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

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.

	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

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.