Just Taxes Blog by ITEP

Minnesota’s Tax Code Should Be Based on Ability to Pay, Not Year of Birth

March 31, 2023

This op-ed was originally published by the Minnesota Reformer.

It was co-authored by Carl Davis and Eli Byerly-Duke.

As you think about who lives on your street, you probably don’t think that much about how much they pay in taxes. You may think about the economic circumstances of your neighbors, but how much they pay to support the public investments we all need is not likely top of mind. And there’s good reason for that: Generally, we assume that people will pay roughly the same in taxes as others in similar economic circumstances.

But when it comes to state income taxes in Minnesota, lawmakers are considering a carveout that would fly in the face of that assumption by treating seniors much more favorably than young families. The proposal would fully exempt all Social Security income from state income tax, even for seniors with exceptionally high incomes. At our organization, we’ve been tracking these types of proposals all across the country over the past few years, and we’ve found that they tend to widen economic, racial, and generational inequalities.

A large portion of Social Security income is already tax-exempt in Minnesota. Low- and moderate-income seniors typically do not pay tax on any of their benefits and couples earning up to $100,020 already get some state subsidies. Moving toward a full carveout for all Social Security income would therefore tend to benefit upper-income families the most.

According to our tax model, more than half of the tax cuts from this change would go to Minnesotans in the top 20% of the income scale — households with incomes above $143,000.

similar analysis done by the state suggests that the state’s most affluent seniors receiving Social Security income would be able to write-off an additional $38,000 on their Minnesota tax forms each year, saving them upwards of $3,700 in state taxes. Simply put, seniors receiving Social Security would often pay less tax than young families, even when those families have less income, because wages would remain taxable while Social Security would be fully exempt.

People of color would also tend to benefit least from this swap. Past and present discrimination has created a significant income gap between white, Black, Hispanic, and Indigenous households. This can be seen both in the average Social Security benefits and average overall incomes received by these groups. Upper-income seniors are disproportionately white, and policy changes that tilt the tax code in their favor therefore tend to worsen racial disparities.

A full carveout for Social Security income would also come at a high cost to the state: $604 million a year and rising, according to the Minnesota Department of Revenue. That’s revenue that would no longer be available to fund services that benefit young and old Minnesotans alike.

All of us stand to lose from these types of giveaways. Removing senior citizens’ income from the tax base makes it far more difficult for states to provide robust services that improve residents’ quality of life and the economy.

The frantic push toward larger tax subsidies for seniors that we are witnessing in Minnesota and across the country right now is violating an intergenerational compact. When people above a certain age are allowed to contribute far less to funding public services — even when they clearly have the means to do so — our shared investment and attachment to society is weakened.

As the Baby Boomer generation opens the door to new carveouts for their retirement income, the younger, more diverse generations that follow will have to endure lower-quality services, higher taxes or some combination of these outcomes as a result.

Your income tax bill should depend on what you can afford to pay, not the year you were born. Proposals like the one being considered in Minnesota would shortchange future generations by skewing the tax code in favor of high-income seniors.



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