The great escape
Do Minnesotans move to escape the estate tax? The weight of the evidence points to a strong yes
States compete to offer the most effective tax system, which leads to regular debates over whether various tax rates and tax burdens are too high or too low. Historically, state death taxes avoided this competition and controversy. That’s because most state death taxes posed
no extra burden on estates as the federal government effectively paid the tax for estates through a state death tax credit. This all changed in 2001 when the federal government eliminated the tax credit. Without the federal tax credit, state death taxes began to pose a real and substantial financial burden on estates.
This new tax burden reintroduced tax competition over state death taxes. In response, a majority of states immediately stopped taxing estates, inheritances and gifts. Since then, states that retained their death taxes consistently face competitive pressure to eliminate or reduce their death taxes. Above all, these states must answer whether state death taxes encourage wealthy people to move their domicile (legal residence) to states without death taxes.
This is a deeply important question to Minnesota. When people move, the state collects less property, income and sales tax revenues, which could more than offset the revenue collected from the estate tax. Furthermore, people give less to local charities, invest less in local businesses, and overall become less and less engaged with the community.
So do Minnesotans move to avoid the estate tax? Unfortunately, there’s no easy way to answer this question. People (and their businesses) tend to leave quietly and they move for a number of reasons. Also, there’s really no solid, reliable empirical research that controls for all the reasons people move to show how much a state death tax influences or does not influence a wealthy individual’s decision to move.
Without good empirical research, policy decisions to reduce or eliminate the estate tax must be based on other types of evidence. The weight of evidence presented here strongly suggests wealthy Minnesotans are moving to avoid the state estate tax. Understanding this, state lawmakers should eliminate the tax and, in doing so, eliminate any risk that the estate tax is eroding other tax revenue, charitable giving, and business investment.
Theory and Common Sense.
All things being equal, people generally prefer to pay lower taxes and a state estate tax is no exception. That is just plain common sense. Obviously, homeowners choose to take the mortgage interest deduction to pay lower taxes. So, as a starting point, it is clear most Minnesotans will choose to pay less estate taxes if given the choice. And people do have a choice. The estate tax has been called a “voluntary” tax due to the many strategies available to avoid it. The tax is especially voluntary at the state level because it’s much easier to avoid the tax by moving one’s domicile. Here’s how a report from the Minnesota House Research Department described the choice of domicile facing wealthy Minnesotans:
Avoiding the [estate] tax requires changing one’s permanent home (domicile) to another state or reducing the amount of Minnesota property owned. Affluent individuals may be willing to change their domiciles to avoid paying potentially multimillion-dollar state estate tax liabilities. The fact that many of these individuals have second homes in states without estate or inheritance taxes increases their ease of moving.
Knowing the ease in moving to a second home, it is just common sense that many Minnesotans will take advantage of this opportunity to avoid the state’s estate tax.
Estate Planning Industry Delivers Prima Facie Evidence.
Beyond common sense, the most obvious piece of evidence is the very existence of a thriving estate planning industry to advise people on how to minimize their exposure to state taxes. Even the University of Minnesota Extension Service lists minimizing estate taxes as one of the main objectives of estate planning. Moving is certainly one strategy advanced by estate planners. It stands to reason that a strategy advanced by people who are paid for their advice is being used by the folks paying them. The advice itself is prima facie evidence Minnesotans move to other states to avoid estate taxes.
In Surveys, Advisers Report Estate Taxes Influence Decisions to Move.
Another important piece of evidence comes from surveys of accountants and attorneys who advise wealthy clients. These are exactly the people who help people decide how to transfer their estates upon death. In that process, they see firsthand whether estate and other taxes influence decisions to move assets or residency to another state.
The Connecticut Department of Revenue administered a survey of practitioners who provide estate planning services in 2008. 52.6 percent of survey respondents “said that their clients changed their Connecticut domicile to another state primarily due to the Connecticut estate tax.” In addition, 76.9 percent “said that their clients changed their Connecticut domicile partially due to the Connecticut estate tax.”
After Minnesota increased the top income tax rate, amended the estate tax and added a gift tax in 2013, the Minnesota Society of Certified Public Accountants surveyed their members. They found that “more than 86 percent of respondents said clients had asked for advice regarding residency options and moving from Minnesota.” 91 percent said the number of clients asking about moving increased from previous years.
Anecdotal Evidence Also Shows Estate Taxes Influence Decisions to Move.
Beyond more structured surveys, simply talking to people who provide estate planning services reveals Minnesota taxes do influence decisions to move. Taxes might not always be the most important factor—family and weather top the list—but taxes are indeed a factor for the very wealthy. For instance, as reported in Twin Cities Business Magazine, Thrivent wealth advisor Ted Contag said, “Many clients have brought this up; yes, everyone is talking about it. Generally it’s not only a tax question but also a weather question.” After Minnesota passed the 2013 tax increases, business and tax attorney Bob Abdo also told the Star Tribune “inquiries into [leaving Minnesota] have increased since the tax law changes became law.”
New York and Maryland Lawmakers Were Convinced.
Lawmakers in New York and Maryland became convinced people are moving by testimony from estate planners and then increased their estate tax exemption to the federal amount. A report commissioned by New York’s Democratic Governor Andrew Cuomo explained how “during the Commission’s outreach meetings, tax practitioners and business leaders noted that the low exemption threshold of the estate tax was a possible factor in taxpayer migration from New York to states without an estate tax.” The same story played out in Maryland and, again, was led by Democrats.
Federal Estate Tax Collections Grow Faster in States without Death Taxes.
Though empirical research that controls for the many reasons people move might not exist, there are still data points to help answer the question. In particular, federal estate tax collections per return are now much higher in states without death taxes compared to states that retained these taxes. Figure 1 compares federal estate tax collections in states with no state death tax in 2012 to states with a state death tax as of 2012. In this comparison, federal estate tax collections per return were consistently about the same from 1998 to 2009. But beginning in 2010, states with no death tax began reporting much higher federal estate tax collections per return. Higher federal estate tax collections per return mean people are now dying with more wealth in states with no death tax. This represents a remarkable change that strongly suggests wealthy people have indeed moved to avoid state death taxes.
Minnesotans Tend to Move to States with No Estate Tax.
A 2013 report published by Center of the American investigated just how many people on net are leaving the state and how much income they take with them. The IRS reports data on the annual movement of all tax returns and the associated income on the tax return. This is not sample data. It’s the actual data for all taxpayers who moved.
The report found on net a consistent outflow of income from Minnesota between 1995 and 2010. During that time $5.1 billion (adjusted for 2010 dollars) left the state of Minnesota. Most importantly, Minnesota is generally losing people to lower tax states and gaining people from higher tax states. Turning to the estate tax, of the top ten states receiving net income from Minnesota, only Washington and North Carolina had an estate tax. By comparison, seven of the top ten states contributing net income to Minnesota had an estate or inheritance tax.
Top Earners Are Leaving Minnesota at a Very High and Increasing Rate.
Since Center of the American Experiment published the 2013 report on income migration, the IRS released new, more detailed data showing the migration of people and their income by both age and income level. So, for the first time we have good data on the movement of top earners—households reporting more than $200,000 in income—from state to state and the results show wealthy, high-income Minnesotans are indeed moving.
On net, from 2012 to 2013, 661 top earners moved from Minnesota to another state and took $590 million in income with them (see table below). This was the fifth largest loss in income in the country when measured as a percent of total income reported by top earners. Only Alaska, Connecticut, Maryland and Illinois lost a larger percentage. The 2012 to 2013 loss also represents a substantial jump from the previous year when Minnesota lost a much smaller, but still very substantial $313 million in income due to the migration of top earners.
This incredible uptick in the migration of top earners to other states strongly suggests something new is motivating top earners to leave the state. So what happened? Well, in 2013 Minnesota lawmakers hiked income, estate and gift taxes on top earners, giving them a larger financial incentive to leave. Yes, it’s just one year of data, but the size and timing of the jump in migration of top earners is simply impossible to ignore. All of this evidence is highly suggestive that taxes, including estate taxes, do play a role in where people decide to live.
Altogether, the evidence outlined above presents a strong case that wealthy Minnesotans are moving to avoid state estate taxes. Those Minnesotans who have already changed their domicile to a second home have already begun paying less income, property and sales taxes. They’ve also begun giving less to Minnesota charities and investing less in Minnesota businesses. As more and more wealthy Minnesotans leave, the combined loss of state revenue and investment in community organizations and businesses will begin to outweigh any revenue gain from Minnesota’s estate tax collections. In fact, these losses may already outweigh estate tax collections.
These losses are just too high to justify maintaining Minnesota’s estate tax. Various legislative proposals offered in 2015 recommend aligning Minnesota’s estate tax with the federal exemption amount. This would be a positive move but it this still leaves a strong incentive for the wealthiest Minnesotans to leavethe state. The small amount of revenue the estate tax brings in does not come close to justifying the losses in revenue and community involvement that likely result when wealthy people work to avoid paying the tax. The estate tax should be eliminated.