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Minnesota's tax attitude can make the state easy to leave

  • Article by: Ross Levin
  • April 7, 2014 - 10:59 AM

While Minnesota winters can be taxing, so can Minnesota’s Department of Revenue.

April is highly predictable. You can count on three things — ice out, freak out, and now move out. Eventually winter ends and the lakes thaw. People prepare their tax returns and freak out about ­Minnesota income taxes, causing them to threaten to move out of the state.

While we may be grateful that the ice eventually leaves, we should be less so when our citizens leave. People may switch residency for a number of reasons — jobs, climate, family. In Minnesota, we have added another reason for people to consider moving — taxes.

It’s easy to act like high school kids and dump somebody before we get dumped. But if we look at this issue from a variety of angles, we should be concerned that this has become an increasingly viable decision for many who have spent their entire lives here.

The issue is this: Because of a tax attitude, which is only partly instituted through policy, we are converting groups of Minnesotans from owners of the state to renters. When you think about your first rental apartment, you probably didn’t care for it in the same way you did your home. You may not have created as much community as you have in your ­current neighborhood. You certainly didn’t make long-term improvements to a place that was merely a stopping ground before your next move.

Welcome to a rental state. The irony is that over the years, our high taxes have made this a great state in which to live. We have an ­educated population, lots of green space, economic opportunity, commitment to social services, world-class arts and sports. But there is a tension in creating a place where people want to live and charging them for it. Many people may always have complained about taxes, but most still stayed.

Now the tides are shifting and we need to pay attention.

A snowbird tax (where people would pay taxes for the time spent in Minnesota) was rejected in 2013, but it was strongly considered. The recent gift tax reversal tried to solve a problem we created. We tax the estates of people who die in Minnesota at much higher rates than the federal government taxes them. The combination of policy and sentiment causes some to leave the state when we are far better off having them stay.

Here is what’s wrong when we have a rental state:

When people know that they will be leaving, they change their behavior long before they leave. It is only natural for someone who is relocating to try to create a life in their new environment. This means that they may try to contribute to their new community in ways that were similar to how they built their old one. They give to a Florida foundation rather than the Minneapolis or St. Paul Foundations; they become involved in organizations in their new home at the expense of their old one; they create ties that draw them away from those they had here.

In a rental state, people tend to be more short-term in their thinking. The investments they make in the community are different from those by owners of the state. Their roots are shallower. They don’t buy their cars or homes here.

In a rental state, businesses need to become creative to maintain customers and clients. They have to open offices in other states, hire people in other states, and come up with ways to stay connected to those who have left.

In a rental state, nonprofits suffer. Not only do people spread their resources between venues, they have to step away from volunteer work. When someone is counting the number of days away in order to protect their new residency, they may participate via speaker phone rather than face to face, causing a crack in the interactions we cherish and reducing the deeper wisdom being passed on.

In a rental state, people plan on moving even if it may not be in their economic interest to do so. Others hear so much about the advantages of low-tax climates that they work on establishing residencies even if they are in more modest income brackets.

In a rental state, offspring are less tied to Minnesota because their parents are no longer spending as much time here. While close-knit families may have made this a tough state for an outsider to break into, it also created long-lasting legacies.

You don’t change from being a rental to an owner state simply by lowering taxes. Many high-bracket taxpayers were willing to pay the higher taxes to experience Minnesota’s quality of life. You become an owner state by ­changing the tenor of the dialogue and by ­creating good will.

For example, simply matching Minnesota’s estate tax exclusion to the Federal estate tax would not cost a huge amount of money. But it would send a message to those who would hear it. Steps like this show directional change and give those affected more confidence in future policy.

Of course there will be a number of Minnesotans for whom nothing we do would be enough. But we need to recognize that for most, the decision to let go of their residency is a very difficult one. Let’s make it even more difficult by signaling that we want them to stay.

Ross Levin is the founding principal of Accredited Investors Inc. in Edina. His Gains & Losses column appears twice monthly. His e-mail is ross@accredited.com.

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