Minnesota is, in fact, losing the ultrarich
Star Tribune readers were greeted May 8 with the front-page headline, “Tax hike not chasing rich from state.” Online the headline read, “There’s no evidence that ultrarich are fleeing Minnesota.” These headlines reflect a faulty conclusion from an article filled with misunderstandings and omissions.
The fact is, strong evidence does exist to show that the 2013 income tax hike imposed by the then DFL-controlled Legislature and Gov. Mark Dayton is already undermining Minnesota’s ability to attract and retain the rich, as well as the not-so-rich.
Independent of each other, the nonpartisan Twin Cities Business and the Center of the American Experiment each recently released studies showing that Minnesota taxes do influence decisions to move.
The Twin Cities Business study was based on 150 responses to a survey sent to 400 money management, legal, accounting, banking, financial advisory and financial services firms — those who see firsthand whether taxes influence decisions to move assets or residency to another state. This survey found that Minnesota lost or began losing an estimated $2.1 billion in taxable income from 3,099 taxpayers over the past two years. And nearly three-quarters of this is due to tax policy and collection issues.
American Experiment analyzed IRS migration data based on year-to-year address changes reported by all tax filers. Without question, this is the most reliable data source for tracking taxpayer migration. In the first year of the 2013 tax hike, the net income loss among all taxpayers jumped to nearly $1 billion, a substantially higher loss than any prior period. The data show that Minnesota tends to lose taxpayers and income to lower tax states and gain income from higher tax states. Moreover, a new IRS dataset tracks who moved by age and income, starting in 2011. These data conclusively show that Minnesota, on net, loses a substantial and growing number of higher-income taxpayers who report incomes over $200,000.
With these two studies delivering strong evidence that people are responding to the 2013 tax hike, a headline claiming no evidence exists is not right. The Star Tribune’s analysis is also confused in several ways:
First, the article cites the fact that the number of tax returns reporting over $1 million in income grew by 15 percent in 2013, using this to counter the notion that people are fleeing. But then it fails to provide critical information on why the number grew, implying that it reflects a healthy and welcoming environment for the ultrarich. But in 2014, the growth of million-dollar-plus incomes was largely due to a federal tax increase that took effect in 2013.
In response to that increase, people shifted income distributions to 2012 to take advantage of lower tax rates. This suppressed income distributions in 2013 and, in turn, inflated income growth in 2014, as income rose back to more normal levels.
Second, even if normal conditions had existed in 2014, it’s misleading to suggest that this growth shows that the 2013 tax hikes are not impacting migration. The reporters had trouble squaring how the number of returns reporting over $1 million in income could grow while, at the same time, the state lost high-income people to migration. Simple: The growth was just less than it otherwise would have been without the migration losses.
Without other data sources, the longer-term trend data showing growth of the ultrarich in Minnesota might suggest that the state is doing OK with affluent people. The trouble is, we do have better data — the IRS migration data — which conclusively show that Minnesota is, on net, losing high-income taxpayers.
Third, the article’s focus on those earning more than $1 million is misplaced. This income category is a small slice of the top earners impacted by the 2013 tax hike. When someone earns over $1 million, it’s often a one-time event in their life, such as the sale of stock options or a business, and so it’s a poor reflection of the average high-income earner. The bigger concern is the salaried worker in the prime of working life making good income and whether Minnesota continues to attract these workers. Minnesota is currently losing them.
Finally, the article, like most discussions on the topic, ignored Minnesota’s more serious migration problem. IRS data show that the larger net loss of taxpayers and income recently is due to fewer people moving to Minnesota. Data from the state demographer’s office show similar trends.
This drop in people moving to Minnesota explains how the 2013 tax hike could have an immediate impact. It’s not likely many taxpayers immediately fled in 2013 to avoid higher taxes, as any move takes time to prepare. However, at any given time plenty of people around the country are close to making a final decision on where to move.
It appears a larger number with higher incomes are now crossing Minnesota off their list of possible relocation destinations.
Peter J. Nelson is vice president and senior policy fellow of the Center of the American Experiment. Dale Kurschner is editor in chief of Twin Cities Business.