A one-page memo on January tax revenue that Minnesota Management and Budget Commissioner Myron Frans sent the governor last week sought to avoid raising alarm. Frans gently reminded the governor and all the legislative leaders who were copied on the memo that variances in one month’s tax revenue figures should be interpreted with “great caution.”
Frans was reporting that January general-fund revenue was $2.28 billion, about 10.7 percent less than the most recent forecast. Most of the lines were close to the forecast but not individual income taxes, coming in about $280 million less than the $1.73 billion forecast.
There’s reason to think this might be nothing worrisome, because taxpayers might still be trying to figure out the new federal tax law and the payments could just be slow. There could also have been a little slip because much of the federal government was shut down in January.
On the other hand, the last state budget update before this one showed that individual income tax revenue fell short the last two months of last year, too, by about $169 million. Perhaps it’s time for at least a little concern that Minnesota, a state that gets more than half its general fund revenue from individual income taxes, has the kind of problem that has been brewing in other high income tax states such as New York and New Jersey.
The numbers in Minnesota are small compared with some states, and even officials in California, where January personal income tax payments came up $2.5 billion short, have kept their cool.
But not everyone is calm. Tax collections for New York in December and January came in $2.3 billion lower than planned, and Gov. Andrew Cuomo called that as serious as a heart attack.
He had an explanation, too, saying tax collections are slow because upper-income New Yorkers have responded to what he thinks are improper incentives baked into the 2017 federal tax law by leaving his state.
The tax law is best known as a corporate tax cut, but there were lots of other provisions in it that affect personal income taxes. The one Cuomo cares about the most is a cap on state and local tax deductions of $10,000.
A lot of folks don’t pay enough in state and local taxes for this so-called SALT deduction to even matter, but high earners do. And they once had no limit on how much they could deduct from their federal taxable income.
The federal law didn’t change state taxes at all, in New York or Minnesota. It just made anything over $10,000 in state and local taxes more expensive. Imagine a corporation suddenly not being able to deduct part of a consulting bill from its taxable income. That consultant just started to cost more.
Skeptics of Cuomo’s argument suggest that they would have noticed had enough people left to cost the state $2.3 billion. But it is certainly true that high-income people in high-tax states have options.
One problem with the perennial tax-policy argument that taxpayers will leave for lower taxes is that studies haven’t found persuasive evidence that it happens a lot, including one from 2016 by professors Cristobal Young and Charles Varner of Stanford University along with co-authors from the U.S. Treasury Department.
From looking at lots of tax records, they found that Americans as a whole turn out to move more frequently than high-income people do. Married, high-income people with kids are particularly rooted.
If the well-off did move, there was no real pattern of heading to low-tax states. Many did go to Florida, which has no personal income tax, but Florida is also a destination for all sorts of people from northern states who are eager to avoid another encounter with the polar vortex.
New York, Connecticut and New Jersey are different from most states in that they share a big financial sector where lots of people earn big incomes. A small number of people have made such staggering sums of money that having them leave town could punch a hole in a state’s budget, as happened when hedge-fund principal David Tepper moved from New Jersey a few years ago.
Tepper earned $1.5 billion just in 2017, the magazine Institutional Investor reported, but by then all of it was beyond the reach of the New Jersey tax collector. His firm still has offices in New Jersey, the magazine added, but he’s gone to Florida.
Relocating for lower taxes is such a common thing in greater New York that Institutional Investor went on to discuss how state and local tax authorities are trying to catch cheaters. The magazine described the J.P. Morgan Private Bank putting out advisories to clients on the topic.
Maybe the only funny line attributed to the J.P. Morgan staff was the simple observation that it’s actually easy to show tax authorities that someone moved to a new state if they really did move there. It only gets complicated when someone has no intention of giving up running the business or selling the old house.
There’s constant chatter here in the Twin Cities with accountants and financial advisers about clients seeking to escape Minnesota winters and Minnesota income taxes. But it’s important to note that Minnesota does not have an economy as lopsided as New York’s, where 1 percent of the taxpayers account for 46 percent of personal income tax revenue.
Here the top 1 percent of households generated about 28 percent of personal income taxes, as of the last updated study by the Department of Revenue, while the top 10 percent paid about 60 percent.
Many of the studies that concluded there wasn’t much movement between states for tax reasons were done a while ago, said Mark Haveman of the Minnesota Center for Fiscal Excellence, and he’s not sure how much thinking may have changed since the 2017 federal tax law capped SALT deductions.
Minnesotans have been arguing about what to do about tax policy, which taxpayers might win or lose, since the federal law passed. What hasn’t been noted nearly enough, he said, is that the limit on SALT deductions has made state income tax a far bigger issue as the state competes with others as a place for well-off people to live, meaning it really could be more vulnerable to a shortfall if affluent taxpayers move on.
It’s simply the case, he said, that “state income taxes matter more than they used to.”