After the last income tax hike, growth in Minnesota’s state tax revenues slumped
Back in 2020, I noted that the growth or otherwise in Minnesota’s state tax revenues seems to be a function of the growth or otherwise of the state’s economy rather…
Repelling the middle class and high wage earners is not a sustainable strategy for any state.
On net, in every year from 2001 through 2016, Minnesota lost residents to other states. This was a source of much discussion in our state, prompting fears of slower economic growth and a lost congressional seat.
So there was some celebration when, in 2017 and 2018, the Census Bureau found that there were net in-migrations of people into Minnesota from other states, in the net amounts of 7,941 and 6,769, respectively.
Unfortunately, that uptick of migration into Minnesota has proved to be temporary. Figures for 2019 show that in-migration dropped essentially to zero, a positive net of 65 people. And another new data set provides more cause for concern.
The Internal Revenue Service maintains a database that allows us to track the movements of individuals between states. Unlike the Census Bureau’s numbers, the IRS database supplies both age and income information about interstate migrants. This gives us a picture of which people we are attracting, and which we are driving away.
As Center of the American Experiment noted in our previous report, “Minnesotans on the Move to Lower Tax States,” the IRS database showed that our state had been losing residents to other states, on net, since 2001-02—matching the Census Bureau numbers. It also showed that, as of 2016, the outflow of residents went overwhelmingly to lower-tax states.
The IRS database has just been updated with the addition of two more years of statistics on the movement of taxpayers across state lines, covering the years 2016-17 and 2017-18. Unfortunately, these new data show that the trend that existed as of 2016 continues: Minnesota gains low-income residents from other states, but loses middle- and upper-income residents, generally to lower-tax states.
In fact, the IRS data show that Minnesota, on net, lost $900 million in 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 seeing the net loss increase again to $673 million in 2017-18.
This is down from the peak outflow of 2013-2014, when former Governor Mark Dayton’s tax hike apparently prompted an egress of taxpayers from the state. As Dayton himself said while discussing tax breaks intended to encourage investment, “Incentives do make a difference.”
In Minnesota, we often hear talk about whether our high tax rates drive away “the rich.” Unfortunately, that is only one of our problems. The IRS database shows that Minnesota was a net loser of residents in every income category from $50,000 up in 2017-18. Out-migration is very much a middle-class issue. By contrast, the state attracted a net inflow of domestic migrants with incomes of $25,000 or less.
Minnesotans sometimes assume that the residents we lose are mostly the elderly, moving to warm-weather retirement destinations. Unfortunately, that’s not the whole story, either. Between 2016 and 2018, Minnesota, on net, lost residents to other states in every age category from 45 upward; thus, including many people in their prime working years.
There are, moreover, two aspects to Minnesota’s migration problem: the first is the one we can see, Minnesotans who leave for greener pastures in other states. The second, the one we can’t see, is equally important—the people who never come to Minnesota in the first place because they have better job opportunities in other states or because they don’t want to pay our high taxes.
In the long run, repelling the middle class and high wage earners is not a sustainable strategy for any state. How can Minnesota do better? High taxes are an obvious culprit. 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 “there is growing evidence that taxes can affect the geographic location of people both within and across countries.”
If Minnesota wants to prosper in the 21st century, we must attract, rather than drive away, highly productive citizens. Whether we like it or not, we are competing with other states for jobs and taxpaying residents. Our climate doesn’t give us a leg up in that competition, so we can’t afford to compound our problem with poor tax policy.
This article first appeared in the Star Tribune.