Minnesota state, local taxes fairer than most, report finds

Minnesota’s tax structure is among the fairest in the country, according to the results of an annual analysis of state and local tax systems released by the nonpartisan Institute on Taxation and Economic Policy.

The report, Who Pays, looks at how states generate tax revenue – and how much it costs taxpayers at different income levels.

In Minnesota the wealthiest 1 percent of earners, with more than $498,000 in annual household income, pay 7.5 percent of their income, on average, in state and local taxes. That’s a lower rate than any other income bracket in the ITEP’s report, including:

•     The rest of the top 20 percent of Minnesota earners, with household incomes between $102,000 and $498,000. On average, they pay about 8.5 percent of their income in state and local taxes.
•     The lowest 20 percent, with less than $24,000 in annual income, who pay an average tax rate of 8.8 percent.
•     The middle 60 percent, with earnings between $24,000 and $102,000, who pay an average tax rate of about 9.7 percent.

Although middle- and low-income people in Minnesota pay more of their income in state and local taxes than the state’s highest earners, the same is true everywhere in the U.S. The good news for Minnesota is the gap between what middle- and low-income people pay and what wealthy people pay is smaller than the gap in 44 other states.

In some states, the report found, the poorest 20 percent of taxpayers pay more than double the effective tax rate paid by the richest 1 percent of taxpayers. Washington is the country’s most regressive state, taxing the poorest residents at 16.8 percent and the top 1 percent at just 2.4 percent.

Why does it matter if state and local taxes ding lower-income families more than upper-income ones? In addition to being a matter of basic fairness, regressive tax structures contribute to growing income inequality in the U.S., which has reached a level not seen since before the Great Depression.

“In recent years, multiple studies have revealed the growing chasm between the wealthy and everyone else,” ITEP Executive Director Matt Gardner said in a press release accompanying the report. “Upside down state tax systems didn’t cause the growing income divide, but they certainly exacerbate the problem.”

Why are state and local tax systems unfair across the board? According to the ITEP report, it’s mostly because these governments tend to rely more heavily on sales taxes to raise revenue than income taxes.

Minnesota’s tax structure is less regressive than most other states, according to Who Pays, in part because of its graduated tax structure, which assesses higher rates to higher income levels. Gov. Mark Dayton and DFL majorities in the Legislature raised taxes on the wealthiest Minnesotans to address a budget shortfall two years ago.

The report also praised Minnesota’s sales tax exclusion for groceries and its Working Family Credit, increased by Dayton and DFL majorities last year.

The state’s comparatively high sales tax rate – on tobacco, in particular – hits lower- and middle-income earners harder than the wealthy, the report found.