Taxes and Migration – Minnesotans on the Move to Lower Tax States
Minnesota’s population growth lags that of the United States. Since the turn of the 21st century, Minnesota has ranked 26th among the fifty states and District of Columbia with population growth of 14.7 percent over this period compared to 16.8 percent for the United States.
Our state’s population growth rate this century has also lagged that of our neighbors to the west, South and North Dakota, with growth of 18.1 and 19.2 percent respectively.
Net domestic out-migration of Minnesota residents to other states accounts for some of this slow population growth. Net domestic migration of people into Minnesota turned negative in 2002 and remained negative until 2017. That year and the following, our state actually gained residents on net from other states, but this inflow dried up as suddenly as it had come. In 2019, Minnesota lost 965 residents on net and in 2020 the net loss was 9,757, the third-largest net loss of residents to other states in thirty years.
Minnesota’s net losses are driven largely by people declining to move here. Both the in-flow and outflow of population consistently increased through the 1990s. However, in the 2000s the outflow of people leaving Minnesota plateaued while the inflow of people dropped. Thus, the decline in the net number of people moving to Minnesota is primarily due to fewer people moving into Minnesota.
As Minnesota has lost residents to other states, it has also lost income to other states. Minneso- ta began experiencing substantial annual losses in Adjusted Gross Income (AGI) in 1997—five years before net domestic migration turned negative, suggesting that higher earners, on average, were at the forefront of this. Minnesota has lost income to other states in every year since then. Income losses to domestic migration held somewhat steady between 1996 and 2011, averaging $514.5 million annually in 2019 dollars. This loss then increased sharply up to 2014, peaking at over $1 billion, before declining up to 2017 and then rising sharply again in the last two years for which we have data.
For migration to boost per capita incomes, Minnesota needs to attract/retain workers with above-average productivity. Data shows that our state has seen net inflows of domestic migrants in every income category below $50,000 annually but net outflows at every income level above that. If we make the standard economic assumption that income is driven by productivity, this means that Minnesota has experienced a net loss among its most economically productive residents.
Losing high earners will also impact state budgets because the rich pay a disproportionate amount of state income taxes. In 2018, the bottom 30 percent of Minnesota households by income (who earned 5.8 percent of all income earned in the state) paid no individual income tax. By contrast, the top ten percent of Minnesota households by income earned 43.0 percent of all the income earned in the state but paid 59.4 percent of total income tax revenues for an effective state income tax rate of 6.4 percent. For the top 1 percent, the disparity is even greater: they earned 16.5 percent of all income earned in the state but paid 27.1 percent of all income tax revenues for an effective state income tax rate of 7.7 percent.
Many factors go into an individual’s decision as to where to live, work, and play. One of these is the comparative tax burdens that different jurisdictions will subject them to. 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.”
Research also finds that wealth taxes, such as the estate tax, influence the migration decisions of higher earners.
Examining the relationship between average tax burdens in other states over the period 2009 to 2018 and the ratio of domestic in-migrants to out-migrants over the period 2009-2010 to 2018-2019, we see a positive relationship between the tax burden in a state and the ratio of in-migrants to out-migrants from that state to Minnesota: in other words, the higher the other state’s tax burden the greater, on average, the ratio of in-migrants to out-migrants and the lower the other state’s tax rate the lower the ratio of in-migrants to out-migrants. Put more simply, the lower (higher) the tax burden in the other state the greater our migration loss to (gain from) it.
Minnesota’s net domestic out-migration makes sense given the findings of the empirical literature: our state has high income and wealth taxes.
At 10.2 percent in 2019, Minnesota had the 6th highest ratio of state and local sales, property, and individual incomes tax revenues to Personal Income out of the fifty states and District of Columbia. Our state’s tax burden has ranked in the top ten on this measure in every year since at least 2009.
This high burden is driven in large part by our state’s high rates of individual income tax. Our state had the fifth-highest rate of state individual income tax in 2021 at 9.85 percent on in- comes over $166,040: Only California, Hawaii, New Jersey, and Oregon have higher rates. Furthermore, for both California and New Jersey, the top rate only kicks in at an income threshold of $1 million. Notably, Minnesota doesn’t just tax ‘the rich’ heavily: our state’s starting rate of personal income tax – 5.35 percent – is higher than the top rate in 23 states.
Minnesota imposes high wealth taxes, too. Ours is one of only twelve states and the District of Columbia to impose an estate tax (a further six impose an inheritance tax, and Maryland imposes both). To compound this, of these 13 jurisdictions, Minnesota’s exemption, $3 million, is lower than in eight. At 13 percent, Minnesota has the second-highest minimum rate of estate tax after Vermont. Minnesota’s top rate of estate tax, 16 percent, is tied for the second-highest.
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