It’s demographics, not taxes


Last week the Freedom Foundation issued a report that highlighted “out-migration” in Minnesota. Net out-migration occurs when the number of people leaving Minnesota for other states exceeds the number of people moving from other states into Minnesota.

The Foundation’s theory — that net out-migration was the result of high taxes in Minnesota — turned out to be all wet. As noted in a recent Hindsight post, the relative tax burden in Minnesota was higher during the period of net in-migration (1995 to 2001) than during the period of net out-migration (2002-2007).

Let’s examine the Freedom Foundation report from another perspective. The Foundation claims that from 1995 to 2007, Minnesota lost an aggregate of the $423.3 million in state and local government revenue to out-migration. Averaged over 13 years, this would come to $32.6 million annually.

In all likelihood, the vast majority of the $32.6 million in revenue loss would have occurred regardless of Minnesota’s effective tax rate relative to other states. The most probable cause of Minnesota’s out-migration is retiring baby-boomers leaving Minnesota for warm-weather states. In short, the driving force behind out-migration is demographics, not taxes.

However, for the sake of argument, let’s assume that a significant portion of the $32.6 million annual revenue loss is due to out-migration driven by taxes. As it turns out, a 0.2 percent increase in Minnesota’s third tier individual income tax rate (which affects married joint filers making over $132,000 a year) is estimated to generate over $50 million a year, far surpassing the small portion of the $32.6 million out-migration revenue loss that is due to higher taxes.

Furthermore, if we are going to consider the alleged out-migration that results from higher taxes, we should also take into account the in-migration that might occur as the result of increased public investment. After all, people are more likely to live in a state where the roads are properly maintained, schools are adequately staffed, and neighborhoods are safe and clean. It is entirely possible that the out-migration resulting from deteriorating infrastructure and public services exceeds out-migration resulting from taxes.

Since 2002, Minnesota has cut taxes, fees, and other own-source revenue more than any other state in the nation. Contrary to rosy predictions from anti-tax proponents, Minnesota has lost ground to other states during our “no new tax” experiment. In light of Minnesota’s recent experience, citizens need to be cautious of reports that claim that the “sky is falling” because of high taxes.