May 12, 2014

Open Letter to Governor Dayton and the Minnesota Legislature

RE: Gift & Estate Tax and Population Migration

Thank you for repealing the gift tax and for increasing the estate tax exemption. This clearly was the right move for the future of the Minnesota economy and job growth.

We at Gopher State Politics have been examining IRS AGI tax data for the 2005-2010 periods. Using the Minnesota to Wisconsin taxpayer migration as a base of norm, we found that a population adjusted movement to South Dakota was almost exactly twice the rate of movement to Wisconsin and almost exactly three times the rate of movement (See our Blog: Why Do Minnesotans Move to South Dakota).

We also looked at the movement to North Dakota and to our chagrin and embarrassment discovered that out of 21 states those Minnesotans moving to North Dakota had the lowest average AGI of all 21 states and it appeared that we were providing a migratory labor force for North Dakota. Our lowest earners went to ND and our taxpayers having three times the average AGI of those going to ND went to Florida. (Blog, The Shame of Minnesotans Having to move to North Dakota). We were also surprised to learn that Bismarck had grown to 64,000.

It was also difficult to imagine how well Sioux Falls has been flourishing. Their population is now 161,000! Will it exceed St. Paul’s in the next decade? The day we were talking with them they had just picked off an impressive Minneapolis business. They really don’t want any publicity as it seems they view Minnesota as a great big Candy store with lots of business flavors.

Adding in the new Edina tax rate of 9.85% just exacerbates the situation. Our analysis and opinion “The Great Minnesota Tax Acts of 2013” (web site) gives a more thorough picture of the Minnesota tax climate vs. others. That study was cited in a new, best seller book which you have recently received (from others) through Barnes & Noble, An Inquiry into the Nature and Causes of the Wealth States  by Dr. Arthur B. Laffer and others. (Page 247 footnote 4 spelled out on page 290.)

Back to the estate tax, we would like to see it eliminated as the best choice. If that is not viewed as politically practical, we suggest that the 2015 legislature bring this into conformity with federal law. Otherwise, increase the exempt amount to $3M in 2015, $4M in 2016 and conformance to the federal in 2017 with COLA adjustments.  Currently $5.34M. Along with that the “claw-back” should be removed in 2015. It creates uncertainty and indefiniteness three years earlier or more than they may have been thinking of and encourages people to leave Minnesota.  It’s just a burr under the saddle.

Minnesota has been losing taxpaying population since the 1990’s. The IRS AGI data indicate as of the 2010 era that we were losing a net $350M per year in taxable income that’s an annual figure of those out-migrating. If we compound the likely number of years we have lost these taxpayers, the likely loss to the Minnesota economy of AGI may well exceed $1B. We are working on this now to develop a model without using a multiplier. That leads us to another aspect of this issue—Minnesota Revenue residency regulations and policies for ex-residents; the 182 days and the illogical 26 pointers.

A true and unequivocal “safe harbor” statute is needed. First, may we suggest a clear legal definition of a “day of residency.” Our thinking is that a day comprises physical presence in Minnesota for a 24 hour period from midnight to midnight anything less is not a day of residency. Next, we invest millions of taxpayers’ dollars in helping Minnesota become the world class medical destination; i.e. the Mayo Clinic and others. Then we punish former residents who have left for tax or other reasons, by counting their days of treatment here against residency days.

May we suggest in addition to a clear 24-hour definition of residency, that we exempt any time that people spend here visiting any licensed medical provider –therapists, chiropractors, dentists, doctors, surgery centers, hospitals, nursing homes and other licensed medical professionals—from counting as days of residency.

It would seem reasonable to us that if the definition, medical exemption and a few other changes were adopted—to make passage politically palatable—the residency days could be reduced from the 182 to 170 (a day a month). Why punish our economy? If ex-residents want to spend their money here, let them!
Their expenditures will help our workers, professions, businesses and state and local tax revenue streams. Abolishing the estate tax may keep more current residents here but tacking on a 25% Edina personal income tax rate increase is similar to using a cattle prod to encourage those hit hardest to move out of Minnesota.
Our 2015 legislative task:  1). Let’s phase out the estate tax. 2). Let’s put together and pass a sane “safe harbor” residency statute. Thank you.

Respectfully submitted,

Robert L. Smith, III