budget trends commission february 27, 2008 minnesota taxes: growth, stability, and demographic...
TRANSCRIPT
Budget Trends Commission
February 27, 2008
Minnesota Taxes:Growth, Stability, and Demographic Changes
Presented by:
Paul WilsonMN Department of Revenue
Outline
Overview of Minnesota Tax System
Three-Legged Stool State vs. Local Taxes
Demographics and the Impact of Aging
Income Tax Sales Tax Property Tax
Growth and Stability
Introduction: Growth, Standard Deviation, and Cyclical Swing Index Income Tax Sales Tax Corporate Tax Property Tax
Source: Price of Government and DOR History file
Chart 1History of Minnesota State and Local Tax Shares
FY 1962 to FY 2011
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Fiscal Year
Per
cen
t o
f T
ota
l T
axes
Other Taxes
Income Tax
Sales Tax Rebate
Sales Tax (with MVET)
Prop Tax (before PTR)
Forecast
What’s different about Minnesota?
More equal mix of income, sales, and property taxes than is typical. In 2006: 39% income tax, 32% property tax, 29% sales tax.
State share of tax revenue is higher than in most states.
Local sales taxes relatively low, and there are no local income taxes. Local governments are unusually dependent on state aids.
Chart 2-A Minnesota Income, Sales, and Property Tax Shares
FY 1962 to FY 2011
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Fiscal Year
Sh
are
of
To
tal T
axes
Income Tax
Sales Tax
Property Tax
Forecast
Source: US Census
Few states have greater “balance” in tax shares.
In 2005, according to US Census data, only 7 states had greater balance (and only 4 had greater balance than Minnesota did in 2002-04).
18 states depend on one of the big three taxes for over half of total state and local revenue (including 12 states who lack one of the three).
The median state’s “Big Three” ratios in 2005 were 46%, 33%, and 21%.
9 states had a longer income tax “leg” than Minnesota (including 3 states with no sales tax).
28 states had a longer sales tax “leg” (including the 7 states with no income tax).
37 states and DC had a longer property tax “leg”.
Source: US Census
Chart 2-B All States Income, Sales and Property Tax Shares
FY 1962 to FY 2005
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Fiscal Year
Sh
are
of
To
tal T
axes
Income Tax
Sales Tax
Property Tax
Implications of relying more heavily on income tax relative to sales and property taxes:
Less stable revenue, but higher average revenue growth.
Progressive income tax helps balance regressivity of other taxes in overall tax system.
Source: US Census
Chart 3State Share of State & Local Taxes
(US Census Data for 2005)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Verm
ont
Arkan
sas
Hawaii
Delawar
e
Wes
t Virg
inia
Minn
esot
a
Kentu
cky
New M
exico
Miss
issipp
i
Idah
o
Mon
tana
North
Car
olina
Oklaho
ma
Califo
rnia
Alabam
a
Mich
igan
North
Dak
ota
Wyo
ming
Was
hingt
onUta
h
Alaska
Nevad
a
Mas
sach
uset
ts
Tenne
ssee
South
Car
olina
Wisc
onsin
Conne
cticu
t
Louis
iana
India
na
Arizon
a
Kansa
sIo
wa
Penns
ylvan
ia
US Tot
al
Main
e
Orego
n
Rhode
Islan
d
Nebra
ska
Virgini
aOhio
Georg
ia
Florida
Mar
yland
Miss
ouri
New Je
rsey
Illino
is
South
Dak
ota
Colora
do
Texas
New H
amps
hire
New Y
ork
MN
US
Source: US Census
Chart 4 State Aid as Percentage of State Aid Plus Local Taxes
(US Census Data, 2005)
0%
10%
20%
30%
40%
50%
60%
70%
80%
Verm
ont
Arkan
sas
New M
exico
Minn
esot
a
Miss
issipp
i
Califo
rnia
Delawar
e
Mich
igan
Wes
t Virg
inia
North
Car
olinaId
aho
Nevad
a
Alabam
a
Wyo
ming
Kentu
cky
Wisc
onsin
Oklaho
ma
Mon
tana
Arizon
a
Orego
n
Was
hingt
onOhio
North
Dak
ota
India
na
South
Car
olina
US Tot
alUta
h
Penns
ylvan
iaIo
wa
Kansa
s
Alaska
Tenne
ssee
Louis
iana
Mas
sach
uset
ts
Georg
ia
Virgini
a
Florida
New Y
ork
Miss
ouri
Illino
is
Nebra
ska
Colora
do
New Je
rsey
South
Dak
ota
New H
amps
hire
Rhode
Islan
d
Texas
Main
e
Mar
yland
Conne
cticu
t
Hawaii
MN
US
Source: US Census
Chart 5Local Share of Sales Tax Revenues by State
(US Census, 2005)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Conne
cticu
t
Hawaii
Idah
o
India
na
Main
e
Mar
yland
Mas
sach
uset
ts
Mich
igan
New Je
rsey
Rhode
Islan
d
Wes
t Virg
inia
Miss
issipp
i
Kentu
cky
Verm
ont
Minn
esot
a
Penns
ylvan
ia
South
Car
olina
Nevad
a
Florida
Wisc
onsin
Illino
is
Was
hingt
on
Nebra
ska
North
Dak
otaOhio
US Tot
al
Tenne
ssee
Texas
Califo
rniaIo
wa
Kansa
sUta
h
Arkan
sas
Wyo
ming
Virgini
a
South
Dak
ota
Arizon
a
North
Car
olina
New M
exico
Georg
ia
Miss
ouri
Alabam
a
Oklaho
ma
New Y
ork
Louis
iana
Colora
do
Alaska
State Share Local Share
MN US
Source: US Census
Chart 6Local Shares of State & Local Income Tax Revenue
(US Census, 2005)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Arizon
a
Arkan
sas
Califo
rnia
Colora
do
Conne
cticu
t
Georg
ia
Hawaii
Idah
o
Illino
is
Kansa
s
Louis
iana
Main
e
Mas
sach
uset
ts
Minn
esot
a
Miss
issipp
i
Mon
tana
Nebra
ska
New H
amps
hire
New Je
rsey
New M
exico
North
Car
olina
North
Dak
ota
Oklaho
ma
Rhode
Islan
d
South
Car
olina
Tenne
ssee
Utah
Verm
ont
Virgini
a
Wes
t Virg
inia
Wisc
onsinIo
wa
Orego
n
Alabam
a
Delawar
e
Mich
igan
Miss
ouri
US Tot
al
India
na
New Y
ork
Kentu
cky
Penns
ylvan
iaOhio
Mar
yland
State Share Local Share
MN US
Chart 7-APercent Reduction in Income and Minnesota Tax Per Return
Compared to Age 55-59 Minnesota Resident Income Tax Filers, 2002
-18%
-24%
-34% -34%
-43%-40%
-52%
-63%
-71%
-4%
-17%
-67%
-80%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%60 to 64 65 to 69 70 to 74 75 to 79 80 to 84 85 and over
Total Income Minnesota Tax
Chart 7-BPercent Reduction in Income and Minnesota Tax Per Person
Compared to Age 55-59 Minnesota Resident Income Tax Filers, 2002
-4%
-20%-22%
-28%-25%
-42%
-51%
-59%-63% -62%
-26%
-17%
-80%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%60 to 64 65 to 69 70 to 74 75 to 79 80 to 84 85 and over
Total Income Minnesota Tax
Chart 8-AAverage FAGI and Exempt Income Reported on Tax Return
Minnesota Resident Income Tax Filers, 2002
6
16
34
49
6067
72 74 75
65
5145
37 3431
16
17
17 20
15
0
0
0
1
1
2
23 6
13
0
10
20
30
40
50
60
70
80
90
lessthan 20
20 to24
25 to29
30 to34
35 to39
40 to44
45 to49
50 to54
55 to59
60 to64
65 to69
70 to74
75 to79
80 to84
85 andover
Age of Taxpayer
$ T
ho
usa
nd
s
Exempt SS, pension, IRA, andinterest reported on return
FAGI
Large percentage of the income seniors report on their tax returns is tax exempt.
Two-Thirds of Social Security (for income tax filers – higher overall) One-quarter of pension and IRA income. For all senior filers, 28% of income reported on tax returns is
exempt.
Note that the share of exempt income for seniors is lower in Minnesota than in many states. In a few states, all Social Security and pension income is exempt. (Minnesota follows federal law on taxation of Social Security and pensions.)
Chart 8-BComponents of Average Income Reported on Tax Return
Minnesota Resident Income Tax Filers, 2002
0
10
20
30
40
50
60
70
80
90
lessthan 20
20 to24
25 to29
30 to34
35 to39
40 to44
45 to49
50 to54
55 to59
60 to64
65 to69
70 to74
75 to79
80 to84
85 andover
Age of Taxpayer
$ T
ho
usa
nd
s
Exempt income per returnTaxable Retirement IncomeTaxable Capital IncomeOther Taxable (incl Sch E)Taxable Earnings
Chart 9Average Minnesota Income Tax (Before Credits)
Minnesota Resident Income Tax Filers, 2002
507
1,248
1,964
2,554
3,007
3,580
3,761
3,123
2,249
1,2301,095
481
109
1,816
1,407
3,361
986
858926
841
1,118
1,323
109
1,354
1,633
2,2642,2672,150
1,915 1,886
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
lessthan20
20 to24
25 to29
30 to34
35 to39
40 to44
45 to49
50 to54
55 to59
60 to64
65 to69
70 to74
75 to79
80 to84
85 andover
Age of Taxpayer
Do
llar
s
Per Return
Per Taxpayer
Tax Incidence Study Database Includes non-filers More comprehensive measure of income
Lowest Highest Income Income
Population of Particular Type of Household
First Quartile Median Third Quartile
Chart 10-ATotal Household Income in 2004
$38,911
$35,042
$15,788
$23,384
$12,851
$24,589
$74,674
$35,574
$51,135
$97,087
$46,296
$69,003
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
First Quartile Median Income 3rd Quartile
Single Senior
Single Non-Senior
Married SeniorMarried Non-Senior (no dependents)
Chart 10-BMinnesota Income Tax in 2004
$93
$431
$121 $106
$3,019
$0
$1,715
$760
$2,641
$762
$4,830
$1,318
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
$5,000
First Quartile Median Income 3rd Quartile
Single Senior
Single Non-Senior
Married SeniorMarried Non-Senior (no dependents)
Impact of Aging on Minnesota Income Tax Revenues
Nina Manzi, Joel Michael, and Paul Wilson, “State Income Tax Revenues in 2002 and 2030: The Impact of the Retirement of the Baby Boom,” National Tax Association Proceedings, November 2005. Reprinted in State Tax Notes (January 23, 2006), pp. 215-240.
House Income Tax Simulation (HITS) Model Used to estimate tax revenue in 2002 assuming:
2030 age distribution, and 2030 estimated shares of income (wages, retirement income, capital income).
Simulation results: Revenues would fall by only 1.8 percent.
Why so small an impact? Fewer young people – who also pay a relatively small amount of tax. Under Current law, the share of retirement income subject to tax will rise.
Social Security threshold is not indexes for inflation, so between 2002 and 2030 the share of SS subject to tax will rise from 32% to 63%.
Effective tax rates for seniors would rise from 2.90% of income to 3.43% of income.
Effective Tax Rate
5%
4%
0%
Age Group
20-2425-29
30-3435-39
40-4445-49
50-5455-59
60-6465-69
70-7475-79
80-8485 and over
Under 20
1%
3%
2%
TY 2030 projected
TY 2002 base
Figure 6: Effective tax rates by age group, 2002 base and 2030 projected
The Big Question: Will current law related to senior preferences continue?
Minnesota Estimates – Impact of Aging AND
Added Senior Preferences(Income held constant)
Revenue impact as percent of:
Total change 2002 to 2030
with preference in
both years
Total change 2002 to 2030 if add new senior tax
benefit
2002base
revenues
2030 base
revenues
Current Minnesota law (“2010 Law”) NA NA -1.8% NA
Full exemption for Social Security -2.3% -5.0% -4.5% -6.8%
Index Social Security Benefits NA -1.9% -3.7% -3.7%
$10,000 pension exclusion, not indexed
-2.7% -2.7% -1.8% -4.5%
Full exemption for Social Security and $10,000 pension exclusion, not indexed
-4.9% -7.4% -4.4% -9.2%
Full exemption for Social Security and $10,000 pension exclusion, indexed
-4.9% -9.2% -6.3% -11.1%
Full exemption for Social Security and pension exclusion
-8.1% -15.8% -10.0% -17.6%
Chart 11Sales Tax on Consumer Purchases
Seniors Compared to Non-Seniors2009 Estimates from Tax Incidence Study Database
$1,502
$690
$743
$1,706
$1,907
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
Single Couple Family of 4
Senior Non-Senior
Revenue impact of aging:
Based on a 2004 study of consumption differences by age, Paul Menchik (Michigan State University) suggested that aging alone would reduce sales tax revenue by 5% in the typical state between 2000 and 2030.
In contrast, more recent analysis by Peter Fisher (University of Iowa) suggests that aging by itself will increase sales tax revenues by 0.3% between 2005 and 2030.
Source: Peter Fisher, University of Iowa (2007)
Chart 12Per Capita Income, Expenditures, and Taxable Expenditures by Age
States with Sales Tax, 2007
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
Under 25 24-34 35-44 45-54 55-64 65-74 75 and over
Age of Reference Person
Income
Expenditures
Taxable Expenditures
Seniors are more likely to be homeowners. Senior homeowners have lower income than non-senior homeowners –
but only about 19% less. Seniors own homes only slightly lower in value than non-seniors. Homeowner tax before property tax refund is 9% lower, but because
incomes are lower the tax equals a higher percentage of income. The PTR reduces senior property tax by more than it reduces non-senior
tax, and tax after PTR as a percent of income is roughly the same for seniors and non-senior homeowners.
Homeowner Property Tax Statistics by Age
Before PTR After PTR
Before PTR
After PTR
Under 65 60% $102,435 $155,045 $2,394 $2,258 2.3% 2.2% 6%65 and Over 72% $82,804 $146,316 $2,173 $1,913 2.6% 2.3% 12%
All Ages 62% $98,133 $153,132 $2,346 $2,182 2.4% 2.2% 7%
Difference as Percent of Non-
Senior Total21% -19% -6% -9% -15% 12% 5% 110%
Age of Homeowner
Percent Who Are
Homeowners (2004)
Average Home Value
(2004)
Homeowner TaxTax as Percent
Income Percent Less Due
to PTRHomeowner
Income
Tax Growth & Instability
Measure 1: Tax base growth.
How does historical growth in the tax base compare to growth in per capita income?
Growth rates stated in per capita terms, and in real (inflation-adjusted)dollars. Compared to growth in real per capita personal income.
Measure 2: Standard deviation of tax base annual growth rates.
How much does the growth rate (real per capita tax base) vary from year to year?
Captures amount of variation around the long-run trend. Larger standard deviation means more instability.
Measure 3: Cyclical swing index.
How much does the tax base “swing” between expansion and recession years?
CSI = Average annual growth in expansion yearsMinus
Average annual growth in recession years
Chart 13Growth in Real Per Capita Income
Minnesota 1989-2005
1.6%1.7%
1.9%
3.7%
4.8%
1.8%
0%
1%
2%
3%
4%
5%
Personal Income Federal Adjusted Gross Income Federal Taxable Income
Average Annual Growth Standard Deviation of Annual Growth
Chart 14Real Per Capita FAGI, FTI, and Personal Income
Minnesota, CY 1970 to CY 2005
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Year
2005
Do
llar
s P
er C
apit
a
Real Personal Income per capita (+1.7%/yr)
Real FAGI per capita (+1.6%/yr)
Real Taxable Income per capita (+1.9%/yr)
Note: Growth rates are average rates per year for 16 years, with compounding.
Chart 15Growth in Components of Real Per Capita FAGI
Minnesota 1989-2005(Average share of FAGI shown in parentheses)
-5.8%
30.3%
11.5% 11.1%
1.6% 1.3%
5.1%
0.7%
6.4%
-0.1%
4.9%3.7%2.2%
5.2%
13.0%
3.9%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
FAGI (100%) Wages (75%) RetirementIncome (6%)
Capital Gains (5%)
Interest (3%) Dividends (2%) Sole Proprietor(3%)
Other (mostlySch. E) (6%)
Average Annual Growth Standard Deviation of Annual Growth
Chart 16Cyclical Swing Index
FTI, FAGI and Components of FAGI (1971-2005)
4.7%3.2% 2.2%
6.0%
14.8%
0.6% 2.6%
-0.4%
-3.0% -3.1%
2.9%
-1.7%
-22.6%
-5.8%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
FTI(Index=7.6%)
FAGI(Index=6.3%)
Wages(Index=3.9%)
Retirement(Index=3.1%)
Capital Gains(Index=37.4%)
Interest & Div(Index=1.0%)
Sole Proprietor(Index=8.4%)
Expansion Years
Recession Years
Chart 17Real Per Capita FAGI and FAGI Minus Capital Gains
Minnesota, CY 1989 to CY 2005
0
5,000
10,000
15,000
20,000
25,000
30,000
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Year
2005
Do
llar
s P
er C
apit
a
Real FAGI per capita (+1.6%/yr)
FAGI excluding capital gains (+1.4%/yr)
Note: Growth rates are average rates per year for 16 years, with compounding.
Chart 18 Durable Goods, Nondurable Goods, and Services Shares
of US Personal Consumption Expenditures
0%
20%
40%
60%
80%
100%
19701972
19741976
19781980
19821984
19861988
19901992
19941996
19982000
20022004
2006
Year
Sh
are
of
To
tal
PC
E
Durable Goods
Nondurable Goods
Services
Chart 19Average Annual Growth Rates 1970-2006
1.6%1.7%
1.2%
2.3%
1.3%
0.4%
0%
1%
1%
2%
2%
3%
Personal Income PCE TaxableConsumption
Services Durable Nondurable
Chart 20Taxable Shares of Personal Consumption Expenditures
(Assuming 2007 law applied in earlier years)
0%
10%
20%
30%
40%
50%
60%
19701972
19741976
19781980
19821984
19861988
19901992
19941996
19982000
20022004
2006
Year
Sh
are
of
PC
E
Goods
Services
All PCE
Chart 21-AGrowth Rates and Standard Deviation of Growth Rates
Real Per Capita Dollars, 1970-2006
2.4%
3.5%
2.5%
6.2%
2.5%
0.4%
1.7%
1.2%
1.6%
2.3%
1.3%
2.6%
0%
1%
2%
3%
4%
5%
6%
7%
Personal Income PCE TaxableConsumption
Services Durable Nondurable
Average Growth
Standard Deviation
Chart 21-BImpact of Base Expansions on Growth and Instability
1970-2006
1.2%1.1%
1.0%
2.1%
1.6%1.7%
3.5% 3.4%
3.0% 3.0%
3.5%
2.9%
2.6%
1.3%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
Current Law Add Clothing Add Food Add Medical Add UntaxedServices
Add Fuels Add All Five
Annual Growth Standard Deviation
Chart 22Cyclical Swing Index for Current Law and Broader Tax Bases
(CSI Index in parentheses)
1.9%2.5%
2.3% 2.3%
3.0%
2.5%
2.7%
-0.8%-0.7%
-2.1%-2.0%-2.2%
-2.8%-2.5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
Current Law(5.0%)
Add Clothing(5.0%)
Add Food(4.1%)
Add Fuels(4.3%)
Add Pers.Serv. (4.8%)
Add Medical(3.7%)
Add All (3.3%)
Averagegrowth inexpansion
Averagegrowth inrecession
The Challenge of Remote Sales
The tax gap from uncollected remote retail sales is substantial and growing rapidly.
From $150 million in 2008 to over $200 million in 2011. Reduces growth in general sales tax revenues by about
0.25% per year. Possible solution: Streamlined sales tax to simplify tax
collection plus either: Congressional action or Court decision.
Chart 23Real Per Capita Corporate Tax Revenue
Growth and Standard Deviation of Growth 1990-2006
1.3%
16.0%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Growth Standard Deviation
Chart 24Cyclical Swing Index for Corporate Tax Revenue
1990-2006(CSI Index = 18.5%)
6.9%
-11.6%-12%
-8%
-4%
0%
4%
8%
Averagegrowth inexpansion
Averagegrowth inrecession
Chart 25Taxable Market Value Change by Class
0%
2%
4%
6%
8%
10%
12%
14%
16%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Residential Homestead
Commercial/Industrial