Number of top income tax filers continues to rise in Minnesota

The number of Minnesotans in the highest state income tax bracket rose dramatically between 2016 and 2017, a trend that is expected to fuel a growing tax debate in the State Capitol.

Nearly 73,000 Minnesota tax filers qualified for the top bracket in 2017, up from about 66,600 in 2016 — an almost 10 percent jump, according to data provided to the Star Tribune by the Minnesota Department of Revenue.

The increase in people in the top bracket sparked fresh sparring Thursday about how taxes affect economic activity and people's decisions to move to Minnesota, stay or flee to states with lower taxes. A similar debate is happening in other states as well as among 2020 presidential candidates; several Democrats have proposed raising taxes on the wealthy. President Donald Trump and his Republican allies in Congress passed major tax cut legislation in 2017, arguing that it would encourage business growth and job creation.

In Minnesota, Republicans have long argued that the state's high taxes relative to neighboring and Sun Belt states — especially on high earners — contribute to a flight of wealth out of the state.

Democrats say the most recent state data don't support that view.

"The bottom line is this huge hysteria that all of these wealthy people are leaving the state simply is not true," said Rep. Paul Marquart, D-Dilworth, the chair of the House Taxes Committee.

But some Republicans say the new revenue figures don't settle the issue.

"When the stock market is booming and the economy is growing, it's going to mask some of these effects of wealth migration," said Rep. Pat Garofalo, R-Farmington, who sits on the committee. He said IRS data show that between 2015 and 2016, Minnesota lost a net of more than 900 tax filers who earn more than $200,000 per year — a group that collectively earned $444 million of income.

Currently a married couple would have to earn about $262,000 to be in Minnesota's top income tax tier; all income above that level is taxed at 9.85 percent.

Republicans argue that the new federal tax legislation could have prompted some affluent Minnesotans to leave the state in the past year. That's because the federal tax cut passed by the Republican Congress limited the amount state residents can deduct on their federal returns for state and local taxes. That could mean a big federal tax hike for top earners in states like Minnesota with relatively high state and local taxes.

"This was designed by Congress to force states like Minnesota to change our tax code or lose money," Garofalo said. "That was the intent, and it's working."

Cynthia Bauerly, the commissioner of the Minnesota Department of Revenue, said she is not convinced the new federal cap on the state and local tax deduction will push Minnesotans to leave. "People made this argument about the fourth tier," she said, referring to the top marginal income tax bracket of 9.85 percent signed by former Gov. Mark Dayton in 2013. "The data doesn't show that it happened at all."

Republicans frequently cite anecdotes about Minnesotans leaving for states with lower taxes. Rep. Kurt Daudt, R-Crown, recently said on the floor of the House that the man who was formerly Minnesota's richest has moved to Florida.

He was referring to Whitney MacMillan, the heir and former chief executive of agribusiness giant Cargill. Best Buy founder Richard Schulze is also now a Florida resident, according to the Forbes 400 list of the richest Americans.

Garofalo acknowledged that people are not necessarily fleeing Minnesota because of taxes. But, he added, some wealthy Minnesotans are leaving.

Bauerly said there are reasons to leave, but more reasons to stay. "I don't discount that for some individuals taxes are important. But for many Minnesotans, they've built a life here, they've raised children and now grandchildren, they've built businesses, they're invested in their communities through churches and nonprofits, and they're committed to Minnesota."

Meanwhile, taxes are once again at the top of the legislative agenda.

Gov. Tim Walz has proposed a 20-cent-per-gallon increase in the gas tax.

The money would go to improving roads and bridges and would free up some infrastructure funds for schools, parks and other services.

Walz also is proposing to keep a tax on health care providers used for health programs that would otherwise expire. Finally, another Walz proposal would lower taxes on some families but raise taxes on some businesses.

Each measure faces stiff opposition in the Republican-controlled state Senate.