Forbes: Minnesota Joins California In Legislating A Roach Motel For Residents

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What does it take to be an official resident of a state?

A house or permanent address? A registered vehicle? Spending more than 183 days (i.e., over half the year) working or living within one state? With millions of Americans moving from one state to another each year, the criteria an individual or family must meet in order to establish residency in a particular state is continuing to expand.

While some states, such as Florida and Texas, don’t penalize those who choose to move outside of their state for work or any other number of reasons, other states are making it increasingly difficult for working men and women to permanently leave, own property, or even work on a temporary basis within their borders without paying an “exit fee,” better known as the state’s income tax. California, for instance, requires former residents to continue paying the Golden State’s high income tax rates until they have been outside of the state for 546 consecutive days, the equivalent of a year and a half. Only then can they officially be considered non-residents.

Unfortunately, California isn’t the only state collecting taxes from former or part-time residents.

During the 2013 legislative session, Minnesota Governor tried to push a “Snowbird Tax” –legislation that would tax all forms of income from non-residents spending at least 60 days in the state – through the state legislature. While that punitive piece of legislation failed to pass, the governor did sign into law an income tax hike that raised the top marginal income tax rate from 7.85 percent to 9.85 percent: the fourth-highest income tax rate in the nation.

However, the most significant tax-related decision came from Minnesota’s judicial branch.

In addition to Governor Dayton and the state legislature increasing the price on work in the Gopher State, a ruling by the state’s Supreme Court in the case of William D. Larson v. Commissioner of Revenue destroyed any and all thoughts that one could keep even one foot in Minnesota without paying the state’s taxes.

In this particular case, the Department of Revenue (DOR) was able to get the court to rule in its favor because it was able to point out that Mr. Larson, the plaintiff in this case, continued business dealings, owned several properties and registered vehicles, and had most of his attorneys, accountants, doctors, and active bank accounts in Minnesota despite living, voting, and working in Nevada (a no-income-tax state) over 183 days per year since 1980. Other factors used in the suit against Larson were his doctors’ visits, received mail, and visits to his grandchildren, all in the state of Minnesota. Thus, he was held responsible for paying $2.5 million in income taxes to the state.

So what is the significance of this legal precedent, coupled with a high state income tax rate? Simple. Minnesota is neither open for business nor willing to let one leave or visit freely.

With a  $4.24 billion in annual adjusted gross income (AGI) leaving Minnesota between 1992 and 2011 (according to Internal Revenue Service data contained within my book How Money Walks), it is no surprise that lawmakers are seeking to keep more working wealth from leaving the state by any means possible. The fact that the DOR used a man’s visits to his grandchildren and doctors against him to claim more revenue for the state is enough evidence of this claim. Rather than using higher tax rates and the courts to balance these losses, Minnesota should go the way of Wisconsin and Michigan and cut taxes –states that are experiencing surpluses in the hundreds of millions of dollars for the first time in years, as well as overall economic growth – rather than California. Regardless of the path they choose, forcing former and current residents to abandon their Minnesota roots only hurts Minnesota as jobs, entrepreneurs, philanthropists, businesses, and working wealth will only seek a quicker exit to states with friendlier tax climates.