Open Letter to the Governor, Minnesota Legislature and Concerned Minnesotans:

It’s Time for Action… Repeal the Edina Tax Bracket and Estate/Gift Tax Retroactively for the 2015 Tax Year. Yes, Retroactively Repeal Both!!!

New IRS tax data methodology is speeding up the process of understanding what is really happening to Minnesota in terms of losing taxpaying population. Yes, we’ve been losing taxpayer population since 2002 and now the process has sped up following 2013 legislative action to add a 25% increase in a new personal state income tax bracket—from a high of 7.85% to 9.85%. That’s a 25% increase. That sure beats COLAs!

That top bracket of 9.85% was aimed, according to the Wall Street Journal, at Edina mid-level executives. Hence, we at the Gopher State Politics Institute (GSPI) have named it the Edina tax. Then, if that didn’t hurt enough, the legislature enacted a three-year claw-back on the Minnesota estate tax. The estate tax exemption is being raised over time some will argue but the formula rate is accelerated and the claw-back was left in place. The example we’ve used in the past comparing a 2012 estate tax to a 2014 only reduced the tax from $182,000 to $178,000.

The 2013 legislature also passed a handful of business-to-business taxes including the so-called “warehouse” tax. That tax was so bad it stopped Minnesota jobs and business expansions in their tracks. Even some of the liberals realized they’d gone too far and the warehouse tax was repealed in the 2014 session. Folks, please let us draw a parallel to the warehouse tax.

What the warehouse tax did to jobs and businesses, the Edina tax is going to do to jobs and individuals. The 9.85% Edina tax bracket will cost the Minnesota economy dearly. Is punishing the hard-working successful person by taxing them out of this state our norm and Minnesota’s reward for the successful?

Have the Legislators and Governor ever heard of the Laffer Curve? That is when you tax people too much, resistance develops, the tax revenue line steepens and actually bends backwards bringing less revenue. Higher taxes do not mean greater tax revenues. When they are perceived as being too high and too much, revenues will decline not increase. We’re afraid Minnesota is at that juncture.

You don’t need to pay attention to us if you so choose, but, but, there is a U.S. entity named the Internal Revenue Service (IRS). They recently came out with Adjusted Gross Income (AGI) tax data through calendar 2014 by state that tracks the migration of AGI and taxpayers to other states. Guess what? Minnesota doesn’t look so good.

May we refer you to a think-tank named the Center of the American Experiment. They’re in Golden Valley and they have some extremely capable personnel. One named Peter J. Nelson just authored a study titled Minnesotans on the Move to Lower Tax States 2016. Oh-h, did it hurt! We would encourage everyone in Minnesota to obtain a print copy of that 20-page report and read it several times. It shows Minnesota has been losing taxpayers since 2002 (Figure 1, page 5).

Then, if you’re brave enough, please turn to page 13 and concentrate on Figure 9. Net Loss in AGI by Age (Millions $2014). Note the 2011-12 amount. Minnesota had a net loss (meaning more AGI went to another state than other states brought into Minnesota) of $532 million. For the 2012-13 period, we had a net loss of $806 million. And for the first year of our Edina tax, 2013-14, we had a net AGI loss of $999 million!

Prior to this new IRS data availability, we worked with aggregate AGI data usually in five-year batches such as the 2005-2010 years. These data showed Minnesota losing $340 million per year versus, for example, Wisconsin losing $134 million. We had no age breakdown available. Many of us thought much of the migration might be seniors pulling out. We had no way to prove it.

Was it seniors heading to Florida, Arizona and Texas for warmth and/or lower or little taxes? We believe the Wisconsin-Minnesota data disprove the idea that the movement was mostly to seek warmer climes. Wisconsin and Minnesota temps aren’t that different so why did Minnesota lose $2.5 dollars in AGI to each $1 Wisconsin AGI? Did the Minnesota estate tax play a role in the difference?

Now, 2016, we have IRS AGI data by age groupings that we never had before. Please turn your attention to page 12, Figure 6. Net Flow of Taxpayers and Dependents by Age of Primary Taxpayer, 2011-2014. We see a positive in-flow of taxpayers age 26-34. That was offset by taxpayers under age 26 leaving Minnesota.

Then, oh-oh, what happens in other age groupings? They are all negative—we lose more than we gain. Age 35-44 down, age 45-54 down, age 55-64 down and 65 plus down less but going back to Figure 9, with a huge loss of wealth leaving Minnesota that generated $280 million AGI. We now have data to show who is leaving Minnesota. We now know that it isn’t just seniors—it is more the working age, productive citizen taxpayers. Why? What causes us to lose these taxpayers?

We’ll bet on the side that our brutal tax climate is a profound factor. People were leaving this state when our top income tax rate was 7.85%—quite high to begin with. Then, increase it by 25% to 9.85% and we may find more heading for the exits. The question will be have we already driven out enough that our rate of departure will subside in the next few years?

Regardless of how one slices these data, net AGI losses of anywhere from $944 ($936 adjusted for final IRS figures) to nearly $1 billion are blows to our state income tax collections, sales tax and charitable giving. All add up to a serious problem for Minnesota’s future. We ought not to wait to see if it gets worse. The time to act is right now. May we suggest?

1) Repeal the 9.85% Edina tax retroactively for 2015;

2) Repeal the estate/gift tax retroactively for 2015.

Thank you.

Robert L. “Bob” Smith 3rd
Gopher State Politics Institute
www.GopherStatePolitics.com
Bob@GopherStatePolitics.com