Tax Incidence Karma

It was only a matter of time before the progressive community's primary political asset turned into a liability.

In retrospect, it may have been a bit of a tell recently when the Department of Revenue released its biennial Tax Incidence Study unaccompanied by the customary recognition and attention.  In previous years, the release has been accompanied by a departmental press release and been the subject of tax committee hearings, all generating considerable media and editorial page attention as a result.  This year, an email announcement of its availability to those on the Department’s list serve…and crickets.

Why did the topic of tax incidence drop out of the spotlight?  One answer may have arrived with today’s Star Tribune headline, “Lowest-Income Minnesotans Hit Hardest by Gov. Tim Walz's Tax Plan,” a finding based on the Department’s tax incidence analysis of the Governor’s tax proposal.

The Department’s biennial tax incidence study (and the supplemental incidence analysis it conducts on proposals like this) is highly regarded across the nation, an absolutely invaluable public policy resource, and an excellent example of Minnesota’s good government ethic.  But like most very complex studies of this nature it has a tendency to turn into a political Rorschach test – seeing what you want to see and ignoring what you want to ignore – and mined for its political talking points rather than its policy value.

For years, the tax incidence findings have been an invaluable political asset for progressive interests.  The breakdown of effective tax rates demonstrated that lower income households paid proportionately more of their income in taxes than higher income households – allowing Minnesota’s tax system to be deemed “unfair”.  Even though greater tax system progressivity can be achieved by other means besides raising taxes on higher income earners, it was political malpractice not to use the argument of greater tax fairness as a mechanism for raising more revenue.

But now things have changed.  With the state’s top income tax bracket near or at its practical limit (especially in light of the TCJA) Governor Walz and DFL legislators are tapping more regressive forms of taxation to pursue their investment and spending objectives.  The problem is that the media and the public have now long been conditioned to treat these incidence-derived tax burdens as the last and only word on “fairness.”  Meanwhile, having been bludgeoned by reporting on tax incidence for years, conservatives are absolutely relishing in the ability to give their political opponents a taste of their own medicine.

Progressive advocates didn’t need to find themselves in the public relations pickle the analysis of the governor’s plan seems to be creating.  Over the years there have been endless opportunities to acknowledge the fact that although incidence analysis does an outstanding job of informing tax fairness, such mathematical calculations can never completely define tax fairness for many reasons.  For example:

  • Many regressive user taxes like solid waste taxes and gas taxes are implicitly and unquestionably “fair” because, as benefit taxes, those who use the service more pay more.
  • Highly regressive vice taxes are discretionary and voluntary taxes making their inclusion in debates on the fairness of a state tax system very problematic.  (Should the wealthy be required to pay more because they don’t engage in their proportionate “fair share” of smoking, gambling and drinking?)
  • Taxpayers don’t separate the taxes they pay into neat mental boxes – every dollar spent on taxes is a dollar that can’t be spent elsewhere.  Most taxpayers won’t notice or care how much any individual level of government gets of their money.  From that perspective, tax fairness really can’t be evaluated without recognizing the burdens and distributional impacts of federal taxation (a realization which now shines on the progressive community like the light on the road to Damascus since the passage of the TCJA).
  • A holistic and more accurate consideration of state tax fairness should include a consideration of the benefit incidence of taxation – who the distribution of tax dollars ultimately helps (which ironically right now would be helping DFL efforts to keep the provider tax in place).

Progressives could have acknowledged all this in the past but that would have undercut the political message of justifying higher income taxes based on the “mathematical fact” that the wealthy in the state weren’t doing their fair share of the lifting.  So now, with only a month to go in the legislative session, the DFL has to figure out a way to rebut a fairness Frankenstein that is largely of their own making if they want to advance their agenda.