How Money Walks in Minnesota

Minnesota’s Population Migration

Minnesota’s Income Migration

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Numerous states are turning to their income tax codes to find an advantage as they try to lure jobs and people – and to maintain the wealth and residents that they currently have. As this year’s legislative session drew to a close, Minnesota missed a tax-reform opportunity. Instead, it 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. By taking a close look at real tax reform, Minnesota could significantly improve its economic future.

Each year, the IRS collects data of where people live and how much they earn – and using this data allows us to show the migration of wealth from state to state, and county to county. 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.

It’s no surprise that Minnesota lost much of its wealth to states with no income tax.

Minnesota Lost Wealth To:

$2.139 billion              Florida (no income tax)

$1.006 billion              Arizona (no income tax)

$373.63 million           Wisconsin

$365.49 million           Texas (no income tax)

$356.51 million           California

Minnesota can’t halt brutal winters. It can’t dramatically boost its tourism industry. But chopping down the top income tax rate could attract more defectors from nearby high-tax states, and keep earners who are more concerned about the tax climate.

Minnesotans may feel like their income tax is nowhere near the likes of California, but the top rate of 9.85 kicks in for incomes of $150,000, making the state unattractive to small business owners and professionals. The next-highest rate, 7.05 percent, kicks in at just $35,481. In California, that income would be taxed at 6 percent.

In a recent Minneapolis Post article, government reporter Steven Dornfeld writes:

“Mark Haveman, executive director of the Center for Fiscal Excellence, says his biggest concern is the impact of the increased income tax on Minnesota’s ability to attract new businesses and jobs.

“How many CEOs are ‘going to look at a 9.85 percent income tax rate and decide this is probably not the best place to expand?’ Haveman says. ‘We think this bill is a very big bet on the irresistibility of Minnesota as a place to do business.’”

By 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 Minnesota’s tax burden as the sixth-highest in the nation. South Dakota, on the other hand, is ranked as the state with the second-lowest tax burden.

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.

While Minnesota’s legislators will undoubtedly work hard to find the right balance that protects their state obligations with the cuts they hope to accomplish, it’s worth noting that slow or no growth has a fiscal cost, too. Over time, people’s choices of where to locate mean lower revenues, fewer jobs, and less investment for a state that is not competitive.

For a state with a diverse economy and a number of publicly traded companies (including Target, General Mills, Best Buy, and UnitedHealth Group), Minnesota could find a great advantage in relying more on sales tax. In fact, Governor Mark Dayton proposed expanding the sales tax to clothing and services. Unfortunately, he abruptly abandoned this plan, which would have made the sales tax and even more stable revenue source.

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 dynamic approach to real tax reform would expedite Minnesota’s success. At How Money Walks, we are looking forward to seeing what the Land of 10,000 Lakes can accomplish.