Taxes and Minnesota's Wealthiest: Heads They Win, Tails You Lose

Weeks before Gov. Tim Pawlenty actually called a special session, it was a forgone conclusion that the Minnesota Legislature wouldn't meet the deadline to balance the state budget. And the extra time won't change the fact that lawmakers basically have two options: institute new taxes--or fees, if you don't have the guts to call them taxes--or cut programs that have already been slashed to the bone. A DFL plan pushed through the Minnesota Senate on party lines in May would raise $1 billion by imposing a temporary income tax increase on the 42,000 richest Minnesotans: individuals making more than $166,665 a year and couples earning $250,000 or more. But here's the kicker: According to local and national tax-equity watchdog groups, idiosyncrasies of the tax code would ensure that this group sees an overall tax cut even if the DFL tax-raising plan was approved.

If the bill makes it to Pawlenty, he will undoubtedly veto it, and the votes don't appear to be there for any veto override. The governor has held hard and fast to the conventional conservative wisdom that raising taxes drives away business and has pledged to veto any bill increasing taxes. Never mind that rebates and tax breaks are arguably the real cause of the current budget crunch: In each legislative session from 1997 to 2001, $3.7 billion in one-time state tax rebates were enacted. Property taxes were cut four times during those five years and motor vehicle registration taxes were cut once. The overall impact of these tax cuts on state coffers in fiscal year 2005 amounts to $2.8 billion.

But the DFL proposal, doomed though it may be, raises an interesting point. Even if a new tax is imposed, the wealthy will still pay less next year than this one. For the five years starting in fiscal year 2006, Congress has promised tax cuts of $106 billion to high-income individuals, according to the Washington-based nonprofit Center on Budget and Policy Priorities. According to calculations made by Minnesota Citizens for Tax Justice, the richest 1 percent of Minnesotans will still receive a net tax break even if the DFL's proposal passes. (The state measure would not rescind the permanent tax cuts of the late 1990s. Instead, it would raise the rate of personal income tax. Taxpayers affected by this proposed "temporary fourth rate" would keep 92 percent of state and federal tax cuts, according to the group.)

Minnesota Republicans will have a hard time arguing that the temporary tax hike is unfair. In recent years, the share of the state budget paid by the wealthiest Minnesotans has shrunk dramatically, according to a City Pages analysis of state Department of Revenue figures. In 2002, the top 10 percent of taxpayers paid a lesser share of their income in state and local taxes than many middle- and upper-middle-class families. And the top 1 percent paid the lowest effective tax rate of all. Meanwhile, middle-income Minnesotans, those making $35,684 to $102,426 in 2002, are paying the highest percentages.

Small wonder, then, that real income growth for the wealthiest 1 percent of Americans was more than 25 times faster than the rate for the poorest 20 percent from 1979 to 2000, according to a study by the Institute on Taxation and Economic Policy. The middle class fared little better, with a real income growth rate more than 14 times slower than that of the wealthiest.

Pawlenty's solution: to dodge the "tax" issue by promoting a 75-cent per pack cigarette "fee" as a means to fund education--a hot-button issue with voters on both sides of the aisle this year--and health care. In addition to being a semantic tap dance, the governor's proposal is problematic. Fees, according to study after study, have the largest effect on lower-income earners.

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