Another Salvo in the Tax Flight Debate

A recently released report by the Center for the American Experiment has triggered another firestorm about tax induced migration out of Minnesota.  The Center concludes Minnesota has lost nearly $8 billion in household income to other states over the past dozen years due to our tax policies.  Critics have dismissed the study as a misuse or misinterpretation of IRS data.

As we understand this IRS database, it only measures income before migration, not afterward.  This presents a challenge attempting to assess income movement between states.  If say someone leaves a $100,000 year job in Minnesota and moves to Florida, the IRS reports Minnesota losing $100,000 —with Florida presumably gaining that income.   But if that person has retired with $50,000 in retirement income, both Minnesota’s loss and Florida’s gain are overstated by 50%.   Plus, as critics of the report have noted, that Minnesota-based job is still there – presumably filled by a Minnesotan (current or new) – and so the income hasn’t really “moved” at all.

But the report does communicate important information and analysis about “who” is moving and the scale of this migration.  And while the specific premise of quantifying actual income loss is problematic, the underlying fundamentals and scale of Minnesota interstate migration do raise important policy issues – including how our tax policies are affecting these patterns.

In any event, this issue is not going away.  Here are three ideas to guide the next round of debate on this topic:

Taxes matter in that they incentivize behaviors, and that fact alone deserves just as much attention as any elusive pursuit of “causality.”  Pretty much everyone concedes that taxes enter into decision-making considerations.  “Proving” actual tax induced flight is exceptionally difficult.  But that fact doesn’t disprove the reality that the existing income and estate tax regimes in Minnesota create incentives for decision-makers to move capital and/or tax base.

Minnesota’s concerns about taxpayer mobility should not start and end with net tax revenue.  There seems to be a rather cold calculus lurking behind the debate over income and estate tax policies: it’s acceptable to lose some high net worth individuals because the loss of tax revenue from those who do leave will be more than offset from revenue gained by those who stay.  Such a perspective may be a little too myopic for the state’s own good because those households contribute more to the state than just tax dollars.  Philanthropy, volunteerism, professional networks and relationships – all these are part of our fabric and also a key to our success.

Sometimes it’s just as important to watch and listen to what is going on around you.  Evidence-based public policy is a wonderful thing.  But in many circumstances political timeframes and required research timeframes don’t line up.  By the time evidence arrives, the impact has been felt.  This is especially true in “tax-induced migration” studies where the investigations typically involve a decade or more of data.   What people are seeing and doing in the present is just as important as paying attention to academic studies exploring what people have done elsewhere in response to taxation in the past.

While this latest report may not be the slam-dunk evidence some are hoping for, the CAE findings on the socioeconomic classes of migration and the scale of migration are very much worth pondering.  And these findings do line up with other evidence – anecdotal though it may be.  We have a lot of tax lawyers and accountants in our membership base.  When we hear their stories about how business is booming for their planning services, we can’t help but take concerns about tax-related flight seriously.