Taxes favor Minnesota’s wealthy, businesses

03/27/2007

Study strengthens DFLers' resolve to turn the tide that puts burden on middle class


BY BILL SALISBURY
Pioneer Press
Article Last Updated: 03/19/2007


It was just the kind of political ammunition Democratic legislators were seeking.

And Gov. Tim Pawlenty's administration handed it to them.

A state Revenue Department study presented to the Senate Tax Committee on Monday showed wealthy Minnesotans are paying a slightly smaller share of their incomes in state and local taxes, while tax burdens for middle-class households are increasing.

The biennial "tax incidence study" also showed taxes are shifting away from businesses and toward individuals.

Overall, the study projected Minnesota's state and local taxes will become somewhat more regressive by 2009. That means the percentage of income a person pays in taxes declines as his or her income rises.

Those findings provide good reasons for increasing income taxes on high earners and boosting business property taxes, Tax Committee Chairman Sen. Tom Bakk, DFL-Cook, said after a hearing on the study.

Bakk strongly hinted he would propose higher income taxes for top earners this week when his committee assembles its major tax bill for this session. He said he would use the additional revenue to buy down homeowner property taxes.

"This (study) shows the people at the top are not paying their fair share," he said.

Pawlenty, a Republican, has repeatedly threatened to veto any state tax increases.

"We think anyone would be hard pressed to make the case that taxes in Minnesota are too low,'' said Pawlenty spokesman Brian McClung. He noted that the U.S. Census Bureau ranked Minnesota's state and local taxes the fourth-highest per capita in the nation.

Last week, leaders of the House Democratic-Farmer-Labor majority proposed raising the top income tax rates from 7.85 percent to 9 percent for couples earning more than $400,000 a year and individuals with annual incomes exceeding $226,000. That's about 50,000 people. House DFLers would spend the new tax revenue on schools, property tax relief and children's health insurance.

Bakk said he's "looking at" increasing income taxes on a larger group of the relatively well off. Bakk said that proposal to raise taxes may reach beyond the top 5 percent of earners - the 118,000 households with incomes of more than $147,000 per year.

Last week, the Senate property tax subcommittee approved a Bakk bill that would reduce homeowner property taxes in part by increasing statewide business property taxes by $230 million over two years.

The Revenue Department's tax study projected business' share of state and local taxes would drop from 33 percent in 2004, the last year for which complete tax collection data are available, to 32 percent in 2009.

"That's troubling," Bakk said. "At a minimum, they (businesses) should pay the same share that they did in previous years. So we will take look at increasing business' share to hold down burdens on households."

Republican Sen. Julianne Ortman, of Chanhassen, warned that businesses likely would offset such tax increases by cutting back on employment.

The study showed state and local taxes, measured as a percentage of personal income, declined from a high of 13 percent in 1994 to 11.2 percent in 2000. The tax bite had crept back up to an average of 11.6 percent of personal income by 2004. The study predicted the tax burden would edge up to 11.7 percent of personal income in 2009.

The analysis revealed Minnesota's state and local tax system is progressive - that is, tax rates rise with income - between the lower- and middle-income levels, but it's slightly regressive between the middle- and upper-income levels.

For instance, households with incomes between $17,000 and $23,000 in 2004 paid 10.5 percent of their earnings in state and local taxes, compared with 12.3 percent for those with incomes of $47,000 to $105,000. But those earning more than $105,000 paid 10.9 percent of their income in state and local taxes, and the top 1 percent of earners - people making more than $355,000 - paid 9.6 percent.

The wealthiest Minnesotans have a lower effective tax rate than the other 99 percent of households because "their incomes are growing faster than taxes," Paul Wilson, the Revenue Department's tax research director, told the committee.

The tax system is becoming slightly more regressive because of economic growth and not necessarily because of tax policy changes, Wilson said.