Friday, March 4, 2011

Will tax increase make millionaires flee Minnesota?

Recently Gov Mark Dayton's plan to raise income taxes on Minnesota's top earners led to overwhelm argument that this would encourage wealthier Minnesotans to move to states with lower taxes. According to Dayton's proposal, Minnesota's top income tax rate should increase from 7.85 percent to 10.95 percent. And those who would be directly affected by this tax change proposal are single filers with annual taxable income of 85,000 or more and couples with taxable incomes of $150,000 or more annually. Apart from this, for everyone earning $500,000 a year or more, a 3 percent surtax would be collected. Should this tax plan be passed, Minnesota would become one of the states with the highest tax rate in the country.

Republicans and business owners strongly doubt whether this tax adjustment could actually help government increase tax revenue. They claim that if rich people choose to leave the state thereafter, government would in fact lose more revenue.

This argument is not without grounds. A sharp increase in migration and dropoff in the number of top earners occurred in other states such as New Jersey and Maryland when they passed similar tax hikes. In 2008, when Maryland started implementing the “billionaire tax”, about one-third of the state's wealthiest residents moved to other places. And New Jersey also suffered from great loss of residents when it passed income tax hike on top earners. So do these past experiences suggest that raising tax is the true cause of the loss of rich residents? And would tax rates really make a difference in what top earners decide to do in terms of where they're going to live?

As we know, there may be other factors resulting in the shrink of tax revenues from rich residents, among which, the economy downturn should be most persuasive. The recession has had a real impact on many states's tax revenue gaining since fewer people than before are earning enough money to make it into the higher tax bracket. And concerning the argument that tax rates would make real a difference in top earners’ decision of where to live, Charles Varner of Princeton University holds a different view. After examining the tax returns of New Jersey residents between 2000 and 2007, including those who earned more than $500,000 a year and had to pay the higher tax starting in 2004, Varner and a colleague at Stanford University found little difference in migration, based on who was paying the new higher taxes.

So should states raise income taxes on top earners as a way of both increasing tax revenue and improving social equity, or should they turn the other way around, offering more tax giveaways to the rich, as Wisconsin did? Is there any justification that top earners and the super-rich should contribute still a larger share of their income to support the nation needs? As we all know, this kind of question can never find an easy answer.

Schack, Tom, MPR, "Will tax increase make millionaires flee Minnesota?"
Reich, Robert, "The coming shutdowns and showdowns: what's really at stake?"


  1. I think if compare the poor and the rich, the rich are less likely to move when tax rate is increased. Because if the rich get a lot of income from one state, it probably means he/she has the network/resources he/she developed. So I think the cost for them to move is quite high.

  2. An additional note is that New Jersey and Maryland are facing more competition from their neighboring states. This may reduce the efficient loss of the proposed tax increase in MN, since the Twin Cities area does not have an easy substitute within hundreds of miles.