It is a familiar talking point, mostly for Republican office holders and candidates criticizing the level of taxation in Minnesota: Residents — especially those with higher incomes, or who are business owners or entrepreneurs — are fleeing the state for lower-taxed states.
“Minnesota is not competitive,” said Rep. Kristin Robbins, R-Maple Grove, after the release of the December state economic and revenue forecast that showed a narrowing revenue surplus. The state’s lowest income tax rate is higher than many states’ highest.
The same day, however, Gov. Tim Walz said this: “Mayo Clinic didn’t invest $5 billion here out of nostalgia. They didn’t invest $5 billion just because they started here. They invested $5 billion because this was the best place to do it. It has the best workforce, the best cluster of things around them and the best opportunity to get the results they want.
“Those who would come up here to tell you that folks are going to leave Minnesota, they’re going to eviscerate us,” Walz said. “First of all, the data doesn’t support it. Secondly, it’s not who we are as a people.”
So who is right? Depending on the data and analyses of that data, both can find backing.
“It’s an easy one to manipulate,” said Mark Haveman, the executive director of the Minnesota Center for Fiscal Excellence, a nonpartisan research nonprofit that advocates for sound tax policy and transparent spending. “The research I’ve looked at says they’re both right in different ways. You need to find a balance.”
Some of the evidence is anecdotal. Amazon founder Jeff Bezos is moving to Florida from Washington state, he says to be closer to aging parents and to be near his space venture, Blue Origin. But some assert that recent moves by Washington state, which lacks an income tax, to assess taxes on high earners like Bezos is the real motivation for the move.
In Minnesota, an op-ed in the Star Tribune last spring by retired businessman Howard Root describing why he is leaving the state led to competing choruses of “we-told-you-so” and “don’t-let-the-door-hit-you-on-your-way-out.”
[image_credit]Minnesota Center for Fiscal Excellence[/image_credit]
“The latest IRS and Census data show that people and businesses favor states with low and structurally sound tax coffers, which can impact the state’s economic growth and governmental coffers,” the Tax Foundation article concluded.
Another analysis in 2020 in the Journal of Economic Perspectives by a quartet of academic economists found that tax levels are a factor in where people choose to live.
“This body of work has shown that certain segments of the labor market, especially high-income workers and professions with little location-specific human capital, may be quite responsive to taxes in their location decisions,” the authors conclude.
John Phelan, an economist with the conservative Minnesota-based Center of the American Experiment, said that study has credibility because the authors lament that the results could discourage investment in services and lead to less-progressive tax systems.
“What I like about this paper is, first, that it is a review of a large body of literature, and, second, that you can tell that the authors aren’t too happy with the finding, which tells you it is robust,” Phelan wrote in response to questions about the subject. And he wrote this in response to previous requests for comment: “I would say that taxes are not the only reason people locate in a particular place, but empirical research does show quite clearly that they are certainly a reason that people locate in a particular place.
“If you think this is a problem, and if you also have … factors like weather and climate going against you, you have to look at your tax policy,” Phelan wrote.
A less academic analysis, the annual tally of moving trips by Atlas Van Lines, put Minnesota in the Top 10 for the percentage of moves that were out of the state versus into the state (though the 61-39 ratio is about the same as it has been for a decade).
So is it indisputable that Minnesota risks losing the types of people its economy and tax system depends on? Has it already discouraged many of those business creators and entrepreneurs whose incomes also fuel the state’s highly progressive tax system? Not so fast, say others — mostly, but not exclusively, Democrats — who cite data that tells a different story.
Minnesota does rank in the Top 10 of states with the highest per capita taxation levels. The most-recent “How Does Minnesota Compare” by the Minnesota Center for Fiscal Excellence shows that the state ranks 5th in individual income tax collections and is in the Top 10 for corporate income tax collections.
[image_credit]Minnesota Center for Fiscal Excellence[/image_credit]
DFL leaders continue to argue that while the state has high taxes, it also has plentiful services and a quality of life that justify the cost. And Democrats have their own favored data. The U.S. Census surveys ask people why they moved — both within states and between states. Most do not identify taxes as a frequently cited reason, instead pointing to changes in marital status and jobs or a desire for housing they can afford. (Phelan dismisses that conclusion because taxes are not one of the prompted responses in the Census survey).
In his 2017 book, “The Myth of Millionaire Flight,” Cristobal Young looked at income tax return data for million-dollar earners in the U.S. Those filers moved less frequently than middle class and low-income tax filers, he concluded.
“In the U.S. tax data, while most of the millionaires’ incomes come from wages and salaries, a quarter of them also own a business,” Young wrote. “Almost all of them are married, and most have children at home. For all of these reasons, places are sticky — it is hard to move after making a career and family in a place.”
“Furthermore, almost all of the tax-migration moves are to just one low-tax state: Florida, where low-income taxes commingle with sun, sand and palm trees,” he wrote in this op-ed in The Guardian.
Eric Harris Bernstein is the coalition director of We Make Minnesota, an organization supported by labor unions and DFL-supporting organizations. He said much of his work is countering conservative arguments on budget and taxes. The flight-of-the-wealthy line of reasoning is just one of them.
“Any lawmaker or policy analyst would be foolish to dismiss this broader conversation about migration out of hand,” he said, though some of his progressive allies do. “I’m sympathetic to that perspective but especially in an era of work-from-home and increasing mobility, it is certainly something to pay attention to.”
[image_credit]Minnesota Center for Fiscal Excellence[/image_credit]
“It’s an interesting policy debate, an interesting economic debate, but I don’t like the ways it is unfairly weaponized against what, in my mind, are basic public goods and services that any sane society depends on,” Bernstein said.
Tight labor market could pose new challenges
A perhaps unlikely source calling into question the theory of wealthy tax flight is Haveman’s organization, formerly the Minnesota Taxpayers Association, that is nonpartisan but more-often cited by supporters of business. Haveman finds a more complicated story about taxes and migration than is typically communicated. But he sees reasons to be concerned about the effects of tax policy on location decisions.
[image_credit]MinnPost file photo by Peter Callaghan[/image_credit][image_caption]Jared Walczak, senior policy analyst with the Tax Foundation, and Mark Haveman, executive director of the Minnesota Center for Fiscal Excellence, speaking before members of the Senate Taxes Committee in 2019.[/image_caption]
To start, Haveman looked at tax filers making $200,000 or more, a category that had been used by Smart Asset that concluded that Minnesota had the 8th highest net out-migration in the U.S. — a net loss of 1,453 tax filers in 2021.
Haveman chose to look not at the absolute numbers of movers among that income group, but at their relative share. That is, he wanted to know what percentage of a state’s $200,000-plus household moved, not the total number.
“The fact is, half of all the $200k and above filers in the entire nation reside in these Top 10 ‘losing’ states, which are some of the nation’s highest income states.” He also looked at a five-year trend rather than just 2021 tax filings.
His conclusions are nuanced, something that works against them driving loud headlines:
- Minnesota has seen a spike in high-income filers leaving the state, losing 4,068 of these households between 2020 and 2021, a 38% increase.
- However, the state did a better job retaining existing high-income filers than most states. That total of 4,068 filers represented just 2.4% of those in that income group — the 9th lowest percentage in the U.S. “Not only is that relative retention better than all the other biggest losing states, it is better than all of one of the top in-migration states.”
- In contrast, Minnesota’s in-migration of high-income earners is among the lowest in the nation. The 2,615 high earners moving in are just 1.6% of the number of people in that filing group in the previous year — 48th in relative numbers behind only Illinois and California.
These are the types of workers states want and need, the managerial talent pool that companies desire. Haveman quotes from the study “Headquarters Economy,” by University of Minnesota management professor Myles Shaver, who concluded that this pool is responsible for the state’s high number of corporate headquarters. Shaver noted that when he talks to executive recruiters, they all say one thing: “It’s really hard to get people to move to the Twin Cities but it’s about impossible to get them to leave.”
Haveman ran a similar analysis for Minnesotans earning between $100,000 and $200,000 and found similar results. Outflow to other states was 6th best in the nation; inflow was 49th.
That’s not to say that Haveman isn’t concerned about the economic effects of high taxation. He said that while DFLers failed to add a new tax bracket last session, it created what he dubs a “back-door 5th tier” by phasing out deductions for high earners.
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“My concern has been that it’s great to make Minnesota an attractive place to live, with important investment in education and infrastructure and quality of life. But to do it at the expense of your business climate is not the way to go about it,” he said.
[image_caption]A South Dakota marketing campaign intended to entice Minnesotans in the southwestern part of the state to cross the border.[/image_caption]
Again, politics colors conclusions. DFL leaders say quality of life will ensure that those needed workers will want to come to Minnesota. Republicans point instead to the state tax and regulatory climate.
“The DFL is doubling down on the very policies that are, in part, responsible for the exodus of Minnesotans,” Phelan wrote in an op-ed titled “Is the DFL trying to chase people out of Minnesota?”
“For all its talk of evidence-based policymaking and ‘following the science,’ the Minnesota DFL ignores this,” Phelan wrote. “Indeed, if the DFL was designing policy with the intention of driving people out of Minnesota, it is hard to see what they would do differently.”
Bernstein agrees with Haveman’s observation that Minnesota is in the midst of an economic experiment, with its policies following a high-service/high cost model and surrounding states doing the opposite.
“We are a state on a different path than the lower-taxed states,” Bernstein said. “The question is, will people feel the value they get for their additional tax dollars are worth it?”
