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On Taxes, Schafer Gets It Half Right

Business columnist Lee Schafer wrote in Saturday’s Star Tribune that Minnesota “needs to take a look at its income tax.” Schafer began with the fact that Minnesota’s personal income tax revenues, like those of other high-tax states, are falling short of projections:

[Management and Budget Commissioner Myron] Frans was reporting that January general-fund revenue was $2.28 billion, about 10.7 percent less than the most recent forecast. Most of the lines were close to the forecast but not individual income taxes, coming in about $280 million less than the $1.73 billion forecast.
[T]he last state budget update before this one showed that individual income tax revenue fell short the last two months of last year, too, by about $169 million.

This led to a discussion of whether high-income residents are avoiding Minnesota’s personal income taxes, citing speculation that the exodus of high earners from high-tax states is accelerating, due to the fact that state and local taxes are now only deductible from federal taxable income up to $10,000:

A lot of folks don’t pay enough in state and local taxes for this so-called SALT deduction to even matter, but high earners do. And they once had no limit on how much they could deduct from their federal taxable income.
One problem with the perennial tax-policy argument that taxpayers will leave for lower taxes is that studies haven’t found persuasive evidence that it happens a lot, including one from 2016 by professors Cristobal Young and Charles Varner of Stanford University along with co-authors from the U.S. Treasury Department.

From looking at lots of tax records, they found that Americans as a whole turn out to move more frequently than high-income people do. Married, high-income people with kids are particularly rooted.

If the well-off did move, there was no real pattern of heading to low-tax states. Many did go to Florida, which has no personal income tax, but Florida is also a destination for all sorts of people from northern states who are eager to avoid another encounter with the polar vortex.

In the realm of public policy, you can find “studies” that purport to prove almost anything. The idea that no one chooses a state of residence in part on account of taxes is ridiculous. There is a reason why Minnesota suffers a net loss of taxpayers to South Dakota, North Dakota and Washington, and it isn’t the weather.

But note that Schafer focuses on only one part of the equation: the number of people who move away from Minnesota on account of the state’s high personal income taxes. As Peter Nelson showed in the Center’s landmark 2016 study, “Minnesotans On the Move to Lower Tax States,” if you focus only on people leaving Minnesota, you are missing at least half of the story:

Net population loss is mostly due to fewer people moving into Minnesota.

High income taxes don’t just drive people out of our state. Equally important–perhaps more important–they deter people (and not just wealthy people, either) from moving to Minnesota in the first place. This is a vitally important part of the tax discussion that should never be forgotten.

The Center will be issuing a new analysis of income migration as soon as the current IRS data become available.