Report: middle class takes hardest tax hit

The Department of Revenue's "tax incidence study" presented to legislators Monday showed that wealthy Minnesotans are paying a slightly smaller share of their incomes in state and local taxes, and that taxes are shifting away from businesses and toward individuals.

By 2009, officials project that Minnesota's tax system will become somewhat more regressive, meaning the percentage of income a person pays in taxes declines as his or her income rises.

Senate Tax Committee Chairman Sen. Tom Bakk, DFL-Cook, said the report buttresses the DFL's argument that taxes should rise on businesses and high-end earners.

"This (study) shows the people at the top are not paying their fair share," he said.

"This (study) shows the people at the top are not paying their fair share."

Republican Gov. Tim Pawlenty has repeatedly threatened to veto any state tax increases.

"We think anyone would be hard pressed to make the case that taxes in Minnesota are too low," said Pawlenty spokesman Brian McClung.

Democratic House leaders last week proposed raising the top income tax rates from 7.85 percent to 9 percent for couples earning more than $400,000 a year and individuals with annual incomes exceeding $226,000. It would affect 50,000 people.

Bakk said his yet-to-be-released proposal could seek an income tax increase on a larger group of the relatively well off, affecting the 118,000 households with incomes of more than $147,000 per year.

That would be in addition to a Bakk bill to reduce homeowner property taxes in part by increasing statewide business property taxes by $230 million over two years.

According to the tax study, business' share of state and local taxes would drop from 33 percent in 2004 to 32 percent in 2009.

State and local taxes, measured as a percentage of personal income, declined from a high of 13 percent in 1994 to 11.2 percent in 2000. By 2004, the average percentange was back up to 11.6 percent. Projections suggest it will be 11.7 percent of personal income in 2009.

Middle-class households have outstripped those on the lower and upper income ends in the share of earnings that go to taxes.

The study found that households with incomes between $17,000 and $23,000 in 2004 paid 10.5 percent of their earnings in state and local taxes, compared with 12.3 percent for those with incomes of $47,000 to $105,000.

For those earning more than $105,000, they paid 10.9 percent of their income in state and local taxes. The top 1 percent of earners - people making more than $355,000 - paid 9.6 percent.

The Revenue Department's research director, Paul Wilson, said the tax system is becoming slightly more regressive because of economic growth and not necessarily because of tax policy changes.

(Copyright 2007 by The Associated Press. All Rights Reserved.)

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