dayton rode into the governor's office in 2010 with a promise to make the tax burden fairer and stabilize state government finances by raising taxes on higher income Minnesotans.

By contrast: A new Tax Incidence Study was released on March 17 and has generated nary a mention in the ensuing weeks from state politicians, despite a growing cadre of candidates running to succeed Dayton in 2019.

That's likely because the new report shows that the gap in effective tax rates that Dayton decried in 2009 and 2010 was almost gone by 2014. That was a year after Dayton signed into law a new top-tier income tax rate — 9.85 percent, applying to that portion of a filer's Minnesota taxable income that exceeds $250,000 for married joint filers and $150,000 for single filers. (Those thresholds climb with inflation each year.)

That change, which Dayton says affected 2 percent of this state's income tax filers, was the largest of several forces that have worked together to spread the state-plus-local tax burden more equally among households regardless of their incomes. The new Tax Incidence Study, which reports on actual taxes paid in 2014 and projects ahead to 2019, finds that most Minnesotans, wealthier and poor, pay about 12 percent of their incomes in state and local taxes. The poorest, with incomes below $35,000, pay a slightly higher effective rate; those with incomes between $150,000 and $350,000 pay a slightly lower rate. But those with million-dollar incomes were taxed at 12 percent, compared with 8.9 percent in 2006. That distribution is projected to hold nearly constant through 2019.

Some Minnesotans are bound to argue that flattening the "tax incidence curve" has been undesirable. It undoubtedly came at a competitive cost among those who compare top-bracket state income tax rates. Minnesota's was third-highest in the nation in 2016.

But if states can compete on tax fairness, Minnesota is positioned to do well. The national Institute on Taxation and Economic Policy ranked Minnesota the fifth-fairest state in the country in 2014 for taxing those at higher incomes at nearly the same effective rate as the poor. It praised Minnesota not only for raising its top income tax rate, but also for its refundable income tax credit for low-income families, its income-adjusted property tax refund programs, and for a sales tax that exempts grocery purchases.

State income tax rates, the working family credit and the property tax refunds are all in play as Dayton and a legislative conference committee get serious in the next several weeks about setting state tax policy for the next two years. With a surplus forecast in the state budget, credits and refunds could go up and rates could go down. The governor and legislators will do well to choose with an eye toward maintaining tax fairness. As Dayton can attest, that's a tax policy characteristic Minnesotans value.