Minnesota’s workforce: Challenges, solutions, and non-solutions

Yesterday I was invited to give some remarks to a gathering of lawmakers on our state’s workforce development and how the various budget proposals would, or would not, help. The article below is based on my speaking notes.

Minnesota’s workforce is shrinking. Between June and December 2022, the number of people employed in Minnesota fell by 38,724.

And not only is our state suffering from people leaving the labor force, it is also suffering from people leaving Minnesota entirely. From mid-2021 to mid-2022, 19,400 Minnesota residents left for other states, by far the highest number in at least three decades. The loss of residents seen in 2021 and 2022 is not a new phenomenon, but the pace of exit is quickening: Minnesotans are fleeing the state in larger numbers. The top destination is Florida.

It is not just “snowbirds” fleeing Minnesota. Data show that from 2011-2012 to 2019-2020, Minnesota was a net loser in domestic migrants in every age category except 26- to 35-year-olds; that included a net loss in under 26-year-olds. Neither is this just “the rich” fleeing our state’s high taxes. Data show that from 2011-2012 to 2019-2020, Minnesota lost residents, on net, in every income category from $50k to $75k and up.

Minnesota needs to attract and retain skilled workers. Right now, it is repelling those it doesn’t have and losing those it does.

What can the state government do?

Empirical research finds that taxes influence where people locate. A recent paper by economists Henrik Kleven, Camille Landais, Mathilde Muñoz, and Stefanie Stantcheva that “review[ed] what we know about mobility responses to personal taxation” 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 with which policymakers need to contend when setting tax policy.

That is why we at the Center have outlined a plan to use Minnesota’s forecast structural budget surplus to cut income tax rates and make our state more attractive.

Sadly, policy seems to be going in exactly the opposite direction, doubling down on the very policies Minnesotans — and Americans in other high-tax states — are fleeing in such large numbers.

Even with a forecasted budget surplus of $17.6 billion, the DFL is proposing to impose a 0.7% payroll tax on Minnesota’s workers — already some of the most heavily taxed in the country — to fund a paid family and medical leave scheme. 

Then there is a proposal to introduce a new, higher, top tier of state income tax of 12.5%. This would bump Minnesota up from having the seventh-highest top rate of state income tax in the United States to second, sandwiched between California and New York, not coincidentally the top two states for domestic out-migration in 2021-22, losing a combined 642,787 residents to other states. Coupled with a proposal to impose a surcharge of up to 4% on income from capital gains, Minnesota would have a top rate of income tax of 16.5%, comfortably the highest in the U.S.

As I noted recently, “if the DFL was designing policy with the intention of driving people out of Minnesota, it is hard to see what they would do differently.” Our state’s workforce challenges are only going to get worse.