K-12 Tax & Spending Climate: 2017 Minnesota Tax Incidence Study Analysis of Minnesota’s household and business taxes.

Minnesota Department of Revenue:

I am pleased to transmit to you the fourteenth Minnesota Tax Incidence Study undertaken by the Department of Revenue in response to Minnesota Statutes, Section 270C.13 (Laws of 1990, Chapter 604, Article 10, Section 9; Laws of 2005, Chapter 151, Article 1, Section 15).

This version of the incidence study report builds on past studies and provides new information regarding tax incidence. Previous studies have estimated how the burden of Minnesota state and local taxes was distributed across income groups from a historic perspective. This study does that by displaying the burden of state and local taxes across income groups in 2014. It includes over 99 percent of Minnesota taxes paid, those paid by business as well as those paid by individuals. The study addresses the important question: “Who pays Minnesota’s taxes?”

The report also estimates tax incidence across income groups for Minnesota state and local taxes for 2019. By forecasting incidence into the future, it is possible to give policymakers a view of the state and local tax system that reflects tax law changes enacted into law to date. Studies that concentrate only on history would not reflect the most recent changes to Minnesota’s tax system. The 2019 projections also reflect the impact of the forecast for economic growth and expected changes in the distribution of income on the tax system. This version of the 2019 projections is based on the November 2016 economic forecast from the Department of Management and Budget.

Conclusions of the research are:

Of the total $30.0 billion in 2014 taxes, 83.6 percent of the burden ultimately falls
on Minnesota residents ($25.0 billion). The remaining $4.9 billion of the tax burden
is “exported” to nonresident consumers or nonresident owners of capital.

In 2014, the state and local tax burden on Minnesota households averaged 12.0
percent of income, up from 11.5 percent in 2012.

The local tax share of tax revenue fell from 29.7 percent in 2012 to 28.1 percent in
2014, but is projected to rise to 28.8 percent in 2019. The state tax share rose from 70.3 percent in 2012 to 71.9 percent in 2014 and is projected to fall to 71.2 percent in 2019.

The share of state and local revenue derived from taxes on income rose from 36.5 percent in 2012 to 38.6 percent in 2014 and is projected to rise to 39.2 percent in 2019. The property tax share fell from 32.4 percent in 2012 to 30.1 percent in 2014, but is projected to rise to 30.5 percent in 2019. The consumption tax share rose slightly between 2012 and 2014, from 31.1 percent to 31.3 percent, but is projected to fall to 30.3 percent in 2019.

The business tax share of total tax revenue rose from 33.2 percent in 2012 to 34.2 percent in 2014 but is projected to fall to 32.8 percent in 2019.

After allowing for the shifting of business taxes, the Minnesota tax system in 2014 remained regressive (as it had been in 2012). The full-sample Suits index, a measure of the progressivity or regressivity of a tax or tax system, rose (toward zero) from -0.052 in 2012 to -0.029 in 2014. This change reflects a substantial decrease in overall regressivity.

Minnesota’s refundable income tax credits and property tax refunds for homeowners and renters substantially reduce overall regressivity. In their absence, the 2014 Suits index would fall from -0.029 to -0.054.

Total Minnesota income is expected to grow by 22.6 percent between 2014 and 2019. Tax receipts and tax burdens on Minnesotans are each forecast to grow more slowly (at 19.6 and 20.5 percent), so the overall effective tax rate is projected to fall from 12.0 percent to 11.8 percent of income.

The full-sample Suits index is projected to rise (toward zero) from -0.029 in 2014 to -0.024 in 2019. Income growth rates are expected to outpace tax growth rates, thereby reducing effective tax rates in every decile except the 9th (where the increase is only 0.03 percent of income).
The fourteen biennial tax incidence studies cover a 26-year period. Comparison with earlier reports provides some historical context for the results of the current study. Figures E-1 and E-2 below show how effective tax rates and Suits indexes have changed over time. The effective tax rate is the ratio of tax burden to total household income. For the Suits index, positive values reflect progressivity and negative values show regressivity. To allow comparability to earlier studies, Figure E-2 shows population-decile Suits indexes as well as the more accurate full-sample Suits indexes, which were not reported until tax year 2004. Chapter 1 provides further explanation for these trends.