Minn. tax plan jeopardizes its health

Connecticut’s dismal economic performance and budget crisis offer a harsh lesson on the limits and consequences of a state raising taxes too high.

My analysis of data from the IRS that tracks the state-to-state movement of taxpayers and their income shows Minnesota is headed down the same taxing path as Connecticut.

Like many states, Connecticut immediately turned to tax increases to balance the severe budget shortfalls nearly every state experienced in the midst of the Great Recession. The state raised taxes by $900 million in 2009, then by $2.6 billion in 2011 and, most recently, by $2 billion in 2015.

Even after all those tax increases, Connecticut’s budget is again dipping into deficit. In facing their budget crisis, Connecticut lawmakers now accept another tax increase is not only out of the question, but prior tax increases are part of the problem.

IRS migration data confirm Connecticut is failing to attract people. These data show Connecticut loses more tax filers to other states than it gains and, in 2014, it posted one of the worst net migration rates for tax filers in the country, ahead of only New York, Illinois and Alaska.

The wakeup call for Connecticut lawmakers was likely the January announcement that General Electic will move its headquarters along with 800 jobs from Fairfield to Boston.

GE executives made their frustration with Connecticut’s tax increases very clear. Reuters reports how in the same month Connecticut raised taxes in 2015, GE CEO Jeffrey Immelt sent an email to employees explaining the company was exploring options to relocate to a state with a “more pro-business environment.”

Is the same shrill wakeup call on Minnesota’s horizon?

Like Connecticut, a DFL-controlled Legislature worked with Gov. Mark Dayton in 2013 to raise taxes by over $2 billion. Much of this 2013 tax increase falls on high-income earners

Like Connecticut, Minnesota is one of 16 states to impose a death tax on transfers to direct family members. Minnesota, however, imposes a higher rate than Connecticut.

Like Connecticut, employment in Minnesota grew slower than the nation the past 10 years. Minnesota growth ranks 29th and Connecticut ranks 30th.

And like Connecticut, Minnesota’s economy grew slower than the nation over the past 10 years.

Fortunately, Minnesota’s under-performing economy still outpaces Connecticut’s, which, to date, has protected Minnesota from the economic and budgetary problems besetting Connecticut.

Nonetheless, these economic data still show Minnesota heading down Connecticut’s path, and economic forecasts project Minnesota will continue to under-perform the nation.

Will Minnesota need a Fortune 500 headquarters to move before waking up to the need for a more welcoming tax climate?

Internal Revenue Service data analyzed in the American Experiment report “Minnesotans on the Move 2016” may offer Minnesota the wake-up call the state needs to avoid hitting the economic lows Connecticut is experiencing.

In the first year of the 2013 tax hike, Minnesota’s net income loss among all taxpayers jumped to nearly $1 billion, a substantially higher loss than any prior period.

Like Connecticut, Minnesota lost higher income tax filers to other states at a higher rate than most states between 2013 and 2014. These are taxpayers who earn over $200,000 per year and pay the brunt of the 2013 tax hike. On this measure, Minnesota ranked 42nd and Connecticut ranked 44th.

These data confirm Minnesota, like Connecticut, is not competing well on one very important metric: the willingness of people to move into, and out of, our state. The clear outflow of taxpayers is occurring across all but the lowest income levels. And a close look at the migration flows show Minnesota tends to lose people to lower tax states and gain people from higher tax states.

If Minnesota is to retain and attract the high-quality employees necessary to grow the economy, these IRS data show lower taxes must be part of the solution.

The omnibus tax bill legislators just passed takes a step in the right direction, but a very small step. A new credit for student loan debt gives recent grads more reason to live in Minnesota, but nothing in the bill makes Minnesota any more welcoming to higher-income taxpayers.

By contrast, Democrats in New York and Maryland are in the process of lowering estate taxes. A bipartisan effort in Maine passed similar estate tax reductions in 2015. And Indiana, North Carolina and Tennessee recently implemented more comprehensive tax reforms that included a full repeal of their death taxes.

These actions by other states make Minnesota’s tax system even more of an outlier, creating even more urgency to implement meaningful tax reductions when the legislative session reconvenes next year.

This the opinion of Peter J. Nelson, vice president and senior policy fellow at Center of the American Experiment, which creates and advocates policies that make Minnesota a freer, more prosperous and better-governed state.