Warning: Minnesota Is Losing Its Wealth
We head into 2014 hopeful that the economy will gain more steam here and abroad, and that Minnesota will see continued growth in well-paid jobs, improved high school graduation rates for all students, and lower poverty and crime rates, particularly in our largest cities. Expectations are for a slight uptick in overall economic growth, and for most near-term significant gains in business earnings to be driven by business acquisitions, divestitures, mergers and restructurings (rather than large gains in healthy margin revenues), according to more than a dozen business, financial, legal and accounting leaders I talked with at the end of last year. Businesses are growing, and will continue to do so, one way or another.
The most daunting question for 2014, however, is where will those who finance, build and lead such businesses choose to live?
Minnesota has had a reputation for taxing its wealthy residents at a higher rate than many other states. It hasn’t been that much worse overall, considering our state’s numerous “quality of life” assets. However, those assets have deteriorated, the recession hit, and the state began to aggressively pursue individuals assumed to be skirting tax-related residency rules. The icing on the cake was last year’s decisions by the Legislature to further tax wealthy families, as well as those hoping to become wealthy someday (dual-income families earning more than $250,000 a year).
These anti-wealth policies are chasing such people out of our state, according to my conversations with the aforementioned leaders, as well as a recent report by the Center for the American Experiment’s Peter Nelson showing we’re losing our highest-paying taxpayers at the rate of $340 million a year in adjusted gross income. Ironically, the state’s well-intentioned revenue policies, aimed at helping fund better schools, etc., are driving away the people who are the largest sources of taxable income – and who also, more importantly, support dozens of nonprofits that make up for shortfalls in such taxpayer-funded programs.
“The [state’s] Department of Revenue will say this stuff happens anyway, and that’s fair; executives at a certain point in time look to move to a state that doesn’t impose an income tax,” says a partner in charge of state and local tax practice at one the largest accounting firms in the Twin Cities. “But I can tell you without a doubt that the changes brought about this last year have accelerated this process and initiated discussions at a noticeably increased rate.”
Several other advisors have provided me with similar reports in recent months. A financial services leader told how his firm recently helped move three generations of a client’s family to Tennessee. That state doesn’t levy a personal income tax on wages and repealed its estate tax in 2013; Minnesota taxes wages, and its estate and gift tax burden are now among the highest in the country. A wealth manager in Wayzata mentioned a client who moved millions of dollars out of Minnesota, depositing them in Florida. He didn’t want the account location used as evidence of residency, hence proof he should pay Minnesota taxes, even though he was clearly a Florida resident. Others say their clients have or will soon stop giving to foundations, seeing their doctors and doing other things to support Minnesota’s economy and culture for the same reason: The Minnesota Department of Revenue may use it as a reason to come after them.
How often does this really happen? Enough for legal, financial and accounting professionals to advise their clients to take the safest route: If you are relocating (or already have), move all of your money and spending away from Minnesota. Which is, of course, tragic, given how many of those successful former Minnesotans would still like to patronize our businesses and professional services, and help fund our civic organizations.
“When evaluating residency, Minnesota will say that it looks at 26 factors,” says the tax partner, who requested anonymity. “Case law has developed around where your base of life is at; where is one’s doctor, money manager, attorney? … These are all factors that add up. So if you have tens of millions of dollars with a money manager in Minnesota, that’s considered to still be a fair portion of your life.”
Meanwhile, several owners of large Sub-Chapter S businesses are considering relocation, after their tax rates increased and new estate tax policy makes it more expensive to transfer ownership. “Few are going to pick up their headquarters and move. But when it comes to expansion, they are looking elsewhere, and over time, that will have an effect here,” the tax partner says.
To those who say this is simply a bunch of complaining and bluffing, we can offer up Nelson’s report, which analyzed IRS data since 1978; since 1995, $5 billion in Minnesota-earned gross income has relocated to other states.
This is occurring, by the way, as more residents move out than move into the state (excluding immigrants). And the people who do move here, whether from overseas or another state, are bringing with them much less wealth than is being taken by Minnesotans relocating elsewhere.
If these trends continue, Minnesota will become a predominantly low- to lower middle-income state, with less funding for public schools, safety and infrastructure, fewer quality arts programs, and satellite business offices rather than the corporate headquarters that are taken for granted by our state government today.