Tax analysis based on Suits

The state’s tax system became more regressive between 2004 and 2006, and it’s all based on Suits.

The Suits Index, named for economist Daniel Suits, calculates a single number that measures tax policy progressivity. The approach basically compares the cumulative share of income received by taxpayers — ordered from lowest to highest — to their cumulative share of taxes paid. From 2004 to 2006, this number for Minnesota dropped from minus-0.024 to minus-0.053, which Paul Wilson, director of tax research for the Department of Revenue, said is a big change. He presented the 2009 Minnesota Tax Incidence Study to the House Taxes Committee March 11.

With the index, the further below zero a number is, the more regressive it is. In a regressive tax system the poorest people pay the most tax relative to income, the wealthiest pay the least.

“It takes a lot to move the Suits Index,” Wilson said. “The point is that it’s hard to explain this. We have more work to do.”

The new methodology for the motor vehicle registration tax can account for minus-0.004, but it is unknown about the remainder. Wilson said there was no policy change large enough to explain a change like this.

Minnesota’s Suits Index was better, or more progressive, in recession years like 1990 and 2002, Wilson said because “everyone is hurting so income grows more equally.” And in “boom” years, like 1998 and 2006, income distribution grew more unequal, causing more regressivity.

This is the 10th mandated, nonpartisan biennial study conducted by the department. Wilson said no other states do studies like this on a recurring basis. The 2009 study looked at data from 2006 and projected out to 2011.

The study used a sample of 105,000 households; weighted to represent 2.45 million households. It’s then divided into 10 income groups.

Between 2006 and 2011, not much changed, Wilson said. The 2011 projection is based on current law and the November 2008 forecast. The big change in 2011 is that state taxes go down and local taxes go up, he said.