State government: When it comes to tax, what is ‘fair’?
ST. PAUL – Making Minnesota’s tax system fair is a key goal for state lawmakers and the governor.
But the definition of tax fairness is more elusive than it might seem.
“Fairness is certainly in the eye of the beholder,” University of Illinois Professor J. Fred Giertz of the Institute of Government and Public Affairs said.
Some argue everyone should pay roughly the same percentage toward government services, while others say the rich can afford to cover some of the cost for the lower-income taxpayers.
That fundamental difference can make it difficult to agree on tax policy.
“There’s no objective or scientific way of determining which way is right,” said Giertz, also a member of the National Tax Association.
Democratic Gov. Mark Dayton has emphasized tax fairness in his budget. He says middle-income Minnesotans pay too much and the richest taxpayers pay a lower percentage overall than others. He has said it is time for all Minnesotans to pay their “fair share.”
His budget proposal includes an income tax increase on the richest Minnesotans, upping the rate by 2 percentage points to 9.85 percent for the top wage earners.
Raising taxes is not the only way to make them fair, said Executive Director Mark Haveman of the Minnesota Center for Fiscal Excellence.
“Sometimes we are concerned we have a tax-raising argument portrayed as a tax-fairness argument,” he said.
Giertz said there are two considerations when looking at tax fairness.
The first is horizontal equity, meaning similar people are treated similarly. For example, if two people make the same amount of money, they would pay the same income tax.
The more difficult piece to factor into tax fairness discussions is vertical equity, meaning general equality across the spectrum of taxpayers.
The question there, Giertz said, is where you draw the line between differently taxed groups and how significant the differences are among them.
Different taxes do affect people differently, Haveman said.
Sales and property taxes tend to be more regressive, meaning they disproportionately affect lower-income people because they impact everyday necessities such as food, clothing and housing.
Income taxes can be one way to offset some of the regressive nature of property and sales taxes, he said.
“That has to be the counter to everything else in the tax system,” he said.
Fairness is not the only factor that should be considered when crafting tax policy, experts say.
“You have principals of good taxation,” St. Thomas professor John Spry said. “Sometimes they’re in conflict, and sometimes they’re not in conflict.”
He said that other than fairness, lawmakers need to consider how taxes affect the state’s competitiveness, financial stability and economic growth.
“You’ve got to look at the system as a whole for these sorts of things,” Haveman said.
Haveman said taxes also need to align with government spending.
“It’s the only way to sort of calibrate our expectation in government with our willingness to pay for it,” he said.
Spry said finding the “best” tax system depends on the philosophy behind taxation.
“Part of what you’re seeing is a discussion of what really are the goals of taxes,” he said.
Even if lawmakers could agree on the fairest tax system, they also have to be realistic, Giertz said.
“The tax system can’t always do what you’d like,” he said. “You have to balance the question about what you’d like to do with the question of what actually is going to work.”
If taxes are too high, they could push people or businesses out of the state, he said. But they also must bring in enough to cover government costs.
“You’ve got to try to strike an appropriate balance among all these essentially competing principles,” Haveman said.