Even sales taxes can make society more equal

April 4, 2023 6:45 am

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The Minnesota Legislature is considering whether to approve two metro area sales taxes; one levied at .75% dedicated to funding roads and transit, and another levied at .25% dedicated to various housing programs. Combined, they would raise about $1.2 billion over the 2024-25 biennium.

Some people oppose these sales taxes because they are regressive, which means they cost lower earners a larger percentage of income than higher earners. Concerns about regressive taxes may come from a well-intentioned place of concern for low-income Minnesotans, but as a policy matter, the aversion to regressive taxes is misguided.

Regardless of the distribution of the tax burden, higher taxes and spending make our society more equal, while lower taxes make us less equal. The variation of tax burdens as a share of income is a good metric to consider, and the state can raise revenue from progressive sources like the income tax, but we cannot adequately fund all of our public investment needs with progressive taxes alone. And increasingly, conservatives have latched on to genuine concerns about regressivity in order to justify an anti-government agenda that is inherently pro-inequality.

In opposing the housing sales tax during a March 29 committee hearing, Rep. Jim Nash, R-Waconia, repeated what has become a fairly common sentiment: “This is going to tax the people for whom you are intending to provide the benefit.” Nash is right about that, but the problem he poses doesn’t stand up to scrutiny.

Here’s why:

Sales taxes are assessed as a flat percentage of taxable consumption, and the rich consume a lot more than the poor. This is especially true of taxable consumption, since major household costs like rent, clothing, and groceries are not taxed.

According to the Minnesota Department of Revenue’s latest tax incidence study, households in the top 10% of the income distribution paid about $5,900 per year in state sales taxes compared to $708 for households in the lowest decile. The chart below shows annual sales tax liabilities for each decile.

Reducing sales taxes would save someone in the top 10% roughly $8 for every $1 saved by someone in the bottom 10%. To most, that would seem unfair to the lower earner. But through the regressivity rubric, the lower earner is getting the better deal because $1 is a larger share of income to them than $8 is to the higher earner.

As a share of total sales tax revenues, the top 20% paid 45% in 2018, while the bottom 20% paid just 8%. The pie chart below shows the share of total statewide sales tax paid for each quintile.

Rather than divvying up that public goods pie equally, saying no to sales taxes because they are regressive is equivalent to saying we should throw out the whole thing so that the lowest earners don’t have to contribute their 8% slice.

Advocates of the transit and housing sales taxes will be quick to point out that forgoing a sales tax increase would hurt the lowest-income Minnesotans because the benefits of the planned spending would go overwhelmingly to those with the highest needs.

And that’s true: 64% of Metro Transit riders earn less than $35,000 per year, and the housing programs earmarked for funding are targeted at those struggling to find and afford stable housing. But, as Matt Bruenig points out in this helpful blog post, spending from regressive revenue sources does not need to be especially targeted in order to represent a net gain for low-income taxpayers.

The chart below shows how the costs and benefits of sales tax revenues would pay out, assuming public investments were spent not on programs geared specifically for the poor, but on broad programs that benefit all income groups equally. The lowest income groups gain on net from raising and spending regressive revenues, while the higher-income groups would stand to benefit substantially from paying less in taxes and receiving fewer benefits.

What this analysis shows is that the fairness concerns about regressivity arise only when we insist on dividing total tax liabilities by income. This not only ignores the positive redistributive aspects of public spending, but it actually weaponizes high levels of inequality against efforts to fund important public investment. In fact, according to the Department of Revenue’s latest tax incidence study, 13 of 15 state revenue sources are regressive, so being opposed to regressive taxes means being opposing the majority of current sources of public funding.

The narrow focus on regressivity also ignores an important positive aspect of broad taxes like the sales tax, which is that everyone pays into them. This creates a sense of shared ownership of public resources that would be absent if only the rich paid.

In the United States, our most popular programs — Social Security and Medicare — are funded by broad payroll taxes and they create massive broadly shared benefits. That’s a good thing.

As a budgetary matter, avoiding broad taxes also risks increasing our reliance on income taxes, which are more volatile, more politically charged, and now represent more than 50% of all state revenue.

Conservatives like the regressivity talking points because they offer a faux-populist message from which to argue against public investments that they generally oppose. The reality is that if we believe public programs like transit and housing will improve the quality of life and expand opportunity for all, then they are worth paying for.

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Eric Harris Bernstein
Eric Harris Bernstein

Eric Bernstein is a policy analyst focused on state tax and budgetary policy. Since the summer of 2020, he has been policy director for We Make Minnesota — a coalition of labor and community groups organizing to raise state revenue for investment in health care, education, racial equity, sustainable environmental stewardship and other public priorities.