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. A new study by economists Enrico Moretti and Daniel J. Wilson confirmed it.
When taxes are high in one jurisdiction, people have an incentive to move to another one with lower taxes. We see people doing just this. The large and growing body of evidence on the effects of taxation on migration was summarized recently by economists Henrik Kleven, Camille Landais, Mathilde Muñoz, and Stefanie Stantcheva. They 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 that policy makers need to contend with when setting tax policy.”
Minnesota’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, $2.7 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.
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 people move, 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 question is 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.
We found they probably aren’t. 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. In their paper, 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 costs in terms of lost revenues from other taxes outweigh the benefits in terms of estate tax revenues. Those states are, coincidentally, the ones with the highest top rates of income tax: Hawaii, Minnesota, Oregon, and Vermont.
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.
John Phelan is an economist for the Center of the American Experiment (AmericanExperiment.org), which is based in Golden Valley, Minn. He wrote this for the News Tribune.