May 21, 2007
Do state taxes really make the wealthy walk?
This op/ed, by Charlie Quimby and Dane Smith, appeared in the May 20, 2007 Minneapolis Star Tribune.
The rich are leaving! The rich are leaving!
We all heard those dire warnings trotted out to justify Gov. Tim Pawlenty's veto last week of an income tax increase on the wealthy that would have provided property tax relief.
If Minnesota raises the top income tax rate, goes this refrain, wealthy citizens will flee the state, businesses will take jobs elsewhere, and entrepreneurs will be discouraged from coming here.
Seductive low-tax states like Florida, Texas and Arizona are primed to pluck more of our most prosperous retirees, like the recently departed executive Bill Cooper. South Dakota is preparing welcoming parties for our beleaguered businesses. And thanks to the veto, we were spared the spectacle of caravans of limos, Hummers and Citations streaming over our borders -- "The Grapes of Wrath," Château-Lafite-Rothschild-style.
But is it true?
Call it tried but not true, lacking in foundation. It's a worn-out argument that has always been thrown up against a more progressive tax system. But unless you already believe that taxes are the root of all evil, it's impossible to look at the evidence and conclude that an income tax increase at the top would set off a massive millionaire migration from Minnesota.
Take businesses leaving the state. It is such a nonproblem, the Department of Employment and Economic Development doesn't even track business departures. When it did measure business outmigration, for nine years in the 1990s, Minnesotans paid higher income taxes and about 1.5 percent more of our income for government services than we do today. If businesses were going to flee the state because of taxes, that was the time to do it.
Yet during that period, only 95 manufacturers moved out of state, totaling an approximate peak employment of fewer than 5,000 workers. Over the same nine years, Minnesota gained nearly 400,000 jobs. In 1996, when our price of government was near its all-time high, we ranked ninth among states for business expansions and 48th for business dissolutions. In other words, high-tax Minnesota offered very good conditions for business success.
A 1997 study by the conservative Center of the American Experiment identified 279 Minnesota manufacturing firms that had relocated, expanded or started business outside the state over a 27-year period. Ninety-six could not be found at the time of the study, so presumably some of the transplants did not go well.
Was income tax a factor? The study doesn't answer the question directly. But more than half the companies cited moved to Wisconsin and Iowa, where income tax rates were not much different from Minnesota's.
What about small, nonmanufacturing businesses? Assistant House Minority Leader Brad Finstad, R-Comfrey, warned that the Legislature's proposal to raise the marginal tax rate on individual incomes above $226,000 "will affect 59 percent of Minnesota small-business owners and employers."
The effects will mostly be fright from overheated rhetoric.
Small-business owners typically report business income as personal income. In 2004, less than 4 percent of such returns filed in Minnesota reported more than $200,000 adjusted gross income from a business.
Small businesses typically rely on local connections -- their social networks, proximity to thriving companies and potential collaborators, intimate understanding of customers and ability to find good employees. How many successful owners would risk uprooting themselves from the source of their prosperity to save a few bucks on taxes?
It's true that Minnesota has a slight outflow of income due in part to migration by more prosperous retirees, but it's a negligible 3.5 cents for every dollar of income growth enjoyed by nonmovers. We know snowbirds fly south, and some of them stay. But do our higher-income tax rates drive Minnesotans out?
In 2005, Growth & Justice studied the question nationwide. We found no clear pattern of dollars flowing away from states with high income taxes to states with low or no income taxes. The reality is, people and income flow both ways, and the patterns appear relatively constant over time.
Of the top 10 gainers, the states were a mixed bag on taxes, but all featured either warm weather or mountain views. Four of the 10 highest-tax states, including Oregon, with the highest income tax rating in the nation, gained income from migration. The states that lost proportionally the most income to migration were mostly low-tax states. Separate studies by Wisconsin and Iowa also concluded that tax levels appear to have no effect on the migration patterns of seniors.
As of 2006, Minnesota still had not experienced a serious millionaire drain, ranking 15th in millionaires per 1,000 households. Five no-tax states ranked lower, and only no-tax Florida and Alaska ranked higher.
To be clear, we are ridiculing only the false claims made on behalf of successful Minnesotans. The state benefits greatly from their talents, their investment and their philanthropy, and we would not support a tax policy that did in fact drive them away.
Despite what the antitax echo chamber tells us, the world does not revolve around taxes. Life changes -- college graduation, decisions to have children, job opportunities and retirement -- are the real sparks to decisions about leaving a place. And good schools, access to health care, quality employers, functional infrastructure and a pleasant environment are reasons for staying.
We are already investing less of the state's income in maintaining these underpinnings of prosperity. If you think hanging onto a few retiring millionaires will keep Minnesota great, then there's some land in Florida you might want to buy.
Note: A related report from the Center for Budget and Policy Priorities says research casts doubt on the argument that estate taxes harm state economies.
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