By Annette Meeks, CEO of the Freedom Foundation of Minnesota.
The latest revenue forecast for Minnesota's state budget revealed that the discussion at the Legislature this session will be the same song, second verse: Lawmakers are once again forced to deal with an additional $1.16 billion budget shortfall for the current biennium. While this lengthy recession drags on, Minnesota's budget mess continues to dominate the work at the State Capitol. And lawmakers remain deeply divided about how much Minnesotans, especially the highest earners, should be taxed.
On one side of this argument, we have a candidate for governor who believes that we need to "tax the rich" to solve Minnesota's budget problems. Former Sen. Mark Dayton (and DFL candidate for governor) argues that wealthy Minnesotans should pay their "fair share," which he believes would justify a 40 percent income tax increase on top earners in the state. Dayton's plan would increase the top income tax rate to 12.1 percent and give Minnesota the dubious distinction of having the top state tax rate in the nation. Others, including Gov. Tim Pawlenty, believe that Minnesotans are already taxed too much and that additional income taxes would only serve to drive additional Minnesota taxpayers out of the state -- turning snow birds into tax birds who build their nests in sunnier climates with lower personal income tax rates.
With this as background, the Freedom Foundation of Minnesota commissioned a report that examines what happens to state and local revenue when Minnesotans vote with their feet and move to a state with lower taxes. What we found was astonishing.
From 2002 to 2009 Minnesota lost an estimated 54,000 residents to other states. These out-migrants take their incomes with them -- and not just for the year they move, but for every year thereafter. According to the IRS, the total amount of income leaving the state was in excess of $3 billion, on which state and local governments would have collected an estimated $423,317,000 in additional taxes. That money would go a long way toward solving our current budget deficit. As a matter of fact, 70 percent of Minnesota's anticipated $1.16 billion state budget shortfall in is due to lower individual income tax collections.
So where are Minnesotans moving, and why? According to the Internal Revenue Service, between 1995 and 2007, the top five destination states were Florida (21,256), Arizona (19,605), Wisconsin (9,449), Colorado (6,894) and Texas (6,551) -- states with far more competitive tax structures. Income departed from Minnesota every year -- even in years when more people moved in to Minnesota than moved out. This last fact suggests that people with higher-than-average incomes have been exiting the state and leaving the rest of us with ever-increasing tax bills to pay.
What can policymakers do to stop this out-migration? For starters, we need to understand why folks are leaving the state -- that's the first step in reversing this trend. One way to do this is to compare various aspects of Minnesota with those of destination states. The data shows that people with higher-than-average incomes are leaving Minnesota for states where taxes are lower (especially income taxes), union membership is lower (an economic indicator used to calculate the cost of doing business in the state), population density is higher, cost of housing is lower and the weather is warmer.
While the Legislature can't do much about the climate, most of these variables can and should be addressed by policymakers on an annual basis to stop the out-migration of Minnesotans. Specifically, tax burdens can be reduced. By reducing tax burdens via reductions in the income tax, we would encourage people and their incomes to stay in Minnesota -- or even encourage migrants from high tax states to venture into Minnesota as a friendly state to live, raise a family and start a new business.
Without action, out-migration will surely continue and may become especially pronounced as the bulk of the Baby Boomer generation approaches retirement age and decide to leave for sunnier states where their retirement incomes will last a little longer. This continued out-migration will also guarantee that our current state budget deficits become a permanent problem for future policymakers to wrestle with.
Instead, we hope that this report will spur legislative discussion and action to ensure that Minnesota's economy remains strong, vibrant and welcoming for many more generations who call this state home. We can move toward that goal by reducing income taxes -- an important first step to ensure Minnesota's future economic viability.
Annette Meeks is founder and CEO of the Freedom Foundation of Minnesota, which describes itself as an independent, nonprofit educational and research organization that actively advocates the principles of individual freedom, personal responsibility, economic freedom and limited government.