No Evidence Taxes are Driving People Out

61056391_31343afdc6_bA new report from the right wing Center of the American Experiment (CAE) contends that Minnesotans are leaving the state in droves—a phenomenon referred to as “income migration.” The culprit—according to the report—are those hateful Minnesota taxes.

A recent post from the Minnesota Budget Project points out that the data used in the CAE report does not measure tax migration at all, because the jobs and business activity that departing households leave behind are largely taken over by other Minnesota workers and businesses. Even if we make the charitable and unwarranted assumption that the CAE report is measuring what it purports to measure, the report’s own internal logic does not support its conclusions.

For starters, the CAE report contends that many of the taxpayers leaving Minnesota are in their prime earning years. That being the case, there is a strong chance they are leaving because of Minnesota’s extremely low 3.7 percent unemployment rate, which limits opportunities for new employment. To some extent, Minnesota may be the victim of its own success in producing one of the lowest unemployment rates in the nation.

Weather also plays a role in location decisions. The report contends that Minnesota income is fleeing to low tax states. However, among the ten states receiving the largest alleged net migration of Minnesota income, 82 percent of the income is going to states with an average January temperature of 40 degrees or above (compared to 8 degrees in Minnesota). Florida beats neighboring South Dakota by a ten-to-one margin as a net recipient of alleged Minnesota income migration, even though South Dakota has a slightly lower “state and local tax burden” than Florida, according to the CAE report. Gosh, do you think weather might have something to with so many more households choosing Florida over South Dakota?

The appeal of warm weather states is likely to increase as baby boomers move toward retirement; this trend—likely more so than tax differentials—explains why the level of alleged income migration has increased each year since 2010.

The report claims that Minnesota has lost “a net total of $7.6 billion in household income to other states” during the period from 1992 to 2014. We need to remind ourselves who was in charge of state fiscal policy over much of this period. From 2003 to 2011, the state fiscal policy was dominated by an anti-tax, anti-investment philosophy. Even the first two years under Governor Dayton were fiscally austere, as the Governor largely capitulated to conservatives to end the state government shutdown. During this ten-year span (FY 2003-2013), real per capita state general fund spending fell by 20 percent and real per capita state and local spending fell by 11 percent.*

And the ten-year period when Minnesota finances were dominated by the “no new tax” crowd is precisely when the bulk (56 percent) of the alleged $7.6 billion net income migration occurred. The ideological blinders with which the CAE report was written prevent the authors from exploring the extent to which conservative fiscal strategies contributed to the outcomes they decry.

Not surprisingly, the report lays the blame for the $247 million increase in Minnesota’s alleged net income migration from 2012-13 to 2013-14 upon tax increases in the 2013 tax act. However, the growth in net year-to-year income migration was nearly as large in the preceding year ($207 million), when anti-tax policies prevailed. As noted above, the growth in alleged net income migration over time likely has more to do with the wave of baby boom retirees and the appeal of warm weather states than to the vagaries of interstate tax differentials.

Furthermore, the report ignores the fact that the net impact of the three tax acts passed during the 2013 and 2014 legislative sessions likely reduced combined state and local taxes for most Minnesotans,† although the acts nonetheless generated significant new revenue by concentrating tax increases at the top of the income spectrum, where income is most heavily concentrated. It is hard to see how these tax acts could have caused massive tax flight of “working age people” when their net effect was a tax reduction for the majority of Minnesotans.

If Minnesota has truly hemorrhaged taxpayers as a result of the 2013 tax act, the impact should have been seen in lower than expected state tax collections. In fact, state tax collections have exceeded the amounts anticipated at the time of the passage of the 2013 tax act by more than one-half billion dollars (from 2 to 5 percent) in each fiscal year since passage of the act and are projected to continue to exceed 2013 expectations by similar margins through the end of the current biennium. It is hard to see how projections could have been met and surpassed to the extent they have been if the 2013 tax act was responsible for such a large “exodus of citizens from Minnesota.”

Since passage of the 2013 tax act, Minnesota has surpassed adjacent states in terms of job creation, personal income growth, and GDP growth. Since these conventional measures of economic performance do not make the case that the 2013 tax act has been ruinous to Minnesota’s economy, the CAE report trots out a new criterion: income migration. But even if the CAE report succeeded in measuring income migration (which it has not), the assertion that the alleged migration is the result of Minnesota’s tax climate falls flat. Most damning to this assertion is the fact that most of the alleged income migration occurred while anti-tax, anti-investment state policymakers were running Minnesota fiscal policy.

To some extent, tax levels do impact behavior. But so does the quality of public services and infrastructure. Minnesotans should not let unsubstantiated allegations of tax flight deter them from making the smart public investments necessary to move the state forward.

 

 

*This is based on a comparison of per capita state and local government general expenditures compiled by the U.S. Census Bureau and adjusted for inflation using the Implicit Price Deflator of State & Local Government Purchases. Because FY 2003 Census state and local finance data was not published, this comparison is based on FY 2002 and FY 2013 data.

 

†This conclusion is based on an incidence analysis of the 2013 tax act and a separate analysis of the two 2014 tax acts, both from the Minnesota Department of Revenue. These MDOR incidence analyses report average effective tax rates within specific income ranges, not the impact on specific households, so based on these analyses it is not possible to identify with precision the number households that experienced a tax increase or decrease as a result of the 2013 and 2014 tax acts. However, based on a careful examination of these analyses, it is likely that a majority of middle-income taxpayers experienced a tax reduction as a result of the 2013 tax act and that a majority of all taxpayers experienced a tax reduction as a result of the combined impact of the 2013 and 2014 tax acts.