Minnesota Budget Project - Income Tax Rate Cuts

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Sales Tax Rate Reductions

Motor Vehicle Registration Tax Reduction Proposals

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Income Tax Rate Cuts

Proposal: Reduce the income tax rates in all three brackets; cut the top and bottom rates by 0.5%, the middle rate by 0.75%. The new rates would be 5%, 6.5%, and 7.5%. These rate changes are contained in HF 2941/SF 3276, authored by Representative Daggett and Senator Olson, and SF 3604 by Senator Runbeck. While these bills contain a variety of tax provisions, this analysis addresses the income tax rate cuts only.

What are the distributional effects?

The amount of tax savings under this proposal vary by income and filing status. All Minnesotans pay around the same percentage of income in total state and local taxes; however, the income tax is a small part of the tax obligation for low-income families but becomes an increasingly larger part as household income rises. A cut in the income tax brings only a small reduction in the total tax bill paid by lower-income households. In contrast, middle- and upper-income Minnesotans receive a nearly 10% reduction in the income tax under this proposal and a noticeable reduction in their total tax burden. To demonstrate the affect of the tax cuts on the total tax burden and therefore on a household’s income, column 4 of the chart below shows the tax cut as a percentage of income.

Federal Adjusted Gross Income

Percentage of filers

Average Tax Cut (in dollars)

Average Tax Cut as a Percentage of Income

Less than $9,999

17.3%

$4

0.11%

$10,000 - $19,999

15.4%

$28

0.19%

$20,000 - $29,999

13.4%

$70

0.29%

$30,000 - $49,000

19.2%

$143

0.37%

$50,000 - $74,999

16.5%

$259

0.43%

$75,000 - $99,999

8.7%

$403

0.48%

$100,000 - $149,999

5.4%

$592

0.52%

$150,000 - $199,999

1.6%

$828

0.52%

$200,000 - $499,999

1.8%

$1,312

0.52%

$500,000 or more

0.6%

$4,287

0.48%

ALL FILERS

100%

$216

0.44%

Data Source: House Research

How Would This Proposal Affect Long-Term Funding Stability?

The cost of these tax cuts would be approximately $500 million cost in tax year 2000 and $530 million in tax year 2001. It would spend a little over $1 billion of the projected $1.8 billion surplus expected by June 20, 2001.

What are the trade-offs?

The legislature will have to weigh the cost of this proposal against other spending, savings, and tax cut possibilities. Some of the major tax cut alternatives include a 0.5% reduction in the sales tax ($663 million in the 2001-2002 fiscal years), creating a Minnesota personal dependent exemption ($847 million for 2000-01 biennium), the "1-2-3" rate compression of property taxes ($309 million for the 2002-2003 biennium), or capping auto tabs at $75 ($276 million in 2001 and increasing in following years).

Who are the ultimate winners and losers?

The largest tax cuts go to the 18% of taxpayers with federal adjusted gross incomes of $75,000 and above. However, 7% of married filing joint filers and 41% of head of household filers would receive tax cuts of $10 or less.

Updated March 6, 2000

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