What’s gloomier than the spring weather we’ve had this year? The widespread questioning by some residents whether to still call Minnesota home—those who feel they were recently beaten up by the governor and state Legislature. I’m talking about vice presidents in their 40s as well as CEOs and business owners in their 50s or 60s, who collectively contribute billions of dollars to our economy—and are also our greatest champions for creating new businesses.
We all get it: Attack-the-rich positioning is popular politically, given that the majority of the population is not rich. But attacking the affluent demonstrates economic ignorance and political cowardice in addressing what’s truly needed: reforming state spending so that it’s more efficient, and effective, before throwing more money into its coffers.
What’s worse, our state government’s recent actions—what the governor and Legislature enacted as well as the Department of Revenue’s increasingly aggressive investigations into those spending only part of their time here—is fueling a migration of affluence and jobs to more welcoming states and countries.
You’re probably thinking, “How many times have I heard that one before?” But things are different today. In just about every conversation I’ve had with CEOs, lawyers, accountants, money managers, and investors during the last few months, they have raised concerns about what they consider to be an impending loss of business owners, retirees, and even younger, talented executives who can find as good a standard of living (or a better one) and a more favorable tax climate in other states. It’s the worst I’ve seen in nearly 25 years keeping tabs on Minnesota’s business pulse.
Minnesota this spring increased by 25 percent the taxes to be paid by its highest wage earners—and lowered the threshold of “highest” to households with $250,000 or more in income. At 9.85 percent, it’s the fourth-highest in the nation, and worse, hits most of the 22,000 Subchapter S corporations in Minnesota, as their profits are passed through to their owners’ tax returns. (Great timing, given a recent Kaufman Foundation report placed Minnesota dead last nationally when it comes to business start-up activity.)
“These are people working 50, 60, 70 hours a week—business owners with blood, sweat, and tears in what they’re doing. It doesn’t seem right that those who are contributing so much to support this economy and help others are getting dinged again,” says Sharon Calhoun, a principal with Vector Wealth Management.
And this increase in tax rates means less investing in one’s business, which in turn can lead to fewer jobs not only from our smaller employers, but from some of our largest and most important.
“Our taxes are going up and that is money that otherwise would have been reinvested in the business,” says Susan Marvin, president of Marvin Windows and Doors, which bit the bullet several ways to keep from laying off any of its employees (nearly 2,000 in the Warroad area) during the recession. “After what we were just through with this recession, and we put off investments to do what we did, we really need to make them now”—and this makes it harder to do so, if at all.
By defining rich households as those with annual incomes of $250,000 on up, more than 40,000 families are paying an estimated $416 a month in additional taxes. While that income level is five times the national average, and only 3 percent of couples earn that much or more, it needs to be considered relative to one’s standard of living and costs. These households are doing well financially, yes. But they’re earning it. And given our pensionless society today, they need to do so for retirement planning.
As Minnesota starts taxing these households more, some are starting to ask why stay here when they and their families can relocate to a place where they can live well, enjoy similar amenities, make more, and pay less in taxes—and in a better climate, to boot? And if they do leave, they also won’t have to worry about the tax pressures that would hit them if they retired in Minnesota (or worse, tried to move out but keep a summer home here).
It’s a similar line of thinking for those looking to build a family business. Case in point: the state’s new gift tax. Minnesota is now one of only two states to tax gifts—10 percent of every dollar given over $1 million during one’s life time. There’s a federal tax for this, but it’s based on gifts beyond $5.25 million. True, this sort of tax probably affects a very small percentage of our population. But this group also owns or leads companies.
“I met with a client three weeks ago; he has a $60 million manufacturing facility and was planning, combined with his wife, to give up to $10 million in ownership to a family trust [which is below the federal $5 million-per-person gift threshold]. I had to tell him that due to this new law, he has to make this happen by June 30 or it will cost him $850,000 in taxes,” says Doug Wolgamot, an attorney with Winthrop & Weinstine. “For a client like this, if he was near retirement, you’d say ‘Change your residency and you won’t have to pay a dime to do this.’ That’s a pretty easy decision.”
Those in favor of the gift tax and other soak-the-rich measures point out that the wealthiest have been paying a slightly smaller percentage of income tax than the rest of the population. And again, the public opinion takes this and basically says “case closed.” But the wealthiest contribute more to our economy than others by way of spending, and in so doing contribute more to the state’s other major revenue streams: consumption and use taxes, and property taxes (combined they account for about 66 percent of state tax revenues).
The top 5 percent of taxpayers in Minnesota average $280,000 in household income and collectively provide the state’s economy with approximately $20 billion in financial support each year, based on our estimates of everything from state and local taxes to entertainment, home repairs and remodeling, professional services, charitable giving, retail purchases, utilities, and kids’ sports programs—as well as an analysis of data from the 2013 Minnesota Tax Incidence Study released by the state in. For every one of these earners who leaves the state, we estimate Minnesota loses $155,000 in annual economic support.
So what can be done at this point? Expand your company’s operations elsewhere and eventually move out, or grin and bear it—and become much more involved, and speak up. “It drives home the importance of becoming involved and engaged before there’s a problem, not after,” Marvin says. “It seems difficult to have a public dialogue about this because the vast majority of us are not willing to talk about taxes and become really educated on the subject, so we often end up thinking we were informed through what really are just sound bites.”