Minnesota Needs Tax Reform: An Open Letter to the Grand Forks Herald

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Regardless of topic, a good media report should begin with the facts – which makes this May 25 Grand Forks Herald article a bit tenuous from the start. The story claims that high income tax rates do not correlate to people moving to lower-tax states. However, this statement is based on unnamed “studies,” with no hard data to back it up. That’s bad news for Minnesotans trying to make an informed decision about where to live and work.

The good news: We don’t have to rely on vague studies and guesswork, because we have unimpeachable Internal Revenue Service and United States Census Bureau dating back to 1995. After analyzing 134 million individual taxpayer records for our How Money Walks book and applications, we learned that people certainly do move to low- or no-income-tax states, where they can earn, save, and re-invest more money.

As the Herald article itself noted, Minnesota has the fourth-highest income tax rate in the entire nation. At the end of this year’s legislative session, Minnesota further cemented its reputation as a high-tax state; under the new state budget, the top tax rate in Minnesota is now a whopping 9.85 percent, a full two percentage points higher than the previous 7.85 percent.

What might happen now that Minnesota’s top income tax is near 10 percent? Here, the IRS and U.S. Census Bureau data can be very illuminating. An examination of this data, collected over the 15-year period between 1995 and 2010, shows that Minnesota lost more than $4.1 billion in net adjusted gross income – and that’s before the recent hike.

Money goes where it is treated best, so it’s no surprise that Minnesota lost much of its wealth to states with no income tax. Over that fifteen-year period, Minnesota lost $2.139 billion to Florida (no income tax), $1.006 billion to Arizona (no income tax) and $365.49 million to Texas (no income tax there, either).

The Herald article claims there is no correlation between high taxes and people moving to lower-tax states, but the numbers show otherwise. The top rate of 9.85 percent kicks in at an income level of $150,000, making Minnesota unattractive to small business owners and professionals. What’s more, those who do stay in Minnesota may offset their losses by reducing their charitable giving to philanthropic organizations. When a state’s too-high income tax affects the bottom line of nonprofits, no one wins.

By way of contrast, Minnesota’s neighboring state of South Dakota is gaining both wealth and residents, thanks largely to its income tax rate of zero percent. The nonpartisan Tax Foundation ranks South Dakota as the state with the second-lowest tax burden in the nation.

Between 1995 and 2010, Minnesota lost $174.2 million to South Dakota. This figure is particularly staggering when we consider the fact that Minnesota’s population is nearly 6.5 times larger than South Dakota’s. Clearly, wealth in the Upper Midwest is going where it is treated best – to a no-income-tax, pro-growth state like South Dakota.

In order to be competitive, Minnesota must work toward real reform that does not disproportionately punish work. The state’s diverse economy and world-class institutions should make it an attractive place for families and businesses, and a dynamic approach to real tax reform would expedite Minnesota’s success.