Taxes are incentives. Much public policy is based on this insight. If we tax something, like carbon emissions or cigarettes, it is because we want people to emit less CO2 or smoke less. But policymakers who support such policy all too often dump this logic when it comes to taxes on incomes. Many of the same policymakers who view taxes on CO2 as disincentives, argue that we can impose or raise taxes on labor or investment income and that people will simply go on working and investing just the same.
But people respond to these incentives too. And one way they can respond to them is by moving from one jurisdiction to another with lower taxes. There are policymakers who argue that ‘tax flight’ doesn’t exist. The evidence shows that those policymakers are wrong. A recent paper by economists Henrik Kleven, Camille Landais, MathildeMuñoz, and Stefanie Stantcheva that “review[s] what we know about mobility responses to personal taxation” found that: “There is growing evidence that taxes can affect the geographic location of people both within and across countries. This migration channel creates another efficiency cost of taxation with which policymakers need to contend when setting tax policy.”
Take Minnesota’s estate tax. Our state’s estate taxes are high. Minnesota is one of only 12 states and the District of Columbia that imposes an estate tax, so anyone looking to avoid it has plenty of options. Of these 13 jurisdictions, Minnesota’s exemption, $3 million, is lower than in another eight. At 13%, Minnesota has the second-highest minimum rate of estate tax after Vermont. Minnesota’s top rate of estate tax, 16%, is the joint second highest.
In line with the empirical research on ‘tax flight’, there is evidence that Minnesotans leave the state in response to these taxes. In 2013, the Minnesota Society of Certified Public Accountants surveyed its members and found that “more than 86 percent of respondents said clients had asked for advice regarding residency options and moving from Minnesota;” 91% said the number of clients asking about moving had increased from previous years.
When these residents leave Minnesota, they take with them the future payments of income and sales taxes, among others. From the point of view of state government tax revenues, the net effect is a question of whether the amount the estate tax brings in from those who stay is high enough to more than offset the lost revenues from these other taxes from those who go.
In our 2018 report, “The Cost of Minnesota’s Estate Tax,” we at the Center of the American Experiment found it was likely that our state’s death tax was costing state government revenue. We estimated that, in 2015-2016 for example, the estate tax cost the state government $232.5 million in lost income and sales tax revenues.
A new study by economists Enrico Moretti and Daniel J. Wilson supports this finding. Moretti and Wilson studied “the effect of state-level estate taxes on the geographical location of the Forbes 400 richest Americans.” They then “estimate(d) the effect of billionaire deaths on state tax revenues.” “Surprisingly,” they concluded, “we find that the benefit exceeds the cost for the vast majority of states.”
But not for Minnesota. We are one of four states identified by Moretti and Wilson where the revenue lost by the state government as a result of the estate tax is greater than the amount of revenue the tax brings in. Those states also happen to be the ones with the highest top rates of income tax: Hawaii, Minnesota, Oregon, and Vermont. There would seem to be a tradeoff here: a state can have a high top rate of state income tax or an estate tax, but it cannot have both.
The purpose of taxation is not to bash the rich but to raise revenue to pay for government functions. The implications of this analysis are clear: Minnesota should repeal its estate tax.
