So What Matters the Most?
By: Cliff Allen
Is Minnesota operating at a disadvantage in trying to sustain our financial and intellectual capital? Disadvantaged by our tax and residency policies? So much so that it causes an exodus of wealth and people from the state? In my opinion, the most comprehensive analysis of this issue has been completed recently by Twin Cities Business Magazine and its editor, Dale Kurschner.
In the March edition, Kurschner speaks of ”…the loss of our Mojo…” – not just the income and net worth held by individuals who move elsewhere, but the loss of the intellectual capital as well. These are not idle observations. TCBM sponsored research that identified 3,099 taxpayers who left the state over just two years taking $2.1bn in taxable income and $31bn in gross estate value ($22.3bn of which was attributed to taxes and tax policy.)
There certainly are wealthy who hoard their capital, but there are also those who generously support causes and charities of their choice. Those who have built an estate of some substance on the shoulders of a business, the benefits to our economy and culture are many:
- Financial – Direct tax payments
- Employment – payroll, more tax payments, vibrant community, economic growth
- Serving – providing intellectual and financial capital to for profit and not-for-profit organizations
- Financial – Estate taxes and possibly bequests
Think of the charitable causes that are supported by wealthy. United Way has experienced cases where their top contributors move and then drop their donations in half. Then they drop to zero to avoid bringing scrutiny on themselves for residency claims. (Minnesota uses 26 factors to determine whether a person is a resident or not – and the audits sometimes turn into investigations. Beware if you move elsewhere and then absentmindedly purchase a resident fishing license in MN. Busted!)
In some cases, a huge chunk of the owner’s net worth is tied up in the business, not to be realized until the business is sold. So the estate taxes often are front and center in determining where to live the last part of your life.
The TCBM article lays out the reasons for Minnesota’s ‘Wealth Migration’ and tax avoidance by individuals, including: “The new top rate of 9.85% ranks as the third-highest such tax in the nation. It also hit many of the state’s 22,000 Subchapter S corporations, as their profits are passed through to their owners’ tax returns.”
I was speaking with a business owner recently who volunteered that he would be moving out of Minnesota before he sold his company – to avoid the punitive tax impact on his net worth. His church will probably also lose a strong and generous member.
Lost income taxes, charitable financial and intellectual contributions at risk, and a rising current of emigrants shows that impact on Minnesota is clear and present. One CEO called it an ‘anti-success’ feeling in the State.
I’m not one of these extremely successful and wealthy individuals, but this is concerning. Seems to me that we need to reestablish an environment that encourages risk, welcomes success and is structured to be transparent and fair to encourage our wealthy residents to remain financial and intellectual contributors to the state.
If you think the state is operating at a disadvantage, how would you solve the problem?