Middle Class Income Tax Competitiveness: How Do Minnesota's Paychecks Compare?

Gains in technology, manufacturing, and business service jobs don't always correlate with where the cheapest sources of labor are, or where the smartest sources of labor are, but rather where wage income can go the furthest. This article from our September-October 2012 edition of Fiscal Focus looks at where Minnesota ranks on this topic and how the personal income tax influences that rank.

Middle Class Income Tax Competitiveness: How Do Minnesota’s Paychecks Compare?

“The best prospects for the future lie in places that both experience income and employment gains but remain relatively affordable…Maintaining affordability and a wide range of high-paying jobs many not be as glamorous a metric for success as the number of hip web startups or the concentration of educated people. But over time it is likely to be about as good a guide to future prospects as we have.”

- The Cities Where a Paycheck Stretches the Furthest,” New Geography , July 2012

It’s generally accepted that labor force is sues are always near or at the top of the list of site factors businesses consider when locating or expanding operations. Labor cost and workforce education are the two factors most commonly cited, and a substantial body of academic research has explored the relationship between these factors and eco nomic growth.

But according to the always interesting web-venture New Geography, rapid population growth, strong domestic in-migration, and resulting gains in technology, manufacturing and business service jobs don’t always correlate with where the cheapest or the smartest sources of labor are. Often, this economic growth is occurring instead where wage income can go the furthest. From both an employee and employer perspective, it’s easy to see how this can be a very powerful consideration for siting decisions and for attracting top talent.

New Geography identified the average wage for the top 50 metropolitan statistical areas (MSA) in the country and the District of Columbia, and then adjusted those wages using cost of living data – which accounts for items such as consumer prices and services, utilities and transportation costs and, most importantly, housing prices. The results provide a purchasing power perspective on wage income. Not surprisingly, the cost of living can have major effects on the relative economic attractiveness of a location. For example, the average wage for the San Francisco MSA ranked third in the nation at nearly $70,000. But thanks to legendary housing prices, San Francisco’s cost of living-adjusted average wage rank plummeted 36 spots to 39th in the nation.

Table 1

Metropolitan Pay Per Job 2011 - Adjusted for Cost of Living and State Income Taxes

Metro Area Average Wage State Income Tax Average Takehome Wage COL Adjusted Average Takehome Wage Rank
Birmingham, AL 46,381 1,553 44,828 50,596 16
Phoenix, AZ 48,022 1,154 46,868 48,568 20
San Jose, CA 92,556 4,816 87,740 58,377 2
San Francisco, CA 69,041 2,719 66,322 44,407 40
San Diego, CA 54,985 1,947 53,038 40,611 46
Los Angeles, CA 55,191 1,957 53,234 40,085 47
Riverside, CA 41,825 1,354 40,471 36,006 49
Denver, CO 54,991 2,012 52,979 50,456 17
Hartford, CT 61,551 2,878 58,673 47,393 31
Washington, DC 71,180 3,709 67,471 49,575 19
Tampa, FL 44,218 0 44,218 48,168 21
Jacksonville, FL 44,840 0 44,840 47,753 27
Orlando, FL 41,932 0 41,932 43,096 41
Miami, FL 45,022 0 45,022 41,286 44
Atlanta, GA 50,273 2,172 48,101 49,743 18
Chicago, IL 56,246 1,627 54,619 50,903 14
Louisville, KY 45,832 2,250 43,582 47,526 28
New Orleans, LA 50,046 1,346 48,700 50,941 13
Baltimore, MD 54,980 2,014 52,966 44,547 39
Boston, MA 66,438 3,182 63,256 46,071 35
Detroit, MI 53,424 2,167 51,257 54,703 5
Minneapolis, MN 55,300 2,765 52,535 47,522 29
St. Louis, MO 48,638 1,760 46,878 51,458 12
Kansas City, MO 49,390 1,788 47,602 47,889 23
Rochester, NY 47,228 2,324 44,904 45,542 36
Buffalo, NY 46,210 2,255 43,955 44,579 38
New York, NY 69,029 3,486 65,543 42,352 43
Las Vegas, NV 44,910 0 44,910 44,865 37
Charlotte, NC 51,143 2,869 48,274 51,741 11
Raleigh, NC 47,577 2,694 44,883 47,850 25
Cincinnati, OH 49,886 1,444 48,442 53,000 9
Columbus, OH 48,483 1,384 47,099 52,158 10
Cleveland, OH 49,531 1,429 48,102 47,438 30
Oklahoma City, OK 44,852 1,866 42,986 46,980 34
Portland, OR 49,472 3,106 46,366 40,815 45
Pittsburgh, PA 49,717 1,526 48,191 50,834 15
Philadelphia, PA 57,745 1,773 55,972 47,840 26
Providence, RI 47,862 1,568 46,294 36,859 48
Memphis, TN 48,025 0 48,025 55,908 3
Nashville, TN 48,343 0 48,343 53,595 8
Houston, TX 59,838 0 59,838 66,933 1
Dallas, TX 53,453 0 53,453 55,564 4
Austin, TX 50,422 0 50,422 54,393 6
San Antonio, TX 43,920 0 43,920 47,175 33
Salt Lake City, UT 47,064 2,315 44,749 47,304 32
Richmond, VA 50,198 2,215 47,983 47,935 22
Virginia Beach, VA 46,934 2,096 44,838 42,581 42
Seattle, WA 60,123 0 60,123 53,874 7
Milwaukee, WI 50,183 2,668 47,515 47,850 24
Table 1: Notes
  • New Geography had no data available for the Indianapolis and Sacramento MSAs. Source: New Geography with tax calculations by MTA.

Living up to its reputation as a high-income state, the Minneapolis-St. Paul MSA average wage ranked 12th nationally. That’s certainly not surprising given that we are the 10th in most college educated metro area in the nation.1 However, according to New Geography, Minnesota’s relatively high cost of living takes a major bite out of our wage competitiveness pushing us to the middle of the pack – 23rd nationally.

But there is another paycheck-related consideration that this cost of living analysis does not include: the state individual income tax. To include this important factor, we scaled the taxpayer profiles supplied by the Minnesota Department of Revenue for MTA’s biennial income tax burden comparison study to the wage amounts used by New Geography. We subtracted the state-level income tax burden from wages and then applied the appropriate cost of living adjustment to derive the after-tax adjusted wages.

The accompanying table shows that after factoring in the effect of state income taxes, Minnesota’s ranking falls an additional 6 spots to 29th in the nation. With the 8th highest individual income tax burden on the average wage, Minnesota’s new adjusted average wage of $47,522 is now about 1.5% less than the unweighted average of all the MSAs. In fact, the drop of 6 spots in the ranking is the largest income tax-induced decline in the nation.

Caveats for interpretation and conclusions abound. Income taxes are obviously not the only taxes that individuals pay, and including the full range of taxes on individuals – sales, property, and the like – would likely jumble the findings further. Ironically, from an individual taxpayer’s perspective, Minnesota’s primary source of tax advantage nationally is likely to be the property tax – something you would never expect listening to the political rhetoric today.

The rankings also would likely be different at different income levels as the unique structure of each state’s income tax system comes into play. And, of course, there is the never-ending debate over societal and quality of life returns from the public sector spending that this taxation makes possible. Undoubtedly, many Minnesotans would never want to embrace the more libertarian lifestyle of, for example, Houston, regardless of potential pocketbook gains.

But as another round of tax reform debate looms on the horizon, findings such as these deserve consideration. The competitiveness principle, most often associated with business taxation, applies no less to individual income taxation. We will have much more on this in a forthcoming study on state competitiveness in January.

To date, the debate surrounding higher individual income taxes has seemingly centered around the narrow issue of whether or not Minnesotans would leave the state. What New Geography and a number of academic research studies suggest is that our focus should be the other side of highway – the implications for potential talent and businesses entering the state.

As one study has described it the effect of the personal income tax on economic growth is a potential “double edged sword.”2 All else equal, higher individual income taxes create an incentive for individuals to apply their talents elsewhere. But if employers compensate employees for the higher burden with higher pre-tax wages to level the playing field, their labor costs go up and the case for expanding and growing business within Minnesota becomes that much more challenging.

  • 1 “A Gap in College Graduates Leaves Some Cities Behind” New York Times, May 30, 2012
  • 2 Mark Rider, The Effect of Personal Income Tax Rates on Individual and Business Decisions – A Review of the Evidence, Working Paper 06-15, Andrew Young School of Policy Studies, Georgia State University.