A response to various objections to American Experiment’s report, “Minnesotans on the Move to Lower Tax States 2016”
Center of the American Experiment recently released a report documenting that, year after year, Minnesota on net loses thousands of people and hundreds of millions of dollars to migration. Between 2013 and 2014, the net loss of income reached nearly $1 billion. A closer look at where people move shows a consistent pattern of movement to lower tax states, providing strong evidence that taxes are part of the problem.
If these data prove one thing, they prove Minnesota is not competing well with other states for new people who can add to our workforce, communities and tax base. That fact should be worrisome to every Minnesotan. Nonetheless, some people, including the Minnesota Budget Project and the Commissioner of Revenue, simply want to discredit the findings of the report without engaging in a serious dialogue. This is no surprise. Any time evidence surfaces on how Minnesota’s high taxes harm the economy, political forces inevitably take action to discredit or at least diminish the value of the evidence. This time, though, the evidence is quite compelling that something needs to change. Here are some responses to the main objections to help reinforce the need for change.
Objection #1: IRS data do not measure income migration. It is not accurate to compare the total incomes of people who moved in and out of Minnesota in a given year and describe the net difference as the loss of income from the state.
The IRS has itself used the difference between the inflow and outflow of income to show a net change in income for a region. When they first introduced the income data they wrote a paper demonstrating how the data can be used with various examples. Looking at migration between 1992 and 1993 for the Northeast region, they found “a net loss of income to the region of, nearly $5 billion.” (Kozeilec 1995).
Also, academic studies I’ve reviewed that use the IRS income data for migration research purposes discusses the income flows in terms of “gains” and “losses” of income to a state or county. (See references below.) These studies do find the difference between the inflow and the outflow of income very meaningful. Studies specifically refer to this difference as “net migration” just as the IRS does. In fact, a couple studies use this net migration figure to estimate the impact of migration on per capita income. (Plane 1999; and Cromartie and Nord 1997.) Moreover, the U.S. Census Bureau, according to the IRS, “relies heavily on these data to estimate the population between censuses and to estimate per capita income.” (Kozielec 1995.)
Objection #2: IRS data do not accurately measure the migration of income because when someone moves from one state to another the income they earned does not necessarily go with them.
It’s true that the income from a particular job usually does not move with someone as people usually move to take a new job. But this does not mean the IRS data don’t provide a meaningful and accurate measure of income migration.
Some studies do issue a caveat explaining how the income tied to a job itself doesn’t move, rather it’s the income earner and their capacity to earn income that moves. (Plane 1999; Manson and Groop 2000) No one is claiming the income generated by specific job moves. Rather, it’s the income generated by a specific person working that moves.
The usage of the income flow data by the IRS, the Census and academics to assess net income flows and estimate per capita income changes creates a strong consensus that the IRS income flows provide an accurate measure of the change in the aggregate income base of a region from migration.
Objection #3: Data used in the report do not provide any basis to conclude why people choose to move, because it does not contain data on people’s motivations for moving.
When making policy decisions one must weigh the evidence that exists. Correlation certainly does not prove causation, but it can often provide strong suggestive evidence. The fact that working-age Minnesotans tend to move to lower tax states and the fact that national migration patterns follow these trends strongly suggests taxes matter.
IRS data do show one thing very clearly: Minnesota is a less attractive place to live and work than many other states and one of the least attractive states to top-earners. Because Minnesota taxes are a likely factor, it is irresponsible for government officials to not take this possibility seriously.
Objection #4: Studies done after tax increases in other states have shown that the increase in the top tax rate did not affect how many high income earners moved out of the state.
Studies referenced to show tax rates don’t influence where top earners live originate from the Stanford Center on Poverty and Inequality. (Young and Varner 2011.) These studies suffer from two major problems. First, they only study the movement of people earning more than $1 million. This is a tiny subset of high income taxpayers that do not reflect the general population of high income taxpayers. Second, the studies generally focus on out-migration, people fleeing high taxes. This ignores the impact taxes can have on a state’s ability to attract high-income earners to move into the state. Furthermore, there are studies by economists from the New Jersey Department of the Treasury that directly conflict with these findings. (Cohen, Lai, and Steindel 2014.)
Aside from these cherry picked studies, empirical studies generally find taxes influence decisions to move. Economist Mark Gius’s review of the academic literature concludes, “most of the prior research found that taxes had a negative effect on migration; in other words, the lower the taxes in a person’s home state, the less likely they will migrate.” (Gius 2011.)
Objection #5: People move for different reasons and Minnesota is an attractive place to move based on various national sources, including median income, CNBC business climate rankings, a higher credit rating and AARP ranking Minnesota the best state for long-term care services and supports.
Cherry picked rankings do not demonstrate Minnesota is more attractive than not. As Minnesotans we love our state and there are indeed all sorts of attractions that keep us living and thriving here. However, there can be no denying that Minnesota loses more people to other states than it gains. Touting various positive rankings in the face of negative net domestic migration does not move Minnesota forward.
Shrinidhi Ambinakudige and Domenico Parisi, “A Spatiotemporal Analysis of Inter-County Migration Patterns in the United States,” Applied Spatial Analysis and Policy (2015).
Roger Cohen, Andrew Lai and Charles Steindel, “State Income Taxes and Interstate Migration,” Business Economics, Vol. 49, No. 3 (2014).
John Cromartie and M. Nord, “Migration Contributes to Nonmetro Per Capita Income Growth,” Rural Conditions and Trends, Vol. 8, No. 2 (1997).
Mark Gius, “ The effect of income taxes on interstate migration: an analysis by age and race,” The Annals of Regional Science (February 2011).
Emily Gross, “Internal Revenue Service Area-To-Area Migration Date: Strengths, Limitations, and Current Trends,” Internal Revenue Service (2005), available at https://www.irs.gov/pub/irs-soi/05gross.pdf.
Sandra C. Holland and David A. Plane, “Methods of Mapping Migration Flow Patterns,” Southeastern Geographer (May 2001).
John Kozielec, “The Tax Return: A Unique Data Source for Tracking Migration,” Internal Revenue Service (1995), available at https://www.irs.gov/pub/irs-soi/1995preprintar14.pdf.
Gary A. Manson and Richard E. Groop, “U.S. Intercounty Migration in the 1990s: People and Income Move Down the Urban Hierchary,” Professional Geographer (2000).
Gary A. Manson and Richard E. Groop, “Gains and Losses of Migrants and Income Through Intecounty Migration in the U.S., 1992-1993,” The Social Science Journal (1999).
David A. Plane, “Geographical Pattern Analysis of Income Migration in the United States,” International Journal of Population Geography (1999).
Samuel M. Otterstrom, “Income Migration and Home Price Trajectories in the United States,” International Real Estate Review (2015).
J. Matthew Shumway and Samuel M. Otterstrom, “Spatial Patterns of Migration and Income Change in the Mountain West: The Dominance of Service-Based, Amenity-Rich Counties,” Professional Geographer (2001).
Alexander Vias and Charles Collins, “Differential Populations and Income Migration in the Great Plains, 1995-98,” Great Plains Research (2003).
Cristobal Young and Charles Varner, “Millionaire Migration and State Taxation of Top Incomes: Evidence from a Natural Experiment,” National Tax Journal (June 2011).