According to recent rankings by finance website Kiplinger, Minnesota is at the top of the list of the least tax-friendly states to live in.
In 2013, Minnesota added a new top income tax rate of 9.85% behind only California, Hawaii and Oregon (13.3, 11, and 9.9 percent respectively). The difference between Minnesota and the states with higher income tax rates can primarily be attributed to the fact that California has a tax bracket for incomes over a million dollars and Hawaii has bracket for income over 200,000. When compared to the top income bracket of $160,000 for Minnesota, this means that although the top tax brackets of California and Oregon pay more taxes, Minnesota has a high tax rate for a lower income. The lowest income tax rate in Minnesota is 5.35%, behind only Maine and North Carolina (5.8, and 5.499 percent respectively). However, as for Maine and North Carolina, Maine does not have a tax bracket beyond 7.15% and North Carolina has a flat income tax rate. Additionally, Minnesota’s tax rate for its lowest tax bracket is higher than the highest tax rate in 23 other states. Overall, Minnesota ranks in the top 4 for the highest tax rate in both the lowest and highest tax brackets.
In addition to the high income tax, Minnesota has an average local sales tax of 7.43 percent. Only sixteen states have higher tax rates, and of those sixteen, California is the only one that also has a higher income tax rate.
California continues its trend of higher taxes than Minnesota with almost double the gas tax per gallon ($0.54 compared to $0.29 in Minnesota) but that is where the tables turn. The median property tax in Minnesota is fifty percent higher than that of California (1.2% of the home value, compared to 0.8% in California). Furthermore, California does not have taxes on inheritances or estates while Minnesota does.
With property tax representing 31.3% of all state tax collections, Minnesota is placed very high compared to almost any state, especially California. Sales tax and income tax are close behind, accounting for a combined 46%. California catches up in this respect but then takes a drop by not taxing inheritance. Furthermore, Minnesota uses federal tax rates as the starting point for calculating state taxes, which could prove to be very problematic with the federal tax overhaul.
The new federal tax overhaul means that hundreds of thousands of Minnesotans will be paying higher state taxes due to the loss of some exemptions on their tax returns. Minnesota lawmakers made an attempt to remedy this issue but were ultimately unable to agree on a solution.
Although Minnesota is currently the least tax friendly state, there is plenty of room for improvement. According to recent estimates, the surplus this year is projected to be over $1.5 billion. This has provoked calls for tax reforms from both Democrats and Republicans. Governor Mark Dayton has proposed a $300 million tax cut, but Republicans in the Minnesota House of Representatives have proposed tax cuts upwards of $1.35 billion.
Governor Dayton’s less extreme tax cut plan would primarily hope to relieve some of the burden on low-income residents along with those in need of child care support. The House Republicans have a much more extreme goal in mind, but do not propose any cuts on income tax rates. Rather they propose tax cuts for Social Security recipients, farmers, business owners and college graduates with heavy debt. Additionally, they hope to raise estate tax exemption levels to the federal level, as well as exclude the first $200,000 in property value from the state business property tax. They also proposed a repeal of the adjustment of the cigarette tax for inflation, that would make the $3.04 per pack tax permanent.
Minnesotan taxes are currently above average in just about every respect besides those on gasoline and vehicles. This alone puts the state in the upper echelon of total tax burden, but what ultimately puts Minnesota at the top of the list of the least tax-friendly states is that Minnesotan lawmakers are unable to agree on the best way to relieve some of the tax burden. With the federal tax overhaul and now the lack of some exemptions from their tax returns, Minnesotans should expect to be paying some of the highest taxes in the country until the state government is able to agree on the best way to decrease this burden.