Adopt tax policies that attract people to Minnesota, not repel them

In April, Minnesotans breathed a sigh of relief when numbers for the 2020 census showed that our state would not lose one of its eight congressional seats after all. But it was close: If the state of New York had counted just 89 more people, it, rather than Minnesota, would have been allotted the 435th of the 435 House seats.

Minnesota’s population growth has long lagged that of the United States generally. Our state’s population growth since the turn of the 21st century — 14.7 percent — ranks below the 16.8 percent growth for the United States. Part of this is down to a persistent net loss of residents to other states.

Census Bureau numbers show that our state’s net domestic migration turned negative in 2002 and remained negative until 2017. That year and the following, Minnesota actually gained residents on net from other states, but this much reported inflow dried up as suddenly as it had come.

In 2019, Minnesota lost a net 965 residents and in 2020 the figure was 9,757, the third largest net loss of residents to other states in 30 years. Net international in-migration usually offsets this to give a positive figure for overall net-migration, but once in Minnesota these folks are as free to join the domestic net out-migration as anybody else.

Many factors influence where individuals choose to locate, and research shows that one of these is the comparative tax burdens that different jurisdictions will subject them to. A recent paper by economists Henrik Kleven, Camille Landais, Mathilde Muñoz, and Stefanie Stantcheva that “review(ed) what we know about mobility responses to personal taxation” found that: “There is growing evidence that taxes can affect the geographic location of people both within and across countries. This migration channel creates another efficiency cost of taxation with which policymakers need to contend when setting tax policy.” Research also finds that wealth taxes, such as the estate tax, influence migration decisions, especially of higher earners.

The findings of our new report, “Taxes and Migration: Minnesotans on the Move to Lower Tax States,” echo this. Examining the relationship between average tax burdens in other states over the period 2009 to 2018 and the ratio of domestic in-migrants to out-migrants from/to those states over the same period, we see a positive relationship between the tax burden in a state and the ratio of in-migrants to out-migrants from that state to Minnesota.

Put simply, the lower the tax burden in the other state the greater our migration loss to it.

Given these findings, the patterns we see in Minnesota’s migration aren’t surprising: Ours is a high-tax state. Our top rate of individual income tax is the fifth highest in the United States, and the starting rate is higher than the top rate in 23 states. This helps explain why net migration from Minnesota flips negative at incomes over $50,000 annually – we don’t just tax “the rich” heavily, we tax almost everybody heavily. Minnesota also imposes high wealth taxes. This is one of only 12 states and the District of Columbia to impose an estate tax (a further six impose an inheritance tax, and Maryland imposes both). Of these 13 jurisdictions, Minnesota’s exemption is lower than in eight. Our state has the second-highest minimum rate of estate tax after Vermont, and our top rate of estate tax is joint second highest.

People will claim that these high taxes are the price we pay for a high quality of life. There is, in fact, no relationship in the data between rankings for state tax burdens and rankings such as U.S. News’ Best States. And ask yourself: Why would people be moving away from higher tax states and towards lower tax states if this link existed?

There is much talk in Minnesota of labor shortages, not only those arising from the COVID-19 pandemic but those forecast to last into the future as our population ages. One way we can ease this is by attracting residents from other states. And, one way state policy can help there, is to adopt tax policies which attract residents, not those that repel them.

This op ed originally appeared in the Pioneer Press on November 12, 2021