2011 Minnesota State and Local Tax Incidence Presentation

Analysis for 2008

Projections to 2013

A full copy of the study can be found on our website athttp://taxes.state.mn.us/legal_policy/pages/research_reports_research_reports.aspx

House Tax CommitteeApril 27, 2011

1

History of the Report

Statutory mandate Who pays Minnesota state and local taxes?

11th biennial study Tax years 1988 through 2008

Modifications over the years 5-year projections added Income deciles as well as population deciles More demographic detail added Appendix C with more detail by tax

2

Outline Strengths of the Report

Looks at Minnesota state & local tax system as a whole Includes business taxes as well as taxes on individuals Includes all Minnesota households Broad definition of income Historical perspective

Brief Summary of Results Sources of Confusion

Why is average income so much lower than in Census? Household variations Business taxes: Average vs. incremental incidence 2008 or 2013? Income deciles or population deciles?

3

Strengths of the Study

1. Includes all Minnesota state and local taxes Not just state taxes. Not just the income tax. Not just General Fund taxes. Focus on the distribution of the combined burden of all

Minnesota state and local taxes.

4

Business Taxes (CY 2013) $ Millions Percent

Business Property Taxes (includes rental property) $4,405 50%

Sales Tax on business inputs (includes MVST) 2,623 30%

Corporate Franchise Tax 830 9%

Motor Fuels Tax on fuels used by business 351 4%

Vehicle Registration Tax on business vehicles 137 2%

Local Gross Earnings Taxes 123 2%

Insurance Premiums Tax on business insurance 109 1%

Mining Production Tax 91 1%

Mortgage & Deed Taxes 37 < 1%

Solid Waste Taxes on business waste 37 < 1%

TOTAL Business Taxes $8,744 100%

Percent of Total Taxes 32.3%

on business property

2. Includes Business Taxes

5

Taxes on Individuals (CY 2013) $ Millions Percent

Individual Income Tax $8,484 46%

Sales Tax on consumer purchases (includes MVST)

4,272 19% Homeowner & Cabin Property Taxes

3,411 23%

MNCare Provider Taxes 557 3%

Motor Fuels Tax on fuel used by individuals 540 3%

Motor Vehicle Registration Taxes 458 2%

Cigarette & Tobacco Taxes

(non-business)

423 2%

Insurance Premiums Tax 285 2%

Estate Tax

on individual insurance

173 1%

Mortgage & Deed Taxes 120 1%

Alcohol Taxes 81 <1%

Gambling Taxes 41 <1%

Solid Waste Taxes on consumer waste 33 <1%

Property Tax Refunds - 550 -3%

TOTAL Taxes on Individuals $18,327 100%

Percent of Total Taxes 67.7%

on homes and cabins

6

Business tax incidence (See pp. 87-99)

Estimate how much of each tax is: Shifted forward to consumers in higher prices Shifted back to workers in lower wages Borne by owners as lower profits

Varies by type of business Long-run incidence – assumes businesses have fully

adjusted to the tax.

Exported tax burden Estimates that 16 percent of Minnesota state and local

taxes are “exported” to non-residents.

7

3. Not limited to income tax filers

11.5% of households do not file income tax returns. (7.5% file neither PTR nor income tax.) Many non-filers are seniors.

Sample includes detailed income and tax information for each of 105,000 households. (See pp. 81-85) Data on household income, income tax, homeowner

property tax, PTR, and motor vehicle registration tax (“hard match”).

Estimated burdens for each of the other taxes.

8

Sample of 105,000 households is weighted to represent 2.54 million households

Divided into 10 groups (“deciles”) each with 254,000 households Lowest-income 254,000 in 1st decile

Incomes less than $9,795 Highest-income 254,000 in 10th decile

Incomes $129,567 or more

9

Income in this study includes all money income Federal Gross Income (may be negative!)

Nontaxable Social Security and pension income Nontaxable interest income Workers’ compensation cash payments Cash MFIP payments Voluntary contributions to deferred compensation

However … income does not include: In-kind assistance (food stamps, housing assistance,

medical assistance) Fringe benefits Pre-tax payments for health insurance or medical care

4. Uses broad measure of income (See pp. 82-85)

10

Results for 2008

32.5%

13.3%

11.7% 11.8% 12.1% 12.3% 12.1% 12.2% 11.7%10.3% 10.0% 9.7%

0%

5%

10%

15%

20%

25%

30%

35%

1 2 3 4 5 6 7 8 9 10 Top 5%

Top 1%

Per

cen

t

Population Deciles

All Taxes Effective Tax Rate ("ETR") by Decile for 2008

Average = 11.5%

Over $130,000

Over $183,000

Over $429,000

11

First Decile Problem (See p. 17)

ETR = 32.5%, far higher than other deciles

Tax burden over-estimated for several reasons Some temporarily low income (e.g., business losses)

12,500 households with negative incomes averaging -$120,000.

Income understated in sample as well as in the Consumer Expenditure Survey (used to estimate burden of consumer taxes)

In-kind income excluded

12

Progressive or Regressive?

Suits Index - A convenient way of comparing the degree of regressivity, progressivity or proportionality of a tax

-1Perfectly RegressiveAll Paid by Lowest

Income Group

0Proportional

+1Perfectly ProgressiveAll Paid by Highest

Income Group

Progressive – ETR rises with income Regressive – ETR falls with income Proportional – ETR same at all incomes

2008 All Taxes: Suits = - 0.060 (somewhat regressive)

13

2008 Tax Incidence by Tax Type

1 2 3 4 5 6 7 8 9 10 Top 5%

Top 1%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

All Other (12%, -0.291)

S&L Sales Tax (22%, -0.229)

Nonresidential Ptx (10%, -0.193)

Res. Ptx after PTR (21%, -0.159)

Income Tax (35%, +0.218)

Population Deciles

Pe

rce

nt

of

Inc

om

e

Note: Numbers in parentheses show percent of total tax burden and the full-sample Suits index.

14

Impact of Refundable Income Tax Credits

Total with credits = 4.1% Total without credits = 4.2%

See pp. 56-57

15

Impact of PTR on Residential Property Taxes*

6.9%

2.0% 2.1%2.6% 2.8% 3.0% 2.9%

2.9%

2.6% 1.6%

10.1%

3.8%3.5% 3.6% 3.4% 3.3% 3.1%

3.0%

2.6%

1.6%

0%

2%

4%

6%

8%

10%

12%

1 2 3 4 5 6 7 8 9 10

Per

cen

t

Population Deciles

Residential Property Taxes by Decile for 2008

With PTR (-0.159) Without PTR (-0.215)

* Homeowners and Renters. Excludes cabins.See pp. 58-59

16

Sources of Confusion1. Household definition differs from Census

This Study: 2.54 million households Median income $41,161 Average persons per household: 2.02

Census 2.09 million households Median income $57,000 Average persons per household: 2.43

Both are correct (See pp. 78-79) This Study: Taxpayer + any spouse or dependents Census: “all who occupy a housing unit” (but not

those in “group quarters”) Total population in this study matches Census

17

2. Median Income is $41,161 Overall, but …

9,796 – 16,278

9,795 & Under

1

Pop. Decile Household Income

10

$129,567 & Over

89,937 – 129,566

68,697 – 89,936

53,315 – 68,696

31,690 – 41,162

23,692 – 31,689

16,279 – 23,691

41,161 – 53,314

8

7

6

5

4

3

2

9

$87,126

$82,541

$59,122

$25,895

$25,219

$25,050

See pp. 69-70

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Decile Variations

Family Type by Population Decile

See p. 69

19

1 2 3 4 5 6 7 8 9 100%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Single Not Seniors

Single Seniors

Married Seniors

Married No Children

Single Parent with Children

Married with Children

Population Decile

Pe

rce

nt

of

All

Ho

us

eh

old

s

Results Limited to a Single Household Type

Take population of “married couples with children,” divide into 10 groups, and summarize results.

(See Table 5-1 on p. 72)

See pp. 71-77 for other household types.

20

3. Business Tax Incidence: A Warning

Study assumes all states impose taxes simultaneously.

An existing tax on capital is broken into three parts: Average tax on national capital Average sector differential Minnesota differential

“Incremental incidence” for a CHANGE in tax will differ from the “average incidence” reported in the study. For a change in tax, the change all represents

“Minnesota differential” Incremental incidence should include federal tax offset.

(See pp. 61-62)

21

Average Incidence

Incremen-tal Inci-dence

Average Incidence

Incremen-tal Inci-dence

Average Incidence

Incremen-tal Inci-dence

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

44%35%

5% 7%

40%

64%

9% 23%

42%

5%

8%

3%

44%

12%

42%

7%87%

28%

16%

4%35%

20% 20% Federal Government

Exported Other

MN Capital

MN Labor

MN Con-sumers

Corporate Tax

Industrial Property Tax

Apartment Property Tax

Average vs. Incremental Incidence

22

32.5%

13.3%11.7% 11.8% 12.1% 12.3% 12.1% 12.2% 11.7%

10.3% 10.0% 9.7%

30.5%

12.1% 11.0% 11.6% 12.1% 12.1% 12.1% 12.3% 11.9% 10.4% 10.1% 9.7%

0%

5%

10%

15%

20%

25%

30%

35%

1 2 3 4 5 6 7 8 9 10 Top5%

Top1%

Per

cen

t

Population Deciles

2008 2013

Average 2013 = 11.5% Suits = -0.052 Average 2008 = 11.5% Suits = -0.060

4. Results for 2008 or Projection to 2013? (2013 assumes current law)

2013 Projections based on Feb. 2011 Economic Forecast

Effective Tax Rates for 2008 and 2013

23

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1 2 3 4 5 6 7 8 9 10

Pe

rce

nt

Population Deciles

2008 2013

Average 2008 = 8.2% Suits = -0.004 Average 2013 = 8.0% Suits = +0.009

State Taxes

2013 projections based on Feb. 2011 Economic Forecast

Effective Tax Rates for 2008 and 2013

State share drops from 70.9% to 68.9%.

24

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

1 2 3 4 5 6 7 8 9 10

Per

cen

t

Population Deciles

2008 2013

Average 2008 = 3.3% Suits = -0.202Average 2013 = 3.5% Suits = -0.192

Local Taxes

2013 projections based on Feb. 2011 Economic Forecast

Effective Tax Rates for 2008 and 2013

Local share rises from 29.1% to 31.1%.

25

2008 to 2013

Local includes county, city, town, school district, and special taxing district taxes.

32.1% 32.7%31.9%

30.9%

28.2% 28.0%

24.6%25.8% 26.4%

29.1%

31.1%

0%

5%

10%

15%

20%

25%

30%

35%

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2013 (est)

Loca

l Tax

es a

s Per

cent

of S

tate

& Lo

cal T

axes

Local Tax Share of Minnesota State and Local Taxes

26

5. Alternative Presentation: Income Deciles (See pp. 46-51)

More detail at lower incomes.

More detail at upper incomes.

Bottom income decile includes lowest four population deciles.

Top population decile includestop four income deciles.

DecilePercent of

HouseholdsPercent of

Income DecilePercent of

HouseholdsPercent of

Income1 10% 1% 1 41% 10%2 10% 2% 2 17% 10%3 10% 3% 3 12% 10%4 10% 4% 4 9% 10%5 10% 5% 5 7% 10%6 10% 7% 6 6% 10%7 10% 9% 7 4% 10%8 10% 12% 8 3% 10%9 10% 16% 9 1% 10%

10 10% 42% 10 0.3% 10%

Top 5% 5% 31% Top 5% 0.03% 5%

Income DecilesPopulation Deciles

27

Income Deciles for 2008

13.8%

12.1% 12.2% 12.2%11.9% 11.6%11.8%

10.7%9.2%

9.7%

7.8%

0%

5%

10%

15%

20%

1 2 3 4 5 6 7 8 9 10 Top 5%

Pe

rce

nt

Income Deciles

All Taxes ETRs by Income Decile for 2008

Average = 11.5%

First 4 population

deciles 10th population

decile (10.9%)Only 836

households

28

History

2013 projections based on Feb. 2011 Economic Forecast

Effective Tax Rates (All Taxes) by Year

12.0% 12.4% 13.0% 12.9%12.0%

11.2% 11.3% 11.6% 11.4%11.5% 11.5%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

1990 (adj.)

1992 (adj.)

1994 (adj.)

1996 (adj.)

1998 (adj.)

2000 2002 2004 2006 2008 2013 (est.)

Per

cen

t

Year

29

History and Projection of Suits Index

2013 projections based on Feb. 2011 Economic Forecast

History Forecast

Ove

rall

Su

its

Ind

ex

30

Income Share of Top 5 Percent

2013 projections based on Feb. 2011 Economic Forecast

How much is tax policy? How much is the economy?

26.0% 27.1% 26.2%28.3%

31.5% 31.4%

28.1%29.8%

32.2% 31.1% 30.4%

0%

7%

14%

21%

28%

35%

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2013 (est.)Base Year

History Forecast

Ove

rall

Su

its

Ind

ex

31