A Tax System that Makes Sense

Over 150 years, Minnesota's state and local tax system has grown into a jungle of levies, credits, refunds, exemptions and aid transfers. Sometimes outmoded, frequently contradictory, the system is challenging for most taxpayers to wade through. We need to listen to citizens as well as tax experts to learn what's working and what isn't, and how to build a tax system that is simpler and easier to deal with from the taxpayer's point of view.

This initiative helps the system better serve the taxpayer. Major goals are:

• A tax system that is fair, simple, understandable and predictable to citizens.
• A tax system that is competitive, modern and minimizes the tax gap (the difference between what taxpayers owe and what they actually pay).

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Goal: A tax system that is fair, simple, understandable and predictable for citizens.

Overall fairness of the state and local revenue system -- by the Suits Index

Overall fairness of the state and local revenue system by the Progressivity Index

Citizens' satisfaction with level of taxation, fairness, understandability and use of tax revenues

Individual satisfaction with the tax process

Business satisfaction with the tax process

Goal: A tax system that is competitive, modern and minimizes the tax gap.

Total state and local revenues as a percent of state personal income. (The price of government)

Minnesota's tax competitiveness compared to other states (Minnesota Taxpayer Association ranking)

Taxes owed compared to taxes voluntarily paid (Indicator under construction)

Overall fairness of the state and local revenue system -- by the Suits Index

Note: The Suits index can be viewed as an absolute measure tracking changes in tax burden over time among Minnesota taxpayers. Developed in 1977 by Professor Daniel B. Suits, the Suits Index measures the overall fairness of the tax system and how much of a tax burden is borne by individuals at different income tax brackets.

Progressive: Taxes are borne more heavily by individuals in high-income brackets, and the index value would be above zero. Regressive: Tax burden falls primarily on individuals in lower-income tax brackets, and the index value would be below zero.

Target: A proportional tax system, with the Suits Index value right at zero. The system in Minnesota has been slightly regressive (less than zero) the last few years.

The Suits Index is reported in the Minnesota Department of Revenue's Minnesota Tax Incidence Study, which is published every two years.

Learn more about the Suits Index at: http://www.taxes.state.mn.us/reports/incidence2001/98collec.pdf

Overall fairness of the state and local revenue system by the Progressivity Index

Note: The Progressivity Index is a measure of the relative tax burden that can be used to compare Minnesota to other states. This measure is computed by the Congressional Quarterly in the State Fact Finder 2002 and compares tax burden as a percentage of income on households of two income levels ($25,000 and $150,000 per year). Minnesota ranks as one of the most progressive states with a ranking of 48th (50th being the most progressive). This means that high income households in Minnesota pay a higher percentage of taxes than low income households, compared to other states. Since 1998, Minnesota's progressivity index ranking has not shifted, but there may be some change in the future as a result of tax reform and other legislative changes.

Citizens' satisfaction with level of taxation, fairness, understandability and use of tax revenues.

Note: What do citizens think of the tax system? A survey in May 2001 found mixed levels of satisfaction with the overall level of taxation, as well as with the fairness, understandability and predictability of the Minnesota tax system.

Our 2003 Target is to see that:

• 50 percent of respondents are either "satisfied" or "very satisfied" with the fairness of the overall Minnesota tax system.
• 50 percent of respondents are either "satisfied" and "very satisfied," on average, with the predictability and understandability of different individual tax types.

The 2001 survey was conducted with 400 Minnesota respondents. Results from this survey have been weighted based on the respondent's income to ensure the overall results proportionally represent the Minnesota taxpayer population as a whole. This survey will be conducted again during spring 2003. Complete survey results are available at: http://www.taxes.state.mn.us/01survey.html

Individual satisfaction with the tax process.

2001 Individual taxpayer satisfaction - Percent of individuals that are either "satisfied" or "very satisfied" with the:

Note: The Department of Revenue conducts a survey to assess individual taxpayer satisfaction with tax forms, payments, refunds processes and the usefulness and accuracy of the information received from the department.

In summer 2001, a firm employed by the department conducted this survey with 400 adult residents who had filed Minnesota income taxes within the past three years. The results are weighted based on the use of a preparer versus self-filing, to ensure the overall results proportionately represent the Minnesota income taxpayer population as a whole. This survey will be conducted again during summer 2003.

Business satisfaction with the tax process.

1999/2000 Business taxpayer satisfaction - Percent of business taxpayers that answered "yes" or "agree/strongly agree" to the following components of the tax filing and paying process:

Note: Business taxpayer satisfaction with the filing and paying process has been measured in both customer input surveys and audit quality surveys since 1995. These results are from 1999 and 2000 department customer input and audit quality surveys. The customer input survey is conducted biennially and the audit quality surveys occur annually. The results are summarized and weighted based on the number of business filers during the year the surveys were conducted.

Total state and local revenue as a percent of state personal income. (The price of government)

Note: The price of government measures total state and local revenues as a percent of state personal income. This is used as a measure of how much Minnesotans pay for state and local government, and can be used as a financial index to help policy-makers and taxpayers monitor the relative size of the public sector. Policy-makers and taxpayers may also use this measure as a budgetary planning tool to assess the future fiscal impact of policy decisions.

Personal income is wages, salaries, plus government transfer income and any interest income and capital gains.

State and local taxes and revenue are state income tax, property tax, sales and use tax, and other tax revenue fees and charges.

In fiscal year 2001, total state, local and school district revenues approached $24.8 billion, and total state personal income was $157 billion. The price of government can be affected by changes in public expenditures, and in state personal income and tax policies. A reduction of a tenth of a percent in the price of government between 2001 and 2005, for example, is a savings of $146 to $168 million.

You can also look at it from the individual taxpayer's perspective: In fiscal year 2001, for every dollar of state personal income, 3.0 cents went to pay for property taxes, 3.7 cents went to pay for income taxes, and 2.3 cents went to pay for sales taxes. Overall, 15.9 cents went to pay for state and local taxes for every $1 of state personal income.

Data is updated with each financial forecast provided by the Minnesota Department of Finance. The complete history of the overall state and local taxes price of government in Minnesota from state fiscal year 1991 to current is available at http://www.finance.state.mn.us/ffeu/

Minnesota's tax competitiveness compared to other states (Minnesota Taxpayer Association ranking)

Note: In addition to the "price of government", there are other measures which can compare the competitiveness of Minnesota's tax system directly to other states, controlling for different state income levels. The Minnesota Taxpayer Association measure uses census data to compute and rank state and local revenues collected per $1000 of personal income. Minnesota's rankings relative to other states may shift with the enactment of subsequent tax policy changes.

Taxes owed compared to taxes voluntarily paid (Indicator under construction)

Note: The tax gap is defined by the Internal Revenue Service as the total amount of income tax owed for a given year but not voluntarily paid. The Department of Revenue tracks compliance levels for taxpayers that voluntarily filed returns and paid their taxes - that is, for the people who did file taxes, how close did they come to voluntarily paying what they actually owed? However, there is not yet a satisfactory way to estimate the extent to which individuals and businesses might be intentionally evading taxes, through nonreporting or substantial underreporting.

By August 2002, the department will have a methodology for estimating sales and use tax compliance using sales and use tax transaction records and audits. With the new estimates, the department will be able to better evaluate the effectiveness of enforcement efforts on reducing the tax gap.

The Internal Revenue Service is developing a similar methodology for estimating the individual income tax gap. This work should be completed by 2004 and will be applicable to Minnesota.