Proposals for feasible tax reform
Last week, we released our new paper ‘The State of Minnesota’s Economy: 2020‘. In it, we argued that Minnesota’s economy is being held back by its excessively high taxes. Chief…
This op ed appeared in the Duluth News Tribune, February 16th, 2020
In 2017 and 2018, the Census Bureau announced positive figures for net internal migration into Minnesota of 7,941 and 6,769, respectively. This was the cause of some celebration. In every year since 2001, Minnesota had lost residents, on net, to other states.
This uptick has not since been maintained, however. Figures for 2019 show that net domestic migration slumped to just 65 people. If Minnesota goes back to losing residents to other states, it will exacerbate one of our state’s most discussed economic issues: slowing population and labor-force growth, leading to slower economic growth.
Minnesota’s labor-force participation rate stood at 63.2% in November 2019, and the State Demographic Center projects this will fall to 60.4% in 2050. A smaller share of Minnesotans working to produce goods and services — Gross Domestic Product, or GDP — means, all else equal, less GDP to divide among the state’s population. In other words, lower per-capita GDP.
Immigration, either domestic or foreign, where Minnesota had a net gain of 9,113 in 2019, is often offered as a solution. This was why the numbers in 2017 and 2018 were celebrated. Of course, immigrants can add to the denominator, population, as well as the numerator, GDP.
So, while they might increase the state’s total GDP, the question of whether they increase the state’s per-capita GDP, which is what really matters for living standards, depends on two factors: their propensity to be employed and their productivity.
This latter is the key point. As the economist Paul Krugman has written, “Productivity isn’t everything, but in the long run it is almost everything. A (state)’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.”
He is exactly right. At a conference in 2017, Minnesota’s state economist, Laura Kalambokidis, was asked about the prospects for economic growth given these demographic challenges. “When you have slow labor-force growth and you want economic growth,” she replied, “the key is going to be productivity.”
If Minnesota can improve its labor productivity, it can maintain economic growth in the face of declining participation rates and employment ratios, even in per-capita terms.
Sadly, another set of recent data, this time from the Internal Revenue Service, suggests that migration might be causing problems here, too.
The IRS recently released data on the movement of taxpayers and income across the country for 2016-’17 and 2017-’18. Minnesota, on net, lost $900 million of income to other states between 2016 and 2018. Specifically, in 2016-’17, the state lost $223 million in adjusted gross income reported by tax filers who moved in and out of Minnesota — the least, adjusted for inflation, since 1995-’96 — before rebounding to $673 million in 2017-’18. This is down from the peak outflow of 2013-’14, when former Gov. Mark Dayton’s tax hike prompted a flow of income from the state. As Dayton himself said, discussing tax breaks to encourage investment, “Incentives do make a difference.”
Contrary to popular belief, Minnesota’s out-migration is not driven by retirement. In both 2016-’17 and 2017-’18, our state saw a net loss of residents in every age category from 45-54 — people their prime working years — and up. Neither is it just “the rich” who are leaving. In 2017-’18, Minnesota was a net loser of residents in every income category from $50,000 to $75,000 and up.
None of this should be a surprise. The large and growing body of evidence on the effects of taxation on migration was summarized recently by economists Henrik Kleven, Camille Landais, Mathilde Muñoz, and Stefanie Stantcheva. They 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 that policymakers need to contend with when setting tax policy.”
And Minnesota’s taxes are famously high. Our top rate of personal income tax — 9.85% on taxable incomes over $163,890 — is higher than anywhere else apart from California, Hawaii, New Jersey, and Oregon. We are one of 13 jurisdictions with an estate tax, which new research shows loses the state government revenue by pushing people out of the state. Equally significant, perhaps, Minnesota’s lowest income tax rate of 5.35% is higher than the highest tax bracket in 25 states.
This brings us back to labor productivity. If we take income as a proxy for productivity, which is a fairly standard approach in economics, the numbers show that Minnesota is, on net, losing its most productive workers. This is not what we need in the face of declining labor-force growth.
Taxes are not the only reason people move, but they are a factor. It is imperative state government policy tilts the table in Minnesota’s favor.
John Phelan is an economist for the Center of the American Experiment (AmericanExperiment.org), which is based in Golden Valley, Minnesota. He wrote this for the News Tribune.