Minnesota’s recent Senate tax bill would, among other things, reduce our state’s income tax floor rate from 5.35% to 2.80%. Refreshing in these politically fractured times, the bill received bipartisan support: it won the votes of all Republican senators, six from the DFL and the two independents.
Some of the reaction to the bill was entirely predictable. Education Minnesota, the state teachers’ union, denounced it as “tax cuts for the rich.” The Minnesota Budget Project, an initiative of the Minnesota Council of Nonprofits, claimed that “despite being described as addressing all taxpayers, this proposal provides no benefit to approximately 1 in 5 Minnesota households.” The DFL, although six of its senators supported the bill, claimed that “more than half of the total tax cuts go to the highest income Minnesotans.”
It is true that this measure would provide no direct benefit to the poorest 20% of Minnesota households in terms of income. Indeed, as the Department of Revenue’s most recent tax incidence study shows, taken together, these households pay no state income tax. Indeed, once tax credits are taken into account, these households are in fact net beneficiaries of the state income tax system. It is not possible to reduce your tax burden if you do not have one.
It is also true that in dollar terms, the wealthiest individuals will see their tax burden reduced the most by this measure (especially those between $150,000 and $249,999). But that’s because they pay a disproportionate amount of state income tax.
Looking again at the tax incidence study, we find that every household income decile in Minnesota up to the eighth – that is, the lowest 80% of households by income – gained a greater share of the state’s total household income than the share it contributed to the state’s individual’s total. income tax receipts. The ninth decile broke even, earning 15% of total state household income and paying 15% of total personal income taxes. But the top 10% of Minnesota’s households earned 43% of the state’s total household income and contributed 59% of its total tax revenue (those numbers have remained fairly stable over time despite varying tax rates). taxation).
It’s the result of a progressive tax system, and Minnesota has had one of the most progressive in the country for decades. But if you create a situation where A) the lowest earning 20% of households pay nothing in income tax and B) the highest earning 10% pay 59% of income tax, you’ve created a situation in which it becomes very difficult to reduce tax rates even for the lowest incomes without the “rich” receiving some of that relief.
But only in dollars. By concentrating the tax cut on the lowest bracket, it applies to a greater share of the income of households at the bottom of the income scale than those at the top. As a result, effective tax rates (income/income taxes) fall more for households at the bottom of the income scale than for those at the top. So while those with incomes between $150,000 and $249,999 will see their tax burden drop by $1,161 per year according to Minnesota Senate counsel, it’s only a 12% drop. their effective tax rate. For households with income between $20,000 and $29,999, the effective tax burden decreases by 100%. It is totally eliminated. For households with income between $30,000 and $49,999, the effective tax rate decreases by 56%. For people earning $500,000 or more, however, the reduction is only 1%.
The reductions in effective tax rates in this bill are heavily biased in favor of those lower on the income scale. This is not a “tax cut for the rich”. That probably won’t stop people from saying it does, but the facts say otherwise.