When People Are Taxed, They Flee

by Burt on February 4, 2013

Some say the most embarrassing event in Minnesota’s history was thirty years ago, when the vaunted Minnesota Gophers were drubbed by Nebraska 84-13 on the football gridiron. Others cite Hubert Humphrey’s first Senate victory in 1948 as the state’s biggest red-faced moment. Both may soon be surpassed by Governor Mark Dayton’s array of tax hikes that he may foist on the unsuspecting taxpayers of Minnesota.

First, Governor Dayton wants a “snowbird tax” on those citizens, mostly retirees, who summer in Minnesota but exit during the winter. If snowbirds spend at least sixty days in Minnesota a year, Dayton wants to tax their income from stocks, bonds, capital gains, and dividends. He says it is “one of the unfairnesses that somebody can spend six months and one day out of the state and pay no state personal income taxes and come back here and take advantage of all the state has to offer for five months and 29 days. So, yes, there’s a snowbird tax,” the governor insists.

Second, Governor Dayton wants to hike the state’s income tax from 7.85 to 9.85% on all income over $150,000 for singles and $250,000 for joint filers. That would give Minnesota the sixth highest state income tax in the nation.

The Wall Street Journal retitles Minnesota the “land of 10,000 taxes” and Governor Dayton’s proposals raise interesting questions. Does he really expect the state’s snowbirds to return to Minnesota in the summer if he and his bureaucrats are there at the border to count their days and grab their cash? Does he also expect the state’s current batch of rich people to stay put, even if they can keep more of what they earn by crossing the border to Wisconsin, Iowa, or South Dakota?

No, that won’t happen. People respond to incentives, and if Governor Dayton tries to fleece the state’s snowbirds, they will fly south permanently–and the state will actually lose, not gain, revenue. That has already happened with tax hikes in New York, California, and Maryland.

The flip side of this issue is that when states–or the nation–cut tax rates, people use their extra cash to earn more, and ultimately pay more in taxes. The Bush tax cuts of 2003 help prove this point. The capital gains tax was cut from 20 to 15%, and when people were allowed to keep more, they invested more. Thus, capital gains revenue more than doubled from $47 billion in 2002 to $97 billion in 2006.

The same thing happened when the top rate of the income tax was cut in 2003 from 39.6 to 35%. Rich people were allowed to keep more and so they invested more, and ultimately paid more in total taxes. For example, people earning $5 million or more per year increased their revenue paid in taxes from $54 billion in 2003 to $131 billion in 2006.

If Governor Dayton passes his “soak the snowbirds” bill, Minnesota is likely to see much revenue fly south.

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