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 at House Tax Committee April 27,

History of the Report Statutory mandate  Who pays Minnesota state and local taxes? 11 th 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) $ MillionsPercent Business Property Taxes (includes rental property)$4,40550% Sales Tax on business inputs (includes MVST) 2,62330% Corporate Franchise Tax830 9% Motor Fuels Tax on fuels used by business 3514% Vehicle Registration Tax on business vehicles 1372% Local Gross Earnings Taxes 1232% Insurance Premiums Tax on business insurance 109 1% Mining Production Tax911% Mortgage & Deed Taxes 37< 1% Solid Waste Taxes on business waste 37 < 1% TOTAL Business Taxes $8, % Percent of Total Taxes 32.3% on business property 2. Includes Business Taxes 5

Taxes on Individuals (CY 2013) $ MillionsPercent Individual Income Tax$8,48446% Sales Taxon consumer purchases (includes MVST) 4,27219% Homeowner & Cabin Property Taxes 3,41123% MNCare Provider Taxes 5573% Motor Fuels Taxon fuel used by individuals 5403% Motor Vehicle Registration Taxes4582% Cigarette & Tobacco Taxes (non-business) 4232% Insurance Premiums Tax2852% Estate Tax on individual insurance 1731% Mortgage & Deed Taxes1201% Alcohol Taxes81 <1% Gambling Taxes41 <1% Solid Waste Taxes on consumer waste 33<1% Property Tax Refunds % TOTAL Taxes on Individuals $18, % Percent of Total Taxes67.7% on homes and cabins 6

Business tax incidence (See pp )  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 )  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 1 st decile Incomes less than $9,795  Highest-income 254,000 in 10 th 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 ) 10

Results 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 Perfectly Regressive All Paid by Lowest Income Group 0 Proportional +1 Perfectly Progressive All 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 = (somewhat regressive) 13

2008 Tax Incidence by Tax Type 14

Impact of Refundable Income Tax Credits Total with credits = 4.1% Total without credits = 4.2% See pp

Impact of PTR on Residential Property Taxes* * Homeowners and Renters. Excludes cabins. See pp

Sources of Confusion 1. 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 ) 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 … See pp

Decile Variations Family Type by Population Decile See p

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 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 ) 21

Average vs. Incremental Incidence 22

Average 2013 = 11.5% Suits = Average 2008 = 11.5% Suits = Results for 2008 or Projection to 2013? (2013 assumes current law) 2013 Projections based on Feb Economic Forecast Effective Tax Rates for 2008 and

Average 2008 = 8.2% Suits = Average 2013 = 8.0% Suits = State Taxes 2013 projections based on Feb Economic Forecast Effective Tax Rates for 2008 and 2013 State share drops from 70.9% to 68.9%. 24

Average 2008 = 3.3% Suits = Average 2013 = 3.5% Suits = Local Taxes 2013 projections based on Feb 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. 26

5. Alternative Presentation: Income Deciles (See pp ) More detail at lower incomes. More detail at upper incomes. Bottom income decile includes lowest four population deciles. Top population decile includes top four income deciles. 27

Income Deciles for 2008 Average = 11.5% First 4 population deciles 10 th population decile (10.9%) Only 836 households 28

History 2013 projections based on Feb Economic Forecast Effective Tax Rates (All Taxes) by Year 29

History and Projection of Suits Index 2013 projections based on Feb Economic Forecast History Forecast Overall Suits Index 30

Income Share of Top 5 Percent 2013 projections based on Feb Economic Forecast How much is tax policy? How much is the economy? History Forecast Overall Suits Index 31