Reforming Tax Deductions Could Raise Hundreds of Millions for Minnesota from Those with Highest Incomes

A new report from the Institute on Taxation and Economic Policy shows how Minnesota could raise needed new revenue--chiefly from those with top incomes--by reforming state income tax deductions.

"The ITEP report identifies sensible strategies for providing a portion of the revenue needed to protect vital services while making the overall tax code fairer," said Wayne Cox, executive director of Mnnesota Citizens for Tax Justice.

The report found that tax deductions that tend to provide much greater benefit for those with highest incomes can be reformed in ways that benefit most taxpayers.

Repealing itemized deductions entirely while increasing the standard deduction by 50% would raise $270 million a year while providing a tax cut for 53% of Minnesotans. For 80% of Minnesota taxpayers, the effect would be minor change or a cut, while those with the top one percent in income would receive an increase of $5,841.

Capping the total value of itemized deductions to $40,000 in annual deductions for married couples and $20,000 in deductions for singles would raise $181 million a year while affecting only five percent of taxpayers. The increase on the top one percent would be $4,597.

Currrently, those with highest incomes get a bigger benefit from state income tax deductions because of their higher marginal tax rates. Converting income tax deductions to a credit would provide $251 million in annual revenue while providing tax cuts on average for 60% of taxpayers. The increase for the top one percent would be $4,086.

The report is "Writing Off" Tax Giveaways: How States Can Help Balance their Budgets by Reforming or Repealing Itemized Deductions. The report lists additional options such as decoupling from recent federal tax changes that increased the value of tax deductions for those with highest incomes.