Minnesota is presently collecting more revenue than it needs. The latest economic forecast projects a $900 million surplus for the current budget and a $2 billion surplus projected for the FY 2018-19 budget. As the legislative session draws to a close, a number of tax reductions are on the negotiating table, including a provision to reduce the estate tax.
IRS migration data, IRS estate tax returns and a recent survey from Twin Cities Business provide compelling evidence that it’s not just time to reduce the estate tax, it’s time to eliminate it. Overall, this evidence shows higher income Minnesotans are moving their residence to another state to avoid Minnesota’s estate tax.
IRS migration data show Minnesota consistently loses more high income taxpayers to other states than it gains. The IRS released a new migration dataset in 2015 that tracks the state-to-state movement of taxpayers by both age and income. The data is based on the movement of all tax filers and so this is without question the most accurate data source for tracking the migration of taxpayers. Among tax filers who earn more than $200,000, Minnesota, on net, lost 761 households and $667 million in income between 2013 and 2014. Measured as a rate—net income loss divided by total income reported—this income loss ranks 47th in the country, ahead of only New Jersey, Illinois, Vermont and Maryland. So, Minnesota is one of the least attractive states to top earners—the people most likely subject to a state estate tax—in the country.
We also know from the migration data that Minnesota tends to lose these higher income people to lower tax states. In fact, five of the top ten states receiving Minnesota income over the last ten years do not impose an income tax. Only one of these receiving states currently imposes an estate tax.
Also, the average estate value, as reported on IRS estate tax returns, grew over 20 percent larger in states with no death tax between 2007 and 2014. As the chart below shows, this growth occurred immediately after the federal credit for state death taxes phased out. This credit had effectively paid state death taxes on behalf of the estates. No federal credit meant state death taxes posed a burden. The growth in estate value in states with no death tax occurred immediately after the feds stopped paying the credit. This is exactly what one would expect to see if the people with the largest estates that are now most burdened by a state death tax move to avoid it.
A recent Twin Cities Business study compliments these IRS data by directly asking whether people moved for tax reasons. The study was based on 150 responses to a survey sent to 400 money management, legal, accounting, banking, financial advisory and financial services firms—those who see firsthand whether taxes influence decisions to move assets or residency to another state. Similar to the IRS migration data, this survey found Minnesota lost or began losing an estimated $2.1 billion in taxable income from 3,099 taxpayers over the past two years. Of clients who planned to move in the next five years, the estate tax came in second behind the individual income tax among the top reasons for moving.
Let’s review the evidence. Minnesota is one of the least attractive states for top earners to move. Minnesota tends to lose income to lower tax states. Average estate values reported on federal estate tax returns are growing larger in states with no death tax. And a survey of people who professionally advise wealthy clients indicates the estate tax is one of the main reasons to move among clients planning an exit.
Altogether, the evidence establishes beyond a reasonable doubt that many wealthy Minnesotans do move to avoid Minnesota’s estate tax.
And when they move, they stop paying income taxes and pay fewer sales and property taxes, if they continue paying any taxes at all. These tax losses from migration may more than offset the revenue Minnesota collects through the estate tax. Thus, the estate tax may be a net revenue loser.
Moreover, when people move they give less to local charities, invest less in local businesses, and overall become less and less engaged with the community.
Add up all these losses and it becomes clear the estate tax does not pay for itself and needs to go.
A number of states have drawn a similar conclusion in recent years. North Carolina, Tennessee and Indiana all eliminated their estate tax effective for deaths occurring on or after January 1, 2013. Since that time New York, Maryland and Maine all acted to increase the exemption amount to the federal level.
These actions by other states make Minnesota’s estate tax even more of an outlier, creating even more urgency for a full repeal of Minnesota’s estate tax.