The “b” as in billion has gotten most of the attention generated by Center of the American Experiment’s new report [PDF] on Minnesotans moving to lower tax states at a net cost of nearly $1 billion in lost income.
Yet the report’s surprising findings also contradict commonly held assumptions about who’s leaving Minnesota, revealing cracks in our workforce and ramifications for the state budget that should unnerve policy makers in St. Paul.
The center’s analysis found that Minnesota’s economy on net lost $948 million in adjusted gross income between 2013 and 2014, based on the Internal Revenue Service’s most up to date data from tax filers who moved in and out of Minnesota.
That deficit represents the largest net income loss to other states ever reported for Minnesota, nearly double the $490 million outflow of three years ago.
While it will require more than one year of data to fully understand the dynamics, the sharp increase came in the first year of a huge tax hike levied on top earners by Gov. Mark Dayton and the then DFL-controlled Legislature.
Where are Minnesota households and income moving? With a few exceptions, Minnesota is losing income to lower tax states to the West and the South. Minnesota tends to gain income from higher tax states in the Midwest and Northeast.
For decades, Minnesotans have understood that many retirees with means head south for the winter, “snowbirds” drawn by the friendlier weather, as well as tax climate.
“Hopefully, this trend doesn’t continue or else all of our retired folks will establish residencies in other lower tax states and only come back for a few months in the summer to enjoy their lake cabins up north,” one Twin Cities resident emailed after reading the report.
Still in the workforce
But newly available IRS data reveal that active participants in the workforce, not snowbirds, comprise the majority of tax filers leaving our state for Washington, Colorado, Texas and other lower tax destinations.
People in their prime earning years, including many high wage earners, represent a large portion of the net loss of taxpayers and income. Fully 71 percent of the income loss quantified in the IRS data comes from people under 65 — people active in the workforce who had been contributing to our economy.
The breakdown shows individuals between the ages of 35 and 54 constitute nearly 40 percent of Minnesota’s net loss of tax filers. On top of that, another 23 percent of this net loss is from people who fall between the ages of 55 to 64, most of whom are still active in the workforce.
More unsettling facts emerge the deeper you drill into the data. For instance, Minnesota loses more college age kids than the state gets back, a finding that corroborates concerns over a potential brain drain previously flagged by the state demographer.
Tend to be high earners
In addition, people exiting the state on net tend to be higher earners, whose annual take-home income exceeds $100,000. High earners are often entrepreneurs and innovators who generate jobs and pay more taxes. But based on their movements as tracked in the IRS data, Minnesota has become mired near the bottom of the list of least attractive jurisdictions for high-wage earners, along with New Jersey, Illinois, Connecticut, Vermont and the District of Columbia.
At the same time, Minnesota serves as something of a magnet for lower income workers. Between 2011 and 2014, Minnesota gained more than 2,000 people who live in households earning less than $25,000. And those are just the people who file tax returns as IRS data do not track low-income movers who don’t file.
Bottom line: Minnesota is gaining individuals whose income levels often result in the need for public services, while losing high income earners whose taxes fund public services.
Clearly, the loss of income and individuals to other states identified in “Minnesotans on the Move to Lower Tax States 2016” will present significant challenges to the state budget, economy, workforce and quality of life.
It’s concerning to consider where we’d be without the vaunted quality of life and other amenities that prevent more Minnesotans from exiting the state.
“My wife and I would have long ago decamped for Florida or Texas, were it not for her Scandinavian heritage and family ties,” one individual wrote in response to our report.
While the decision to move to another state involves numerous considerations, these findings conclusively show Minnesota’s high taxes factor into the decision. The IRS data point to the necessity of revising Minnesota’s tax structure in order to reverse current trends and keep the caliber of worker needed to expand opportunity for all state citizens.
Tom Steward is a government oversight reporter at Center of the American Experiment.
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