Wednesday, March 13, 2013

Minnesota 'snowbird' tax: Is it a good idea?

Minnesota Governor Mark Dayton’s recent tax proposals include many changes to the state’s tax code, and one that stands out is the “snowbird tax.”  This tax is intended to address a perceived loophole in the state tax code that allows residents to not pay any income taxes to the state of Minnesota if they live there less than half of the year.  Governor Dayton is worried that so-called “snowbirds” (who are people, usually retired, who spend the winter months in warmer climates—some of whom who go to states like Florida and Texas that don’t have any state income taxes) are filing their taxes in other states while using Minnesota services for a considerable portion of the year.

The law would tax non-residents who live in the state for two to six months out of the year.  Rather than taxing income on wages and salaries, this tax would be only tax income earned from stocks, bonds, capital gains and dividends.  This strategy appears to indicate that the policy is aimed at retirees who may not be earning income from working anymore.  The Minnesota Department of Revenue estimates that the tax would generate $30 million in revenue, or 1.5% of Governor Dayton’s proposed $2.1 billion dollar overall revenue increase.  The proposed 2013 overall budget totals $37.9 billion.

One element of the issue that the governor is considering is the idea of equity.  The governor sees people who spend considerable time in the state and use Minnesota goods services such as infrastructure, public works, and parks, to not pay taxes that help maintain that level of services as being free-riders who are not paying their fair share for services that they are using.  Fairness is a concept that Governor Dayton is making a central part of his defense of this proposed tax. 

While in principal this tax might increase equity, it may be difficult to collect.  It would either force nonresidents to disclose the amount of time they spent in the state, or it would require the state to add some type of mechanism that would enable it to monitor and/or verify how long these nonresidents spend here.  Either of these options complicates the methodology for levying this tax, and with the expected revenue stream from the “snowbird tax” being so low, it may not be worth it.

If it passes, Minnesota would be the first state to implement such a measure.  It is strange that the governor would go to such an extent to pass a groundbreaking tax like this for such a small amount of revenue.  Perhaps this is a case where the governor’s sense of fairness is overshadowing practical considerations and political pressure. 


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