Governor s Supplemental Budget Tax Proposals Tax and Transportation Bills

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1 Tax Incidence Analysis Prepared by the Tax Research Division, Minnesota Department of Revenue May 9, 2017 (REVISED) Governor s Supplemental Budget Tax Proposals Tax and Transportation Bills Including Modifications Made in Supplemental Budget Proposals The Governor s Supplemental Budget (March 2017) proposes the following tax law changes: Governor s Tax Bill Income Tax: o Increase Child and Dependent Care Credit to match the federal credit amounts, but make credit refundable (unlike the federal) and phase-out the credit starting at $77,000. o Increase Working Family Credit by (1) increasing credit rate during phase-in and (2) extending eligibility to higher income levels. Maximum credit remains unchanged. For those with no dependents, eligibility is extended to ages 21 to 24. o Extend eligibility for the Credit for Past Military Service to higher incomes. Corporate Tax: Six provisions to increase tax and one to reduce tax. Property Taxes: Changes in railroad valuation law and the state general property tax will increase both state and local property taxes on railroad property. Changes to state aids to local governments and a new credit on farms and rural vacant land will decrease local property taxes on farms, homes, and other types of property. Note on MnCare Provider Taxes: The Governor s budget would Repeal the December 31, sunset for these taxes, continuing them at their rate. There is no tax change relative to current law for, which is the comparison made in the body of this document. As a result, the distributional impact of repealing the sunset is discussed only in the Addendum (page 10). Governor s Transportation Bill New Gross Receipts Tax on Motor Fuels: Create new tax at 6.5% of the larger of the wholesale price or $2.50 per gallon. Under the current forecast, the tax rate is expected by be 16.3 cents per gallon in. Motor Vehicle Registration Tax: Phase in increases in the tax rate (rising from 1.25% to 1.5%) plus an additional $10 per vehicle. Metro Sales Tax: Raise the transit sales tax by 0.5 percentage points in the seven metro counties. These tax law changes would modify the burden of state and local taxes compared to what it would be under current law. The supplemental budget s impact can be estimated using the database and underlying models developed for the Minnesota Tax Incidence Study. Because the latest study projects income and taxes to calendar year, this analysis generally estimates the impact of law changes in that year. Note that dollar estimates are for calendar year (or tax year in the case of income tax and property tax refunds) rather than fiscal year. The analysis is limited to permanent changes in tax law. Law changes phased in over several years (such as the increased motor vehicle registration taxes) are modeled as if fully effective in. 1

2 A change in state and local taxes will in some cases have a direct impact on federal taxes either by changing federal itemized deductions or by changing state and local taxes deducted on federal returns filed by businesses. As has been true for all incidence analyses completed for proposed law changes in past years, this analysis takes those direct changes in federal taxes into account (See Appendix 2). Impact of Proposals on Minnesota State & Local Tax Burdens on Minnesota Residents Income Tax Changes: Proposed changes in income tax provisions would reduce the tax liability of Minnesota residents by $86.2 million.1 The impact of the expanded Child and Dependent Care Credit is modeled using the House Income Tax Simulation (HITS) Model for tax year. Minnesota residents would receive a $35.4 million tax reduction. This includes $7.5 million in reduced state tax for those who gain by shifting from pre-tax accounts to claiming the combined federal and state credits. The expanded Working Family Credit (also modeled using the HITS Model) would reduce the tax liability of Minnesota residents by $47.2 million. Extending the Credit for Past Military Service to higher incomes reduces tax by $1.4 million. Corporate Tax Changes: The burden of the estimated $35.5 million increase in corporate tax from 7 different provisions is modeled using the corporate tax incidence model. Some of the burden would be borne in higher prices, some in lower wages, and some in lower returns to business owners. Tax burdens for Minnesota residents would rise by an estimated $21.4 million (about 60% of added revenue). The remainder would be borne by nonresidents or the federal government (in lower federal corporate tax revenue). These estimates apply to the long-term burden, after businesses have fully adjusted to the change in tax burdens. Property Taxes: Property tax on railroad property will rise by $78 million. Other property taxes will fall by $124 million ($37 million less on homestead property, $12 million less on rental housing, $51 million less on farms, and $36 million less on other types of property). The net impact on Minnesota residents is a tax reduction of $93 million. Property Tax Refunds: Homestead refunds will fall by $4.3 million due to the reduction in property tax on homes. This offsets part of the cut in home property taxes. Gross Receipts Tax on Motor Fuels: Minnesota residents would pay (directly or indirectly) $428 million (85%) of the $504 million in additional tax. This includes $240 million (89%) of the $268 million tax on consumer purchases and $188 million (80%) of the $236 million tax on purchases by business. Motor Vehicle Registration Tax: The tax burden on Minnesota residents would rise by $166 million. The burden offset to a small extent for those who itemize deductions on income tax returns, causing their state income tax liability to fall by $3.8 million. Transit Sales Tax: The tax burden on Minnesota residents would rise by $256 million (91%) of the $280 million increase in tax. This includes $133 million (89%) of the $149 million increase in the sales tax on consumer purchases and $123 million (94%) of the $131 million increase in the sales tax on business purchases. 1 This total includes the indirect impact of higher itemized deductions due to higher motor vehicle registration taxes (-$3.8 million) and lower itemized deductions due to lower home property taxes (+$1.7 million). 2

3 Law Changes Not Included in the Analysis Several small changes in the estate, sales, tobacco, solid waste management, and petroleum taxes are excluded (a net increase of $4.5 million). The expanded sales tax exemption for nonprofits (a reduction of $7.1 million) is excluded because it is unclear how to allocate the tax reduction among individuals. One provision that affects only nonresidents the acceleration of the income tax on the gain from the sale of a Minnesota business by a nonresident is excluded because it would only affect nonresidents. This analysis includes only impacts on full-year residents. Results by Decile: Change in Minnesota State and Local Tax Burdens Table 1A shows the combined impact of the tax cuts in the Governor s Tax Bill and the larger tax increases proposed in the Governor s Transportation Bill. The Minnesota state and local tax burden on Minnesota taxpayers would rise by $696 million. Of that increase, 27% would fall on the top 10% (with 42% of total income), 17% on the top 5% (with 31% of total income), and 6% on the top 1% (with 16% of total income). Minnesota state and local tax burdens would rise by an average of 0.27% of income. The increased tax burden as a percent of income is above that average for all but the top decile. Table 1A. Governor s Tax and Transportation Bills Change in Minnesota State and Local Tax Burden as Percent of Income by Decile Percent of Minnesota State and Local Tax Burden as Percent of Income Decile Income Range Households Current Law Proposed Law Change 1 13,418 & under 10% 26.1% 26.6% 0.53% 2 13,419 to 21,894 10% 12.6% 13.0% 0.46% 3 21,895 to 31,391 10% 11.4% 11.9% 0.52% 4 31,392 to 41,344 10% 11.3% 11.7% 0.38% 5 41,345 to 55,093 10% 11.9% 12.3% 0.35% 6 55,094 to 70,943 10% 12.2% 12.6% 0.35% 7 70,944 to 92,150 10% 12.3% 12.6% 0.33% 8 92,151 to 121,494 10% 12.0% 12.4% 0.33% 9 121,495 to 174,624 10% 12.0% 12.3% 0.29% ,625 & over 10% 11.3% 11.4% 0.18% Households 100% 11.8% 12.1% 0.27% Lower Half 174,625 to 250,362 5% 11.4% 11.7% 0.25% Next 4% 250,363 to 598,214 4% 11.0% 11.2% 0.20% Top 1% 598,215 & over 1% 11.4% 11.5% 0.10% Full Decile 174,625 & over 10% 11.3% 11.4% 0.18% 3

4 Chart 1 illustrates the impact on effective tax rates by decile. As discussed on page 17 of the 2017 Minnesota Tax Incidence Study, results for the first decile are overstated for several reasons. This chart starts with the second decile. The net impact shown above combines the tax reductions included in the Governor s Tax Omnibus Bill with the larger tax increases included in the Governor s Transportation Bill. 4

5 Table 1B shows the impact of the tax cuts in the Governor s Tax Bill separately. The tax bill reduces the overall average effective tax rate by 0.06 percent of income. The reductions exceed that average in all except the top three deciles. The top decile receives 12 percent of the tax cuts, though it has 42 percent of all income The first five deciles (with half of all households) receive roughly half of the tax cuts, though they have 15 percent of total income. Table 1B. Impact of the Governor s Tax Bill Alone Percent of Minnesota State and Local Tax Burden as Percent of Income Decile Income Range Households Current Law Proposed Law Change 1 13,418 & under 10% 26.1% 25.3% -0.80% 2 13,419 to 21,894 10% 12.6% 12.3% -0.29% 3 21,895 to 31,391 10% 11.4% 11.3% -0.09% 4 31,392 to 41,344 10% 11.3% 11.2% -0.14% 5 41,345 to 55,093 10% 11.9% 11.8% -0.12% 6 55,094 to 70,943 10% 12.2% 12.1% -0.08% 7 70,944 to 92,150 10% 12.3% 12.2% -0.08% 8 92,151 to 121,494 10% 12.0% 12.0% -0.04% 9 121,495 to 174,624 10% 12.0% 11.9% -0.04% ,625 & over 10% 11.3% 11.2% -0.02% Households 100% 11.8% 11.8% -0.06% Lower Half 174,625 to 250,362 5% 11.4% 11.4% -0.03% Next 4% 250,363 to 598,214 4% 11.0% 11.0% -0.02% Top 1% 598,215 & over 1% 11.4% 11.4% -0.01% Full Decile 174,625 & over 10% 11.3% 11.2% -0.02% As discussed on page 17 of the 2017 Minnesota Tax Incidence Study, results for the first decile are overstated for several reasons. 5

6 Table 1C shows the impact of the tax cuts in the Governor s Transportation Bill separately. The transportation bill raises the average effective tax rate by 0.33 percent of income. The percentage point increase exceeds that average in all except the top decile. The top decile bears 25 percent of the tax increases, though it has 42 percent of all income. The first five deciles (with half of all households) bear 27 percent of the tax increases, though they have 15 percent of total income. Table 1C. Impact of the Governor s Transportation Bill Alone Percent of Minnesota State and Local Tax Burden as Percent of Income Decile Income Range Households Current Law Proposed Law Change 1 13,418 & under 10% 26.1% 27.4% 1.33% 2 13,419 to 21,894 10% 12.6% 13.3% 0.75% 3 21,895 to 31,391 10% 11.4% 12.0% 0.61% 4 31,392 to 41,344 10% 11.3% 11.8% 0.52% 5 41,345 to 55,093 10% 11.9% 12.4% 0.47% 6 55,094 to 70,943 10% 12.2% 12.6% 0.43% 7 70,944 to 92,150 10% 12.3% 12.7% 0.41% 8 92,151 to 121,494 10% 12.0% 12.4% 0.37% 9 121,495 to 174,624 10% 12.0% 12.3% 0.34% ,625 & over 10% 11.3% 11.5% 0.19% Households 100% 11.8% 12.1% 0.33% Lower Half 174,625 to 250,362 5% 11.4% 11.7% 0.29% Next 4% 250,363 to 598,214 4% 11.0% 11.3% 0.22% Top 1% 598,215 & over 1% 11.4% 11.5% 0.10% Full Decile 174,625 & over 10% 11.3% 11.5% 0.19% As discussed on page 17 of the 2017 Minnesota Tax Incidence Study, results for the first decile are overstated for several reasons. Overall Impact of Proposed Tax Changes (Tax and Transportation Bills Combined) The income and property tax changes are progressive, but their impact is outweighed by the transportation tax increases (motor fuels gross receipts tax, motor vehicle registration tax, and metro sales tax). Effective Minnesota state and local tax rates rise at all income levels, and the percentage point increases fall steadily with income. The Suits index for the net tax change is , which is regressive. o The Suits index for the income tax changes alone is , compared to for the property tax reductions (net of small PTR and income tax interactions), for the corporate tax, for the motor vehicle registration tax (net of income tax interaction), for the metro sales tax, and for the motor fuels tax. 6

7 With the proposed tax changes, the Suits index for all Minnesota state and local taxes would become more negative, falling from to Though more regressive than current law, this would still be less regressive than in recent years (2006 to 2012) and would match the Suits index for 2014 (the baseline year of the most recent study). It would undo less than one-quarter of the net increase in progressivity caused by tax law changes enacted in 2013 and o By themselves, the net tax reductions in the Governor s Tax Bill would be progressive, with a Suits index of By themselves, they would raise the overall Suits index from the current-law to o By themselves, the tax increases in the Governor s Transportation Bill would be regressive, with a Suits index of By themselves, they would reduce the Suits index from the current-law to As shown in Table 2, total Minnesota state and local tax burdens would rise by 2.3%. The increases would be 1.6% for the top decile and 0.9% for the top 1%. Increases would be above the 2.3% average for all deciles other than the 10 th decile. Table 2. Dollars of Minnesota State and Local Tax Burden Impact of Tax Proposals in Governor's 2017 Budget Bills Percent of Estimated Calendar Year Impact Percent of Prior Law Tax Burden ($1000s) Minnesota State and Local Tax Burden New Law Tax Burden ($1000s) Change in Tax Burden ($1000s) Decile's Share of Total Change in Tax Percent Increase in Burden Over Prior Law Decile Income Range Households Income 1 13,418 & under 10% 0.9% 577, ,368 11, % 2.0% 2 13,419 to 21,894 10% 1.9% 618, ,015 22, % 3.7% 3 21,895 to 31,391 10% 2.9% 841, ,399 37, % 4.5% 4 31,392 to 41,344 10% 4.0% 1,153,044 1,191,803 38, % 3.4% 5 41,345 to 55,093 10% 5.3% 1,601,986 1,648,532 46, % 2.9% 6 55,094 to 70,943 10% 6.8% 2,123,295 2,184,236 60, % 2.9% 7 70,944 to 92,150 10% 8.8% 2,765,392 2,839,290 73, % 2.7% 8 92,151 to 121,494 10% 11.5% 3,542,771 3,639,463 96, % 2.7% 9 121,495 to 174,624 10% 15.7% 4,814,669 4,933, , % 2.5% ,625 & over 10% 42.2% 12,133,581 12,322, , % 1.6% ALL MINNESOTA HOUSEHOLDS 100% 100.0% 30,172,201 30,868, , % 2.3% Lower Half 174,625 to 250,362 5% 11.1% 3,244,743 3,316,273 71, % 2.2% Next 4% 250,363 to 598,214 4% 15.4% 4,357,090 4,435,369 78, % 1.8% Top 1% 598,215 & over 1% 15.6% 4,531,749 4,570,814 39, % 0.9% Full Decile 174,625 & over 10% 42.2% 12,133,581 12,322, , % 1.6% 7

8 Table 3 and Chart 2 show the tax changes by tax type. The reduction in income tax and property tax burdens (down $175 million) offsets 20 percent of the increased burden due to other taxes. The net added burden from other taxes totals $871 million. The motor fuels tax accounts for roughly 50 percent of that amount, increased motor vehicle registration tax for 19 percent, the metro sales tax increase for 29 percent, and corporate tax for 2 percent. Table 3. Change in Minnesota State and Local Tax Burden by Tax Type Impact of Tax Proposals in Governor's 2017 Budget Bills Estimated Calendar Year Impact, by Tax Type Dollars in $1000s Change in Tax Burden Decile Income Range Percent of Households Percent of Income Income Tax Corporate Tax Property Tax Net of PTR Motor Fuels Tax Motor Vehicle Registration Tax Local Sales Tax (Transit) Total 1 $13,418 & under 10% 0.9% ($15,671) $568 ($2,578) $16,044 $4,006 $9,299 $11, ,419 to 21,894 10% 1.9% (13,114) 756 (2,015) 20,671 4,480 11,898 22, ,895 to 31,391 10% 2.9% (4,628) 952 (3,168) 24,446 6,526 13,849 37, ,392 to 41,344 10% 4.0% (12,199) 1,147 (3,684) 28,592 8,968 15,934 38, ,345 to 55,093 10% 5.3% (12,946) 1,379 (5,113) 33,054 11,955 18,216 46, ,094 to 70,943 10% 6.8% (8,157) 1,663 (7,408) 38,205 15,217 21,421 60, ,944 to 92,150 10% 8.8% (9,883) 2,095 (9,868) 45,779 19,773 26,002 73, ,151 to 121,494 10% 11.5% (5,934) 2,637 (10,369) 55,249 23,708 31,402 96, ,495 to 174,624 10% 15.7% (2,583) 3,509 (18,312) 66,879 29,641 39, , ,625 & over 10% 42.2% (1,043) 6,685 (26,064) 98,861 41,321 69, ,875 ALL MINNESOTA HOUSEHOLDS 100% 100.0% ($86,158) $21,391 ($88,579) $427,779 $165,595 $256,338 $696,366 Lower Half $174,625 to 250,362 5% 11.1% ($459) $2,333 ($11,921) $39,796 $17,204 $24,578 $71,530 Next 4% 250,363 to 598,214 4% 15.4% (427) 2,721 (9,939) 40,265 17,922 27,738 78,280 Top 1% 598,215 & over 1% 15.6% (157) 1,632 (4,204) 18,800 6,195 16,799 39,065 Full Decile $174,625 & over 10% 42.2% ($1,043) $6,685 ($26,064) $98,861 $41,321 $69, ,875 8

9 Table 4 provides more detail of the overall impact of proposals, in the same manner as shown on Table 3-1 in the Tax Incidence Study for all current-law taxes. (See page 44 of that report.) Table 4. Impact of Tax Proposals in Governor's 2017 Budget Bills on State and Local Tax Collections and Tax Burdens (Calendar Year ) dollars in millions dollar values rounded to nearest million dollars. values that are truly zero are shown as blanks. Suits Index Change in As Imposed After Shifting for Tax Change* Tax Type Collections MN HH's NR Business Minnesota Exported (Full Sample) State Taxes Taxes on Income and Estates Individual income tax Corporate franchise tax Estate tax Total Income and Estate Taxes Taxes on Consumption Total sales tax General sales tax Sales tax on motor vehicles Motor fuels excise tax Alcoholic beverage excise taxes Cigarette and tobacco excise taxes Insurance premiums taxes Gambling taxes MinnesotaCare taxes Solid waste management taxes Total Consumption Taxes Taxes on Property State property tax Residential recreational property Commercial Industrial Utility Railroad** Motor vehicle registration tax Mortgage and deed taxes Total Property Taxes Property Tax Refunds Homeowners Renters Total Property Tax Refunds Total State Taxes Local Taxes Property Taxes General Property Tax Homeowners (before PTR) Residential recreational property Commercial Industrial Farm (other than residence) Rental Housing Utility Railroad** Mining Production Taxes (taconite) Taxes on Consumption Local Sales Taxes Local Gross Earnings Taxes Total Local Taxes Total State and Local Taxes Parts may not sum to totals due to rounding. * Suits indexes for a reduction in regressive taxes (such as property tax reductions) are shown as positive because the tax cut makes the system less regressive. **Because the tax increases are limited to railroad property, railroads are shown separately on this table rather than being combined with commercial property tax. 9

10 Addendum: Repeal of Sunset on MnCare Provider Taxes Under current law, the two percent MnCare provider taxes (on the gross receipts of medical providers, hospitals, surgical centers, and wholesale drugs) will sunset on December 31,. The Governor proposes to repeal the sunset, maintaining the tax at its current rate (2 percent). The analysis above showed how the current-law tax burden in would change if the Governor s proposals were enacted. Because repeal of the sunset maintains the current-law tax and rate, repeal of the sunset is not a tax increase relative to that baseline. This is why it is not included in the analysis above. There is no consistent way to show the impact of repealing the sunset on the graphs and charts in the body of this document. Nevertheless, the repeal of a sunset is a tax increase compared to current law in 2020 and later years. Under the assumptions of the Tax Incidence Study, the tax burden falls on consumers of medical care. Minnesota residents bear 92 percent of the total burden ($639 million of $697 million). The distribution of the burden of the existing MnCare provider taxes in is shown in Table 5. The effective tax rate falls steadily as income rises. The tax is regressive, with a Suits index of Table 5. MinnesotaCare Tax as Percent of Total Income (Calendar Year ) Tax as Percent Income Range of Total Income 1 $ 13,418 & under 0.86% 2 13,419 to 21, % 3 21,895 to 31, % 4 31,392 to 41, % 5 41,345 to 55, % 6 55,094 to 70, % 7 70,944 to 92, % 8 92,151 to 121, % 9 121,495 to 174, % ,625 & over 0.11% Households 0.25% Lower Half 174,625 to 250, % Next 4% 250,363 to 598, % Top 1% 598,215 & over 0.03% Full Decile 174,625 & over 0.11% The numbers suggest what we would have shown if we had used 2020 and the year for comparison rather than. If the $639 million in MnCare tax is added to the $696 million net increase in tax burdens included in the body of this document, the total increase in tax burden on Minnesota residents in would have been $1,335 million. This would have equaled 0.52 percent of total income. The Suits index for the combined $1,335 million change in net tax would have been If there had been no MnCare taxes in (hence $639 less tax from residents), the Suits index would have been The $1,335 million tax increase would have reduced the Suits index (as reported in the main document) to

11 Appendix 1: Impact on Both Minnesota and Federal Tax Burdens Because homeowner property taxes, state income taxes, and motor vehicle registration taxes can be claimed as itemized deductions on federal income tax returns, a change in these state and local taxes can change federal tax liability. The impact on federal tax offsets part of any increase or decrease in each of these Minnesota taxes. There is no federal offset for those who do not itemize deductions, nor is there any tax offset for a taxpayer who is subject to the federal alternative minimum tax (because property, state income, and motor vehicle registration taxes are not deductible under the AMT). For those who itemize (and are not subject to the federal AMT), the portion of the change in Minnesota tax that is offset by a change in federal liability is generally equal to the federal tax rate on the last dollar of the taxpayer s income. The offset is 15% for a taxpayer in the 15% tax bracket and 36.9% for a taxpayer in the 36.9% tax bracket. Higher federal tax liability would offset almost 3% ($2.5 million) of the $86 million reduction in Minnesota income taxes paid by Minnesota residents. However, lower federal tax liability would offset 10% ($12.5 million) of the net $126 million increase in property taxes (higher motor vehicle registration tax and lower home property taxes). The switch by some from pretax child care accounts to the combined state and federal credits would raise federal tax by $1.2 million (though it cuts state tax by more), so the net reduction in federal taxes would be only $8.8 million. Although the proposals would increase the burden of Minnesota state and local taxes by $696 million, they would increase the total burden of federal plus Minnesota state and local tax burdens by $688 million. The small impact of the federal tax offset on the change in effective tax rates is shown in Tables 6 and 7. (Dollars in $1000s) Net Change in Change Federal in Taxes Due To: Net Change in Minnesota Tax Burden Change in Federal itemized Deductions for State Income Taxes Federal Itemized Deductions for Property & MV Registraton Taxes Switch from Pre-Tax Child Care Expense Accounts to Child Care Credits $ $ 44 $ (84) - Net Change in Minnesota and Federal Tax Burden Number of Decile Income Range Households ($1000s) 1 $13,418 & under 10% 11,668 $ $ 11, ,419 to 21,894 10% 22, (35) 53 22, ,895 to 31,391 10% 37, (54) (45) 37, ,392 to 41,344 10% 38, (147) (31) 38, ,345 to 55,093 10% 46, (313) (34) 46, ,094 to 70,943 10% 60, (642) 74 60, ,944 to 92,150 10% 73, (1,239) , ,151 to 121,494 10% 96, (1,808) , ,495 to 174,624 10% 118, (3,932) , ,625 & over 10% 188, (4,277) ,761 ALL MINNESOTA HOUSEHOLDS Table 6. Dollar Change in Minnesota State, Local, and Federal Tax Burden Impact of Tax Proposals in Governor's 2017 Budget Bills 100% $ 696,366 $ 2,531 $ (12,532) $ 1,200 $ 687,565 Lower Half $174,625 to $250,362 5% $ 71,530 $ 91 $ (2,666) $ 17 $ 68,971 Next 4% 250,363 to 598,214 4% 78, (635) - 77,665 Top 1% $598,215 & over 1% 39, (976) - 38,124 Full Decile $174,625 & over 10% $ 188,875 $ 146 $ (4,277) $ 17 $ 184,761 11

12 2017 Table 7 Change in Minnesota State, Local, and Federal Tax Burden as Percent of Income Impact of Tax Proposals in Governor's 2017 Budget Bills Percent of (Dollars in $1000s) Net Change in Minnesota Tax Burden as Percent of Lower Itemized Deductions for Minnesota Income Tax Net Change in Federal Taxes as Percent of Income Lower Itemized Deductions for Home Property Taxes Switch from Pre-Tax Child Care Expense Accounts to Child Care Net Change in Minnesota and Federal Tax Burden as Percent of Decile Income Range Households Income Income 1 $13,418 & under 10% 0.53% 0.002% % 0.000% 0.53% 2 13,419 to 21,894 10% 0.46% 0.001% % 0.008% 0.47% 3 21,895 to 31,391 10% 0.52% 0.001% % % 0.51% 4 31,392 to 41,344 10% 0.38% 0.001% % % 0.38% 5 41,345 to 55,093 10% 0.35% 0.002% % % 0.34% 6 55,094 to 70,943 10% 0.35% 0.002% % 0.004% 0.35% 7 70,944 to 92,150 10% 0.33% 0.002% % 0.008% 0.33% 8 92,151 to 121,494 10% 0.33% 0.002% % 0.011% 0.34% 9 121,495 to 174,624 10% 0.29% 0.001% % 0.012% 0.30% ,625 & over 10% 0.18% 0.000% % 0.000% 0.17% ALL MINNESOTA HOUSEHOLDS 100% 0.27% 0.001% % 0.004% 0.27% Lower Half 174,625 to 250,362 5% 0.25% 0.000% % 0.000% 0.24% Next 4% 250,363 to 598,214 4% 0.20% 0.000% % 0.000% 0.20% Top 1% 598,215 & over 1% 0.10% 0.000% % 0.000% 0.10% Full Decile $174,625 & over 10% 0.18% 0.000% % 0.000% 0.17% Because the tax benefits of itemized deductions are received primarily by those with high income, the induced reduction in federal tax liability increases the overall regressivity of the proposals. The Suits index for the proposed change in taxes after adjusting for the change in federal taxes falls from to (more regressive). 12

13 Appendix 2: Technical Notes A. Assumptions about Changes in Local Property Taxes Local government levies will change in response to changes in state aids and credits. Standard assumptions developed in consultation with nonpartisan legislative research and fiscal staff are used by the Property Tax Division to estimate the magnitude of those changes. B. Estimating the Incidence of CHANGES in Business Taxes ( Incremental Incidence ) As explained on pages of the 2017 Tax Incidence Study, the incidence of a change in the level of business taxes ( incremental incidence ) will differ from the incidence of existing business taxes ( average incidence ). Average incidence divides an existing business tax into three parts the national average tax on all capital, the sector differential, and the Minnesota differential. In contrast, a change in the level of a business tax is all treated as a change in the Minnesota differential. If the level of Minnesota business taxes changes, this will generally change the amount of federal tax paid by the business either the federal corporate income tax or the federal individual income tax (for flow-through businesses). For a corporation paying federal tax at the 35% rate, each additional $1000 in Minnesota tax will reduce the federal tax burden by $350. So $350 of the $1000 of Minnesota tax burden is borne by the federal government in foregone tax revenue. The burden of the remaining $650 in tax may be shifted to consumers in higher prices or to workers in lower compensation or it may reduce the after-tax income of the business owner. This analysis assumes federal tax rates of 35% for corporate tax and 20% for individual income tax. The extent to which the tax burden will be shifted to consumers or workers will depend on the nature of the market. Minnesota tax changes are most likely to result in price changes if the market is local and close competitors face the same change in tax. Businesses selling in national or international markets are much less likely to shift the added cost to consumers by raising prices (or reduce their price in response to a tax cut). As in the incidence study, the incidence results assume the market has had time to fully adjust to any tax changes. The incidence of the business tax changes in the bill (as modeled here) is as follows: o Corporate tax increases: 32% shifted to Minnesota consumers, 28% shifted to Minnesota workers, less than 1% borne by Minnesota owners, and 40% borne by nonresidents and the federal government. o Business property tax reductions for nonresidential property (other than railroads and farms): 29% of the benefits to Minnesota consumers, 14% to Minnesota workers, 6% to Minnesota owners, and 51% to nonresidents and the federal government. For rental residential property, 56% of the benefits to renters, 21% to Minnesota owners, and 23% to nonresidents and the federal government. For tax cuts on farms, 78% of the benefits to Minnesota owners, 2% to labor, and 20% to the federal government. For the tax increases on railroad property, over 90% is exported to nonresidents and the federal government. o Metro transit sales tax increase: 71% borne by Minnesota consumers, 22% by Minnesota workers, less than 1% by Minnesota owners, and 6% by nonresidents. o Motor fuels tax increase: 43% borne by Minnesota consumers, 36% by Minnesota workers, less than 1% by Minnesota owners, and 20% by nonresidents. 13