Brehm: Why is this much wealth leaving Minnesota?

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A political lowlight of 2024 for me was the retirement of Pat Garofalo from the Minnesota House. For 20 years, Garofalo represented the southeastern metro area with smarts and sensibility. He’s the kind of Republican we need more of in Minnesota: optimistic, substantive and measured.

While he’s no longer in public office, Garofalo’s feed on the social media platform X remains a favorite of mine. What attracted my recent attention was his digestion of disturbing data showing a massive and growing migration of wealth out of Minnesota — an exodus unlike anything our neighboring states are experiencing.

According to the most nonpartisan source there is, the Internal Revenue Service, the net migration of adjusted gross income in 2022 was a shocking $2.19 billion. In other words, although about $3.9 billion of such income was imported into the state, $6.1 billion was exported. Ouch.

While the 2023 data is not yet available, the recent trend in this area suggests it will be just as bad or worse. In 2017, the negative net migration of income here was only $215 million. But that has grown steadily each year thereafter; nearly $5 billion of potentially taxable earnings have left the state without replacement in just the last three years alone. That’s a little over 2% of all the income generated in Minnesota annually up and out in only a triennium. Not good.

But isn’t this all just the inevitable result of people seeking warmer climes? Not really. While our sister state Wisconsin lost adjusted gross income in 2022 too, that deficit was a more modest $311 million and only 14% of Minnesota’s mass departure of income, even though the two states are roughly the same size. Meanwhile, South Dakota enjoyed a prosperous positive $589 million net migration of earnings that same year — and the Mount Rushmore state gets just as cold as we do.

Whatever one’s political party, this data deserves our attention. It correlates with many other analyses that show the state is unsustainably losing more economic activity than it attracts. We may not feel the consequences of that quite yet, but we will. If Minnesota’s tax base continues to contract so substantially, current rates, which are already some of the highest in the nation, will soon be insufficient to fund the state’s expansive government programs. And these negative numbers, if allowed to continue, will also mean Minnesota’s prosperity will lag that of those states able to attract population and capital growth.

Finding a solution to this requires us to identify the source. Why are people and their paychecks leaving?

The primary culprit is likely Minnesota’s oppressive tax regime and hostile business climate. According to the nonpartisan Tax Foundation, Minnesota has the eighth highest state tax collections per capita and the 12th-highest state-local tax burden. After surveying more than 500 CEOs hailing from all over the country, Chief Executive magazine ranked Minnesota the ninth worst state to do business in, thanks in part to its having the highest corporate tax rate in the country and a growing panoply of unfriendly commercial regulations. In contrast, Texas was considered to be the best state for private enterprise, with Florida right behind it. Both those states enjoy enormous positive net migrations of income in the billions each year. The simple truth is that companies are relocating to places where they can do business better and families are resettling to regions where they can keep more of their hard-earned income. It’s all pretty rational.

In a recent study, the fintech company SmartAsset ranked states based on net migration of young households (ages 26 to 35) in 2022 that earn at least $200,000 a year. Half of the states attracting the most of these young and wealthy households (Florida and Texas top this list, too) don’t assess a state income tax at all. In contrast, Minnesota, with the sixth-highest top income tax rate in the nation, is no magnet for households like that, and ranks a troubling ninth in terms of shedding the most of these young, high-wage taxpayers critical to the long-term fiscal health of progressive states like ours that rely so heavily on taxing their most affluent citizens to fund government operations.

But Minnesota has always been a high-tax state. Why has the migration of income out increased so dramatically in recent years?

Part of it comes down to return on investment. Minnesotans, even more conservative ones, were once willing to pay higher-than-average taxes because of what they received in return: best-in-the-nation public schools, a big but well-run and moderate state government, second-to-none infrastructure, low crime, and a thriving and accessible major metropolitan area. But over the past few years, student test scores here have sunk, violent-crime rates have increased, scandal after scandal plagues Minnesota bureaucracies, and Minneapolis and St. Paul, while still decent cities, are nowhere near the draw they once were. The terms of the deal of Minnesota residency have changed, and they aren’t as good for many taxpayers as they once were.

To make matters worse, while 14 states cut their income tax rates in 2024 and many are working toward eliminating them altogether in order to attract more population and investment, Minnesota’s Democratic leadership has signaled a desire to increase Minnesota taxes even more. Foreseeing an even poorer tax climate, many Minnesotans may just preemptively be pulling up the stakes.

Minnesota is still a very good and special state. Both its rural and urban areas are some of the most geographically beautiful places in the United States. The Land of 10,000 Lakes is full of hardworking and talented people and caring and kind communities. And we boast university and health care systems that are the envy of the world. But ensuring that Minnesota’s best days are not behind it requires a humble and honest assessment of the troubling demographic trajectory the state is on — and responding to it.

That means cutting taxes so that Minnesota is competitive with its business-friendly neighbors again and eliminating wasteful spending so we can afford it. And let’s ditch the vacuous cheerleading and tired excuses and recognize that the quality of life for many Minnesotans is just not what it once was and can and must be bettered.

Facts are stubborn things, and responsible citizens of both parties must address the dramatic movement of income out of Minnesota. I believe we can. But if we won’t, math is math, and the problem will only get worse. The burden likely won’t fall on the wealthy — many of them will have left or will when times get tougher. Instead it will be less mobile lower- and middle-class Minnesotans stuck with the consequences of the resulting economic and fiscal mess. That’s not right. Those of us that care deeply about the future of this state and its people must demand that our leaders commit to addressing the crisis of capital fleeing Minnesota and restore our state’s once high standards of excellence and economic competitiveness. And, come November, voters must replace those who won’t if we want to get our state back on track.