A recent report named Minnesota’s tax code the most progressive in the U.S., meaning that Minnesota’s state and local tax system does more to reduce income inequality than that of any other state in the country.
The upshot of the new report — “Who Pays?” from the left-leaning Institute on Taxation and Economic Policy — is that low-income Minnesotans pay less in taxes (including income, sales, property, and excise taxes) than their counterparts in most other states, while high earners pay more. But because most states have steeply regressive tax codes — meaning lower earners pay a larger share of their income than the rich — the reality is that Minnesota state and local effective tax rates (total taxes divided by income) are fairly flat across income groups, especially outside of the lowest 20%. The chart below shows effective tax rates for Minnesota, South Dakota and Wisconsin for each income quintile, with the highest 20% broken out into subgroups.
South Dakota and Wisconsin’s effective tax rates for lower-income households are similar to Minnesota’s middle-income rates, but fall steeply at the top. This is the hallmark of a regressive tax code, and the same holds true for other low-tax states like Florida and Texas.
For Minnesota, the ranking of most progressive tax code is an achievement several decades in the making, resulting from policies like a graduated income tax as well as a number of credit and refund programs targeted at lower-income households. Most recently, a new child tax credit and a surtax on investment income of very high earners — combined with corporate tax cuts in other states — vaulted Minnesota to the top spot.
The ranking was lauded by economic fairness advocates both here and across the country, who praised Minnesota for reducing inequality by ensuring the rich pay a larger share of their income in taxes than the poor. They are right to celebrate: A progressive tax code follows the egalitarian values of the Minnesota Miracle; it helps those in need, and it asks more from those whom society has benefited most. Those are all good things that Minnesotans should be proud of.
But when it comes to taxes, there is danger in focusing too much on the question of “who pays?” over “what do they pay for?”
Once raised, state and local tax dollars fund an enormous and often under-appreciated range of public investments that support our daily lives, shape the character of our communities, and set the fundamental terms of our social contract. This encompasses not just the public programs we have now, but the things that we might want in the future.
For example, Evan Ramstad recently published an excellent column in the Star Tribune discussing America’s shameful under-investment in child care compared to European countries. As Ramstad points out, these sorts of investments are could be established here. But they require a different conversation around taxes.
Namely: Taxes are good. They pay for things that benefit us all, and so it’s right that everyone contribute. Taxes can fund basic necessities like affordable child care, health care, college, and greater housing supply, as well as quality-of-life amenities like parks, libraries and the arts.
These are inherently public goods that we can neither afford to buy as individuals, nor effectively distribute through private markets. Case in point: the overpriced, understaffed child care system described in Ramstad’s column and many other places. As Ramstad points out, solutions to these problems exist in other places and they are attainable here. But it requires a more tax-positive approach.
Asking Minnesotans to embrace higher taxes will be no small feat, but it is especially necessary in the United States, which raises and spends less money on public goods and services than any other developed nation of comparable wealth.
Measured as a share of total economic output, U.S. taxes are about 20% lower than the OECD average, and 35% lower than countries like Sweden, Finland, and Denmark, which are renowned for low levels of poverty and crime, excellent health outcomes, and a generally high quality of life.
For Americans, the lack of public investment means higher out-of-pocket costs for health care, child care and college. More broadly, the fragile social safety net means a more precarious life, without the guarantee of income support, basic housing, or medical care in the event of calamity. These would seem like far more pressing (and politically inspiring) questions than whether a middle-earner spends 8.6% (the South Dakota average), 10% (the Minnesota average), or 10.5% (the U.S. average) on state and local taxes.
Right now, many national tax policy advocates are focused on tax fairness and the idea that only “the rich” should pay for additional public spending. This is understandable given current levels of inequality. But an overwhelming progressivity may come at the expense of the revenues we could raise to fund collective investments in a better society.
Minnesota has long carved its own path to becoming the state that works, with the strongest economy in the region and some of the highest quality of life in the country. Our policymakers should continue looking for opportunities to build on that success by easing barriers to attaining life’s basic necessities.
Relying too much on progressive taxation will greatly limit the state’s funding options, given that 13 out of 15 state tax revenue sources are considered regressive by the technical definition. Higher incomes are also more volatile, which is a problem for states that need to balance every budget. And, although its effects are often overstated, there is also the perennial threat of rich taxpayers leaving.
That’s not to say that Minnesota shouldn’t raise taxes on the rich. But it would be a mistake to accept progressivity as the litmus test of a worthwhile revenue source.
For decades, Minnesota has been a pioneer in funding a more just society. Now that we have the most progressive tax code in the country, the fiscal conversation in Minnesota should pivot to: “What can we get for it?”
