The Minnesota Department of Revenue's (DOR) new incidence analysis of the 2013 omnibus tax act confirms what was widely anticipated: the new law will significantly reduced Minnesota's state and local tax regressivity.
The new DOR incidence analysis reveals that:
The new tax bill will result in a $798 million (3.3 percent) increase in Minnesota taxes in 2015 relative to previous law. (The new DOR incidence analysis is based on calendar year 2015 data.)
Nearly two-thirds (62 percent) of this tax increase will be borne by the top one percent of all Minnesota households by income. Nearly three-quarters (72 percent) will be borne by the top five percent. (Data for the top two percent of households—the focus of the fourth tier income tax increase—is not available.)
Relative to the previous law, state and local taxes per dollar of income will increase by roughly a penny and a half (1.40 cents) for the top one percent of all Minnesota households by income, 0.27 cents for the next four percent (i.e., from the 95th to 99th percentile), and by 0.15 cents for the bottom 95 percent.
The powerfully progressive income tax increase—combined with a significant reduction in regressive property taxes—is more than sufficient to offset the impact of regressive excise, sales, and corporate income tax changes.
Economists use the Suits index to measure tax regressivity. A Suits index of +1.0 indicates a tax that is perfectly progressive, while an index on -1.0 indicates a tax that is perfectly regressive. A Suits index can be calculated for individual taxes, for a combination of taxes, or for an entire tax system.
The overall Suits index for the net tax change resulting from the 2013 tax act +0.459, which is extremely progressive. The Suits index for the fourth tier income tax change alone is +0.842. The powerfully progressive changes in the 2013 tax act is sufficient to improve the Suits index for the total Minnesota state and local tax system from -0.049 to -0.033. This is likely the largest reduction in regressivity produced by a single tax bill for several decades.
For those who cry "class warfare" whenever a tax increase on high income households is discussed, a word of advice: relax. The top one percent and the top five percent of all Minnesota households by income will continue to enjoy a state and local effective tax rate (i.e., state and local taxes as a percent of income) that is less than that paid by any other income group in the state.