The ranks of the very rich are growing in Minnesota, despite a controversial tax increase that singles out the biggest earners to pay more.
Critics predicted that the ultra-affluent would flee after Gov. Mark Dayton secured 2013 passage of a new income tax tier of 9.85 percent on individuals who make more than $156,000 a year. But the latest data show that the number of people who filed tax returns with over $1 million in income grew by 15.3 percent in the year after the tax passed, while the new top tier of taxpayers grew by 6 percent.
No doubt wealthy Minnesotans have changed their residency since 2012, but either more have moved in or more who were already here gained enough income to reach the top bracket.
Dayton argues taxes are not the driving force behind migration into or out of Minnesota. A change in residency is a decision involving weather, jobs and family, he said. Even if taxes figure in, they were already high in Minnesota before 2013, when the rate on top incomes was 7.85 percent.
“I can’t say [people leaving] doesn’t occur,” Dayton said on Friday. “But a similar incentive was in place before the [new] tier.”
The debate is emerging again in the final two weeks of the legislative session, as lawmakers decide what to do with a $900 million budget surplus. And the concern that the rich could abandon Minnesota is likely to remain part of the discussion because it sounds logical, because the data about wealth and taxes is complex and because it may yet happen.
Similar battles are playing out in other high-tax states, where fears simmer that rich residents will decamp to Florida, Texas, Nevada or Arizona — warm states with low income taxes or none at all. New Jersey lost its single biggest taxpayer, billionaire hedge fund manager David Tepper, to Florida. Connecticut is struggling with a shortfall partly caused by declining receipts from top taxpayers.
Tax critics say that scenario ultimately will hit Minnesota, which has the nation’s third-highest state income tax on the wealthy and a roughly 10 percent estate tax on their offspring.
“If you tax something more, you get less of it,” said Rep. Greg Davids, R-Preston, the chairman of the House Taxes Committee and architect of a $2 billion House tax cut bill. “You tax cigarettes, you get less smoking. You tax income, you get less income.”
Shown data on the number of top-tier filers rising in recent years, Davids, a financial planner who has lost clients to low tax states, said he would be eager to see data in two years. Moving takes time, sometimes years, Davids said.
However, those advocating on behalf of lower taxes, including business lobbyists and financial consultants, have not pointed to specific cases of people moving, citing privacy concerns and fears that state tax officials will retaliate.
John Christianson, an accountant in Willmar, said he’s aware of 12 wealthy people in his community who moved away, and six who expanded their businesses in other states. “People are at least considering it,” he says. “Ten or fifteen years ago, it wasn’t as prevalent.”
Dayton said new revenue from top-tier taxpayers has restored fiscal stability to Minnesota. “I thank them,” he said. “They should know what a difference it’s made for Minnesota.”
But he criticized those who would live here for several months, enjoying a quality of life paid for with Minnesota taxes, without paying taxes. People can avoid Minnesota residency if they live elsewhere for 183 days a year and meet other requirements.
“If they don’t like our tax, they have a right to do so, but they shouldn’t be coming back here for six months a year to take advantage of Minnesota state services that other Minnesota taxpayers pay for,” Dayton said.
At the Capitol, the Republican-led House is pushing for tax cuts — including a lower estate tax — in compromise legislation on the fate of the surplus. DFLers say the surplus should go instead to priorities like prekindergarten, broadband Internet infrastructure and local government aid. Even after the session ends this month, the debate will continue as candidates in each of the state’s 201 legislative districts face voters in November.
More big incomes
The precise number of Minnesota taxpayers with big incomes rises and falls with changes in the stock market. Since 2012, when the market has generally risen, the data shows no decline in the ranks of Minnesota’s wealthy. And over a longer timeframe, there has been no striking slowdown in the growth of that group.
Tax returns filed with annual incomes over $1 million in Minnesota rose in 2014 — 2015 figures won’t be compiled until the fall — by 15.3 percent, to 6,257.
A broader category of the wealthy in Minnesota is also growing. The number of tax returns in Minnesota’s top tier — single people with income of at least $156,000 and couples who earn more than $259,000 — rose in 2014 to 64,276.
Those taxpayers yielded $480.1 million in income taxes in 2013 and $550.6 million in 2014.
Between 1997 and 2013, the longest timeframe for which the Internal Revenue Service provides state-by-state data, Minnesota added 3,203 households that earn more than $1 million per year. That was a better rate of growth than Michigan or Arizona, lower-tax states.
When it comes to expanding its pool of extremely high earners, Minnesota does lag behind its lower-tax neighbors, a trend that goes back 10 years to the Pawlenty administration.
Between 2005 and 2014, the number of tax returns filed with more than $1 million in income rose on average 8 percent each year in Iowa, 8.5 percent per year in Wisconsin and 3 percent per year in Minnesota. From 1997 to 2013, South Dakota, which has no state income tax, nearly quadrupled its number of tax filers who earn more than $1 million per year.
Republicans and their business allies found fresh ammunition in a paper from the Center of the American Experiment — a conservative think tank — that measures income migration into and out of Minnesota. The report, written by Peter Nelson, says that the net flow of people with incomes over $200,000 was negative for Minnesota from 2011 to 2014, and that the movement of people in and out of Minnesota resulted in a loss of $948 million in income in 2014.
That outflow isn’t reflected in either the overall income tax base or the taxable income of the rich, both of which are growing steadily.
And think tanks on the political left argue that income migration data reflects other factors aside from taxes. People are more likely to move from Florida, which has no income tax, to Georgia, North Carolina and nine other states that have an income tax, said Michael Mazerov, an economist with the liberal Center on Budget and Policy Priorities. And Arizona, with an income tax, draws nearly as many migrants as Texas and more than Nevada, which are both free of income tax.
If rich people are fleeing Minnesota, they are secretive about it, arguing that their residency will be scrutinized if they speak publicly about their move.
Pressed to provide examples of the very rich who moved to other states because of Minnesota’s high taxes, neither the Minnesota Chamber of Commerce nor the Minnesota Business Partnership — two of the loudest voices for lower taxes in the Minnesota debate — could find someone who would speak to the Star Tribune about their decision.
The Department of Revenue rejects the idea that it would hunt down wealthy taxpayers who speak publicly about moving to another state, and Dayton himself bristles at the suggestion.
“It’s an unfounded and scurrilous charge that we would retaliate against people for exercising their First Amendment rights,” Dayton said. “It’s an irresponsible accusation, and it’s simply untrue.”