Everything has its breaking point. Turn up the heat and water boils. Pile on the straw and the camel's back breaks. And with taxes, everyone also has a breaking point.
Our clients span the political spectrum. Like each of us, their behavior is often consistent with their expressed values. And sometimes it isn't. One of the differences between more conservative clients and progressive ones is their view on whether government is best suited to deliver benefits to those who need them. Some of our conservative clients often feel that government gets in the way, so paying for more government can be a waste. And some progressive clients may not agree with everything government does, but tend to feel that paying more for more service is fine. Both are right. It seems like today we want to quickly sort people into their categories through simplistic mischaracterizations.
I know many people who have left the state because of taxes. On the surface, I might not have much in common with some of them, yet there are many with whom I do seemingly share a lot. What I have recently noticed, though, is the surprising number of people with whom I interact who are contemplating moving. If Gov. Walz's latest tax proposal on surcharges regarding capital gains and dividends goes through, contemplation will likely lead to increased action.
We have a progressive tax system in Minnesota, meaning those who have more usually pay a higher percentage of income tax. We are also one of only 18 states with an estate or inheritance tax. Those are facts. It is opinion whether this is good or bad or fair or unfair, but different people have different breaking points. Many of the people I know who are leaving the state for tax reasons have supported the state for years with higher than most state tax payments.
Contemplating leaving, though, ultimately means connections suffer. When people feel less connected to the state, their behavior begins to change. Anyone who has ever left a job or a relationship knows that things tended to devolve over time. You began to focus on what was wrong rather than what was right. It is the same with people who are thinking about leaving the state.
It is no longer those who simply hated paying Minnesota taxes that are leaving. We are talking to clients who in the past have said I earned my money in Minnesota, I paid my taxes in Minnesota while working, and I will continue to pay them when I am done working. As Minnesota income tax continues to rise above most other states, some, not all, are no longer willing to keep paying.
If people have second homes, they are beginning to get involved in communities in those places. One of the ways they are meeting people is through continuing their philanthropy efforts where they summer or winter. Philanthropy is often a way to meet people who care about some of the same things that are important to you. But most people have a charitable budget, so dollars they are going in a new direction mean less dollars someplace else. This is not good for Minnesota, which recently slipped from the most philanthropic state to third place. Still admirable, but potentially alarming.
Others have simply moved their Minnesota community because their friends have bought in similar places. They may come back for a few months in the summer, but they are carefully counting days here. And as the ability to work remotely has increased, not all of these people are retirees. They are substituting Minnesota tax for a mortgage payment.
Those contemplating their departure and those who have left are not likely Minnesota cheerleaders in their new locations. The state could use some better PR.
Our current tax strategy not only doesn't attract new residents, it repels current ones. Signaling to those who pay the most in tax that their percentage will continue to increase can make their blood boil and be the straw that breaks their residency back.
Ross Levin is founder of Accredited Investors Wealth Management in Edina. He can be reached at ross@accredited.com.
