Are tax differences really costing Minnesota revenue?

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About this time every year, small government advocates engage in their own Ground Hog Day ritual as they gaze at some shadowy data and declare that Minnesota faces an eternity of economic winter — unless we cut taxes.

Last year, we heard Rep. (and now candidate for governor) Marty Seifert, invoking the bogeyman of ever-growing government, and the Wall Street Journal, seeing dire portents in interstate moving van rentals.

Last week, the Freedom Foundation of Minnesota released a report — “Minnesota’s Out-Migration Compounds State Budget Woes” — that warns: “Thousands of Minnesotans are moving to states with more competitive tax rates, costing state and local government hundreds of millions of lost tax revenue at a time of historic budget deficits.” Here’s the study [Download PDF].

Briefly, the report shows that Minnesota used to have positive net in-migration but in recent years it has become negative. Seeking reasons why, it looks at migration between Minnesota and five other states that are warmer (Florida, Arizona and Texas), scenic (Colorado) or next door (Wisconsin). As a group, the five states have lower tax burdens, lower union penetration, and are more densely populated.

For those favoring lower taxes, it’s not a great leap to conclude that taxes may be to blame and, therefore, Minnesota should reduce its tax burden.

Even if the tax burden/out-migration correlation holds up, that alone cannot prove causation.

Here’s a post by MPR’s Bob Collins that points out the problem with inferring a cause from a correlation found by the study:

It would appear the report started with a conclusion, and then built data around it; a not-unusual tactic for special-interest groups on both sides of the issue.

For example, I could conclude that when people leave Minnesota, they’re looking for more opportunities to be unemployed. Silly? Of course it is. But Florida (11.6%), Arizona (8.8%), Wisconsin (8.3%), and Texas (8%) all have higher unemployment rates than Minnesota (7.3%). Colorado has the same unemployment rate, but a better hockey team. So maybe people are moving there because of hockey.

Here are a couple more concerns I have about assumptions the authors make:

  1. When a person moves out of Minnesota, that person is gone forever.  That may be true for some, but not necessarily all migrants. A person might move away for a few years to go to school, serve in the Armed Forces or pursue a job and then return to raise a family. This pattern is quite familiar to Minnesota recruiters seeking out-of-state talent.
  2. A person who takes up legal residence outside Minnesota for income tax purposes no longer (and forever) pays any state sales or property taxes. But many older snowbirds spend up to six months per year in the state, spending money and maintaining residences here. By using tax returns to establish where money and time are actually spent, the study likely overstates the loss.
  3. People with higher-than-average incomes have been leaving the state. Not quite. The data says people moving out of the state had higher income than those moving into the state. This could be an age-related phenomenon: many older out-migrants with substantial portfolio income versus many younger in-migrants at the early stages of their careers. The in-migration of younger people might bode well for the state, as they bring newer skills, greater future consumption and longer time horizons of future productivity.
  4. Health, family and opportunity in neighboring states don’t matter. The study did not examine these factors at all. Yet ask any group of migrants why they move, and these reasons are likely to figure prominently. The opportunity doesn’t have to be about jobs, either. Western Wisconsin has a significant number of residents who can live in a relatively rural setting and commute to jobs in the Twin Cities.
  5. If relative tax burden is so important, why don’t more Minnesotans go to Florida? One challenge for the Freedom Foundation is explaining why so few people move. At the least, they should be presenting evidence estimating how much of the decision to move is associated with or explained by taxes. 

The Freedom Foundation is correct when it says, “Understanding why folks are leaving the state is the first step in reversing it.”

Unfortunately, the study doesn’t really tell us. But it suggests some areas where future research and analysis might look for the answers.

One possible analysis would take advantage of recent changes in relative income tax rates (Minnesota versus these destination states) to study to what extent Minnesota’s reduced tax rates are related to net migration. Controlling for population (proportions of Minnesota residents who move) would also deepen understanding, as well as sketching out the patterns of in-migration and out-migration in warmer states.