News & Updates

New data from the Minnesota Department of Revenue (MDOR) shows a significant increase in the number of very high-income taxpayers and the income taxes paid by them in the year following enactment of a new “top tier” income tax rate targeted at households with taxable income in excess of $250,000 for married joint filters, $200,000 for heads of households, and $150,000 for single filers. This new information flies in the face of claims from conservative groups that high-income households have fled Minnesota in response to the new top tier income tax rate enacted in 2013.

As reported by the Star Tribune in a May 8 article:

“The latest data [from MDOR] show that the number of people who filed tax returns with over $1 million in income grew by 15.3 percent in the year after the tax passed, while the new top tier of taxpayers grew by 6 percent. No doubt wealthy Minnesotans have changed their residency since 2012, but either more have moved in or more who were already here gained enough income to reach the top bracket.”

High-income tax filer graph

New MDOR data on the number of top tier income tax filers in 2014 and the number of filers who would have been in the top tier had it existed during the period from 2007 to 2013 reveals that the number of filers who would have been in the top tier actually decreased from 2012 to 2013. Meanwhile, the number of top tier filers increased from 2013 to 2014—the year in which the higher tax rate on top tier income took effect. The increase in top tier filers from 2013 to 2014 (6.0 percent) was approximately six times greater than the average annual increase in the number of these filers over the preceding six years; approximately half of the growth in top tier filers between 2007 and 2014 occurred from 2013 to 2014—the only year that the new top tier rate was in effect.

Total Minnesota individual income tax collections increased by $647 million (7.2 percent) from FY 2013 (the fiscal year in which the income tax increase was enacted) to FY 2014, which was over $100 million more than the increase anticipated when the income tax rate hike was enacted in May of 2013. Based on new data from MDOR, income tax revenue collected from the new top tier increased by 14.7 percent from 2013 to 2014.

The strong growth in the number of top tier filers and the income taxes paid by them in the first year that the new top rate was in effect would appear to belie claims of massive tax flight alleged by conservative groups. Much of the evidence of tax flight consists of anecdotal accounts from accountants and financial advisors who cite individuals who say they are leaving the state because of taxes. However, little effort is made to ascertain the extent to which taxes actually impacted the departure decision. According to the Star Tribune:

“Pressed to provide examples of the very rich who moved to other states because of Minnesota’s high taxes, neither the Minnesota Chamber of Commerce nor the Minnesota Business Partnership—two of the loudest voices for lower taxes in the Minnesota debate—could find someone who would speak to the Star Tribune about their decision.”

The number of high-income tax filers and the amount of income taxes paid by them vary from year to year for a variety of reasons—most of which have little or nothing to do with interstate migration by taxpayers. Chief among the reasons affecting changes in the number of high-income filers are general trends in the national economy, especially the performance of the stock market.

The Star Tribune also notes:

“Between 1997 and 2013, the longest timeframe for which the Internal Revenue Service provides state-by-state data, Minnesota added 3,203 households that earn more than $1 million per year. That was a better rate of growth than Michigan or Arizona, lower-tax states.”

Citing information from the Center on Budget and Policy Priorities, the Star Tribune further notes that “People are more likely to move from Florida, which has no income tax, to Georgia, North Carolina and nine other states that have an income tax… And Arizona, with an income tax, draws nearly as many migrants as Texas and more than Nevada, which are both free of income tax.”

A report from the conservative Center of the American Experiment (CAE) purported to show massive flight of income from Minnesota since 1991. However, a North Star analysis showed that the CAE report, apart from failing to measure the actual exit of income from Minnesota, overlooked the fact that most of the alleged income migration occurred during a period when state fiscal policy was dominated by a conservative “no new tax” agenda. Similarly, the Star Tribune found that while Minnesota lags behind neighboring states in terms of growth in the number of extremely high income households, that trend long predates the enactment of the new top tier income tax rate, reaching far back into the fiscally conservative Pawlenty administration.

All of this supports testimony given by North Star earlier this year to the House Tax Committee that patterns of migration from Minnesota “does not coincide with changes in state tax policy, but does coincide with the trend of an increasing number of baby boomers reaching retirement age [and seeking to relocate to warmer climes]” or with broader economic trends.

The new MDOR data provides strong support that the 2013 tax increase has not resulted in significant tax flight from Minnesota. In fact, given that Minnesota outperforms neighboring states in terms of job, income, and GDP growth, the 2013 tax changes may have actually strengthened Minnesota’s economy by allowing new investment in education, infrastructure, affordable housing and health care, and other critical state and local government services.

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