Regarding Minnesota's budget: New data demonstrate the problem with tax hikes

The current budget surplus is no doubt largely driven by the massive 2013 tax increase that Gov. Mark Dayton and the then-DFL-controlled Legislature imposed on Minnesota.

In his recent State of the State address, Dayton made a special point to argue that those tax increases were imposed "on only the wealthiest 2 percent of Minnesotans." He then went on to entirely discount the impact these high taxes have on Minnesota's economy.

But there can be no denying that taxes matter. It's a basic law of physics that every action has a reaction and a basic law of economics that when you tax something, you get less of it.

New data from the IRS provide convincing evidence that Minnesota is not somehow free from these laws and getting away with taxing either the rich or the middle class without any economic impact. People vote with their feet, and Minnesota is losing families and their income to lower-tax states.

These IRS data track the movement of taxpayers and income across the country by identifying when people list a new state of residence on their tax return. For instance, if a Minnesotan reporting $50,000 in income moves to Kansas, the IRS reports a $50,000 outflow from Minnesota to Kansas, and vice versa. These data are based on every tax return filed, not on a sample, and so they are incredibly reliable.

I analyzed these data for a new report published by the Center of the American Experiment titled "Minnesotans on the Move to Lower Tax States 2016." The results provide the first look at how Minnesotans are reacting to tax increases imposed in 2013, and the findings are alarming.

Minnesota, on net, lost $1 billion of income to other states between 2013 and 2014. Specifically, the state lost $944 million in adjusted gross income reported by tax filers who moved in and out of Minnesota. This is the largest net loss of income ever reported for Minnesota, and it represents a dramatic rise from just three years ago, when the state lost $490 million.

While the IRS has been tracking income movement since 1992, it released a new data series last year that for the first time provides annual information on who is moving from state to state, based on age and income. These new data refute a long-held assumption that Minnesota's income loss is primarily due to retirement.

In fact, people in their prime working years represent the largest portion of the net loss of taxpayers and income. Working-age people between 35 and 54 account for nearly 40 percent of Minnesota's net loss of tax filers for the 2013-14 period. People between 55 and 64 — most of whom are still in the workforce — account for another 23 percent.

Many factors influence a family's decision to move. But these data provide convincing evidence that show Minnesota's high taxes are indeed one of those factors.

With only a few exceptions, Minnesota is losing income to lower-tax states to the West and the South, such as Arizona, Colorado, Florida, South Dakota, Texas and Washington. Minnesota tends to gain income from higher-tax states in the Midwest and Northeast. Notably, five of the 10 states to which Minnesota loses the most income impose no income tax.

Looking specifically at top earners — the people most directly impacted by Minnesota's 2013 tax increase — shows that Minnesota is losing taxpayers earning over $200,000 at an alarming rate. The state's rate of income loss from these people ranks 47th for 2013-14.

This low ranking reveals one undeniable fact: Minnesota is one of the least-attractive states to top earners in the country. The fact that Minnesota bottoms out in the cellar with high-tax states like Vermont, Illinois, New Jersey and Maryland further confirms that taxes matter.

But this isn't just about the top 2 percent, as the governor wants people to believe.

Minnesota taxes on the middle class are still high relative to other states. Not surprisingly, Minnesota is, on net, losing this population, too. In fact, between 2011 and 2014, taxpayers earning between $100,000 and $200,000 accounted for 41 percent of the state's net population loss.

Minnesota's consistent net loss of people and income to other states poses serious challenges to the state both today and into the future. Economic growth is currently constrained by a tight labor market, which, in part, is due to the state not attracting the people with the qualifications necessary to fill today's jobs.

If the state is to compete to retain and attract the high-quality employees necessary to grow the economy for all Minnesotans to prosper, these IRS data demonstrate that the state needs to make Minnesota's tax climate more attractive.

Peter J. Nelson is vice president and senior policy fellow at Center of the American Experiment.