Wednesday, March 21, 2007

New incidence study 

I noted last week that Minnesota was about to release its new incidence study -- the study of how taxes affect people by income class, between businesses and households, and between Minnesotans and non-residents. It's out now, and shows stories that support both some Republican and DFL talking points.

The DFL's point that property taxes are increasing, and that these taxes are regressive (placing a higher burden on lower income families) is borne out by the study. Assuming no change in taxes, property tax rates in the local effective tax rate in 2004 of 5.1% on the second decile of income (families earning $13,500 a year), rising to 5.5% in 2009. Now, because this study like most uses money income as their definition of household income -- excluding savings or retirees spending down their retirement assets -- this may overstate the true burden. (See the box on page 17 of the report.) Still, it's predictable that the DFL will use the talking point of how high property taxes are burdening lower-income families and that relief is needed. (I need someone to explain to me, by the way, why that relief does not show up in a more generous renters credit. That seems to be the right way to target that money, but I've heard nary a peep about using it for property tax relief for renters.)

On the Republican side, the effective tax rate on Minnesotans rose under the Republicans from 11.3% in 2002 to 11.6% in 2004. Assuming no change in tax policy, that rate rises in 2009 to an expected 11.7%. This is down from the 13% of the bad old days in 1994, but below the 11.2% that existed during the Ventura year of 2000.

More interesting will be the burden of the tax on the rich: the top 1% of income earners (incomes over $354,758( in Minnesota pay 24.3% of the state income taxes in the state; the top 5% ($146,809), 43.1%; the top 10% ($105,451), 55.4%. Other taxes are not nearly so progressive, but state sales taxes are shifted onto consumers to a significant degree (a little more than half) and businesses pay about half of property taxes as well.

One fact you won't see in the published reports, I will guess, is the extent to which excise and sales taxes are regressive (even with the exclusion of clothing and food). The sales tax is unavoidable for the poor who cannot use the internet to grab goods from out of state. If one wanted to deal with tax equity, that would be an area to address. And another would be business taxes, including such taxes as the business property tax, corporation franchise tax, taxes on capital purchases and excises and fees paid on goods used by businesses for production.
Although the legal impact of each of these taxes falls on the business entity, each is partially shifted to consumers (in higher prices) or in some cases to labor (in lower wages). Only a portion of business taxes are borne by capital owners as a lower rate of return on their investment. Part of the burden of each of these taxes is also shifted to nonresidents. This study estimates the degree to which such shifting occurs and then allocates the estimated burden to Minnesota households based on each household�s sources of income and patterns of spending.

Overall, the burden of Minnesota business taxes on Minnesota households was regressive. ...the effective tax rate fell as income increased. The effective tax rate was 5.6 percent in the second decile; it fell steadily as income rose, reaching 1.9 percent in the tenth decile. (p. 32)
So as the DFL proposes taxes on everything from fuel to deeds, the Republicans can argue that these taxes are in fact running in the opposite direction of the soak-the-rich schemes other DFLers have proposed.

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