A Closer Look at Some Recent Migration-Related Concerns

Recently, CNBC’s annual “Best States for Business” report bestowed on Minnesota the enviable ranking of fifth in the nation.  This accomplishment was made possible by top ten scores in technology and innovation, infrastructure, and quality of life which managed to offset distinctively below average grades in cost of doing business, business friendliness, and access to capital (or “what truly matters to business” in the words of one state business leader questioning the weighting measures employed).¹  

Hot on its heels came a couple reports casting a less glowing light on matters pertaining to the state’s current and economic future.  Both of these had to do with the issue of population migration.  The first is a research report by Smart Asset, picked up by CNBC and some local media as well, examining high income household migration (defined as adjusted gross incomes exceeding $200,000).  Based on the latest migration data from the IRS, the study found Minnesota had the 8^th highest net out-migration of these households in the nation -- a net loss of 1,453 of such filers in the 2021 tax year. 

Shortly thereafter, a news report highlighting a different migration matter made headlines in the Star Tribune:  the continuing loss of college age students from the state.  The article noted college age students make up nearly two-thirds of the Minnesota’s annual net loss in domestic migration casting an economic shadow in an era of tight labor markets and aging populations.

Diving a little deeper into the issues and the data reveals some interesting nuance and findings with potential considerations for policy-making. We took a closer look at both.

The Significance of “Net”

The ranking measure used by Smart Asset -- the absolute amount of net domestic migration of $200,000 -plus incomes -- is eye-catching but potentially a bit distorting because it focuses on absolute rather than relative changes.   The fact is half of all the $200k and above filers in the entire nation reside in these top 10 “losing” states which are some of the nation’s highest income states.  As a result, we revised this state migration measure by calculating net migration totals as a percentage of the $200k and above filers in each state.   This provides a better perspective on the relative magnitude the net migration represents.   We calculated separate relative rankings for both state in-migration and out-migration to highlight the relative influence of the migration direction in deriving a “net” figure.    We also extended the analysis to a include the 5-year trend.

A note on the data source.  IRS Statistics of Income data on state migration is based on year-to-year address changes reported on individual income tax returns filed with the IRS.  Tax returns are matched for two consecutive calendar years based on the filer’s taxpayer identification thus capturing both inflows (the number of new residents who moved to a state and where they migrated from) and outflows (the number of residents leaving a state and where they went.)  The “$200,000 and above” income threshold is the highest threshold reported.

As we have observed before, some use and interpretation cautions accompany this data.   The most frequent error is to interpret out-migrated adjusted gross income totals as “lost taxable income” to a state (a topic we don’t wade into here).   The other issue, more relevant to this review, is the fact that the many different permutations of exactly when people move and when they file, how they file, and filing status changes between years can have an influence on these reported migration totals.² 

Interstate Migration of High-Income Filers Between Tax Year 2020 and 2021 
Source: IRS Statistics of Income Tax Stats - Migration Data, Gross Migration File

With those caveats in mind, a few “numbers behind the numbers” are worth noting:

• Minnesota has experienced a recent spike in high income filer outmigration.   Minnesota’s 4,068 200k-plus “outflow returns” between 2020 and 2021 represents a 38% increase over the previous four-year average.  There is no readily apparent indication of any pandemic-related influence in these totals.  Yet, 
• Minnesota did a better job of retaining its existing high-income filers than most other states in the nation.   These 4,068 filers that left the state between tax year 2020 and 2021 represented 2.4% of the total population of all 200k+ filers in the state in the previous tax year.   As the accompanying table shows that is actually 9^th lowest percentage in the nation.  (Nevada appears to be revolving door of high-income filers placing in the top 5 in both coming and going.)  Not only is that relative retention better than all the other biggest losing states, it is better than all but one of the top in-migration states.   Between tax year 2020 and 2021, even Florida had a larger share of its $200k-plus filer cohort move out of the state than Minnesota.   This relative national performance holds generally true for at least the five years in our review.
• In stark contrast, Minnesota’s relative in-migration of high-income earners is among the lowest in the nation.   As the table also shows, the 2,615 high earners entering the state constitutes just 1.6% of the previous year’s 200k filer base placing the state 48^th in the nation behind only Illinois and California.    This relative “replacement share” is 61% less than the 50-state average.   As with outmigration, this performance also holds true over time-period studied.   Five years ago, in-migration as a share of the filing cohort was 1.5% or 49^th in the nation.

What to make of this is interesting to ponder.   In Minnesota, approximately 80% of this cohort are filers between the ages of 35 and 65.   These results suggest a strong validation of the findings in Headquarters Economy: Managers, Mobility, and Migration” by Myles Shaver of the University of Minnesota which concluded that the strong managerial talent pool rooted in the state is responsible for the state’s “headquarters economy” and a major contributor to the state’s economic vitality.  With respect to talent migration, Shaver has observed, “When I talk to executive recruiters, they all say one thing: ‘It’s really hard to get people to move to the Twin Cities but it’s about impossible to get them to leave.’"³

The relative importance of this talent retention and development for Minnesota can be seen by comparing cohort growth over time adjusting for migration changes.  Doing so provides a rough estimate of a state’s “home grown” higher income filers over a five-year period.  Minnesota “grew” roughly 11 new high-income filers for every departure during this period.  

Talent pools, however, need to be replenished.  That’s especially true today in the context of aging demographics and tight labor markets.   It’s in this context that the interaction of policies enacted this session on the state’s already poor rates of in-migration deserve some consideration.   For example, this year Minnesota essentially created a sort of “back door fifth tier” in the state income tax by phasing out both itemized and standard deductions faster for households at adjusted gross income levels far lower than what this past session’s proposed fifth tier would have affected.  As a result, the job of executive and talent recruiters likely got a little harder this year, and the wage premiums needing to be paid by Minnesota employers to offer competitive salaries with other states likely got a little bigger.

Does “Ski-U-Mah” Mean “See You Later?”

Talent can also be developed at home which was the focus of a different migration report.  A Star Tribune article, “Minnesota is losing more college students than it attracts, a troubling trend” reported on the state’s largest demographic outflow – 18-24 year-olds – and the ripple effects it may have on the state’s economy in the future.   Comprising nearly two-thirds of the state’s annual loss in domestic migration -- about 8,000 individuals per year -- this out-migration has potentially significant implications for the state’s higher education entities.   According to national education statistics reported by the Strib, Minnesota is only one of 10 states that lose more college students than it attracts, and only seven states had a worse ratio of students moving out to coming in.

While this is understandably disturbing news for the state’s colleges and universities, by itself it does not represent a looming Minnesota brain drain crisis.  That’s because it doesn’t take into account an arguably even more important issue: where graduates migrate (or don’t) to work.   The primary social return on investment from higher education comes from where a degree is eventually put to use in the economy rather than from where it is obtained. 

Most of the research on the relationship between labor markets and higher education has focused on the markets that colleges face for incoming students, not where they ultimately live and work.   The latter has been a much more challenging research task for data reasons.  Taking up this challenge, a swat team of academic researchers and employment research institute professionals conducted such a study employing a novel data source: Linked In.⁴   The result was a new measure of college-specific labor markets for 2,600 public and private non-profit higher education institutions offering at least an associate’s degree -- an investigation covering 99% of the degrees awarded from 2010-2018. 

The findings of this study offer a more positive assessment of the state’s situation.   For starters, those who earned their degrees in Minnesota tended to stay in Minnesota.  Minnesota ranked 5^th in the nation in graduate retention with over 75% of students who earned their degrees in the state staying in state to work.  The only states to outperform Minnesota on this measure were four states with substantially larger state economies, populations, and presumably employment opportunities than our own – California, Texas, Florida, and New York.    In addition, Minnesota was only one of eight states with a positive net flow of college graduates indicating more graduates were imported and retained in the state than left to reside and work elsewhere.  

The role of in-migration and the ability to “pull” talent offered by having a healthy, diverse, and growing business climate is critical to these findings.  Or as the authors state, “areas with high wages for college-educated workers and urban areas have high local returns because they attract more graduates regardless of where students completed college.”   Census figures appear to back this us up.  As reported by the Strib, about 3,000 more people between 25 to 39 move to Minnesota each year than depart, and about 40% of those moving here in that age range were either born here or are married to someone who was.  Presumably, this means half of this important demographic cohort had no significant preexisting ties to the state.  This cohort migration into the state is not a “silver lining” to the dark clouds of out-migrating college age students; it’s the substance of continued economic performance and success. 

The study also examined the important issue of economic mobility by constructing intergenerational bottom-to-top income mobility rates in colleges and universities.  Again, the contribution of labor markets were key in achieving high performance.   With respect to educational institutions, the authors found “basic institutional characteristics such as control (public/private) and measures of instructional or endowment spending have limited capacity to predict bottom to top quintile mobility rates.” Rather, results suggest, “the strength of the average labor market to which a college sends its graduates meaningfully predicts rates of intergenerational economic mobility across institutions over and above key observable characteristics of colleges and the students they educate.”  

None of this discounts the critical importance of having excellent higher education institutions serving the needs of young Minnesotans and the state economy.   But these study findings illustrate the importance of offering a strong business climate to extract the greatest benefit from these investments.  Put it all together and the primary lesson of college and post college migration might be best summarized as “brains tend to drain to where the good opportunities and incomes are.”

The Other Side of the Highway

Debates about migration and Minnesota tax policy inevitably tend to focus on outbound traffic -- who or what is leaving or may leave the state.  That is understandable, especially today given the state’s demographics and recent policy changes.  With chronically tight labor markets, and Minnesota now more reliant on individual income taxation -- and on high-income earners for those income tax revenues -- than at any time in state history, it’s an issue that deserves monitoring.  

However, a closer look at these two investigations suggest that Minnesota’s attention and focus would be better directed on the traffic flow on the other side of the highway.   In-migration demands as much or more attention since it reflects the intersection of capital mobility, workforce availability, and business decision making.    Attracting talent to the state, whether it be experienced professionals or newly educated workers who will be their eventual successors, is a cornerstone of continued economic success.   Getting them here appears to be a greater challenge for the state than keeping them here.

What policies support greater state in-migration?  As the most recent session has demonstrated, the perspectives and emphasis of the parties differ on this issue.  The DFL is banking on more foundational competitiveness expenditures on infrastructure and quality of life factors as the key to state success.  It’s possible Minnesota’s “no-cost” social policies may prove to be even more influential than this spending, or at least provide a tailwind behind these efforts.  Deeply controversial and highly divisive state policies being enacted around the country on a number of hot button social issues may result in a brand new dimension of “Tiebout sorting” at the state level.⁵

Republicans, unsurprisingly, emphasize improving state competitiveness, specifically the state tax and regulatory climate.  The individual income tax, a continuing focus of state Republicans, is part of this calculus.  As one research study has described it, the effect of the personal income tax on economic growth is a potential “double edged sword.”  All else equal, higher individual income taxes create an incentive for individuals to apply their talents elsewhere.  But if employers must 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.⁶

The different perspectives largely reflect the age-old “do jobs follow people or people follow jobs” debate.   One of the most interesting pieces of recent research finds the answer to be “both" suggesting a proper balance of policies addressing both foundational competitiveness and business attractiveness needs to be struck.⁷   If the CNBC results are to be taken seriously, an attempt to restore some balance is needed. Minnesota has doubled down on investing in the areas in which it already has relative significant competitive advantages compared to other states while arguably in the process making the climate for business investment even more challenging than its current below average grades indicate. 

Footnotes

¹ “Unbridled spending won't result in another 'Minnesota miracle'”, Doug Loon, Duluth News Tribune, August 1, 2003
²  For a good explanation of both these issues, see “New IRS SOI Data is Out and Even More Improved,” and “A Simple Reference Guide to IRS Data Quirks,” by Lyman Stone and available at the blog “In A State of Migration” at Medium.com
³ “Professor Myles Shaver Uncovers Why Business Works in the Twin Cities,”  Carlson School of Management, April 5, 2019
^4 "Grads on the Go: Measuring College-Specific Labor Markets for Graduates,” Conzelmann, Hemelt, Hershbein, Martin, Simon, and Strange;  NBER Working Paper 30088, May, 2022.
⁵ 'What's life like in Minnesota?' Out-of-staters ponder a move thanks to online buzz “ Star Tribune July 29, 2023
⁶  "The Effect of Personal Income Tax Rates on Individual and Business Decisions – A Review of the Evidence," Rider,  Working Paper 06-15, Andrew Young School of Policy Studies, Georgia State University.
⁷ "Do Jobs Follow People or Do People Follow Jobs?" Bloomberg, May 30, 2017