Thursday, May 10, 2007

Peculiar observations from tax incidence study 

As the Legislature returns to thinking about using a new individual income tax rate to pay for property tax relief, I got back tonight to reading through the gory details of the Tax Incidence Report that continually is used to justify the raising of the rate. By gory details I mean getting past the data and figuring out how they actually calculate this beast. (I'm working on a short article to this effect.) These are some notes I wrote as I was reading:
  1. "The personal income tax is paid by individual taxpayers, and the incidence is the same as the initial impact of the tax." (p. 69) That means that if you are a sole proprietor, you have absolutely no ability to shift any of the burden of the tax onto the consumers of your products or the workers you hire. But if you incorporate, you magically acquire such powers. Why would that be? The closest I see to an estimate of how much business income is in the individual income tax subject to taxation is 3.07% estimated in this Minnesota Taxpayers Association study.
  2. "Compared to the results in this study, economic theory suggests that the long-run incidence impact of a change in Minnesota business taxes would tend to fall:
    • less on nonresidents,
    • less on Minnesota owners of capital,
    • more on Minnesota consumers, and
    • more on Minnesota labor." (p. 84, emphasis added)
    It's worth noting that the study's analysis assumes that a fair amount of corporate taxes falls on capital owners and entrepreneurs not in the state, so that the amount paid is seen as being just Minnesota getting its share of the capital held by owners around the country and world. Incremental changes in tax rates alter the tax differential between Minnesota and other states and the study assumes they are quite responsive. So South Dakota will acquire a lot of our corporations ... but again, none of our entrepreneurs that operate partnerships or sole proprietorships.
  3. The study assumes that labor never moves as a result of a tax increase, neither do entrepreneurs (shifting seems the result of only capital-owners.) Yet this report from the Minnesota State Demographic Center suggests
    Among households with a 35-to-54-year-old householder, nonmover households had the highest median income combined with the lowest proportions with very high or very low incomes. Among movers, domestic out-migrants had the highest median household and per capita income and the highest proportion of households with incomes of $100,000 or more.
Altogether, I think this means we are quite underestimating the impact of a tax hike on the rich in terms of their potential for movement. That may lead to over-estimation of the amount of money available for property tax relief. Given also the lack of a levy limit it is hard to see how the bill does what its proponents say it does. That doesn't daunt our Tiny:

Assistant Senate Majority Leader Tarryl Clark, DFL-St. Cloud, disputed suggestions that sending the bill to Pawlenty is futile.

"We told people we were going to be working on this," she said. "If we're not trying to get passed into law the pieces that we campaigned on, I think people would be pretty disappointed about that".

We're still waiting for the evidence that they campaigned on it.

Sidebar to Sen. Sharon Erickson Ropes:
Freshman Sen. Sharon Erickson Ropes, DFL-Winona, said she and her husband would fall into the fourth tier. She said she would gladly pay, calling it a moral issue and quoting the Biblical verse "to whom much is given, much is expected."
Senator, please help Rep. Steve Gottwalt get this bill passed. We want you to be able to fulfill your Biblical need to give. I'm sure the Representative will also help you distinguish between giving and taking.

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