From concealed weapons to concealed wealth…
An eager reader points to a May article indicating that there is no evidence that Minnesota’s rich folks are fleeing to other states to hide their wealth from the new higher income tax tier Governor Mark Dayton got passed in 2013:
Critics predicted that the ultra-affluent would flee after Gov. Mark Dayton secured 2013 passage of a new income tax tier of 9.85 percent on individuals who make more than $156,000 a year. But the latest data show that the number of people who filed tax returns with over $1 million in income grew by 15.3 percent in the year after the tax passed, while the new top tier of taxpayers grew by 6 percent [Adam Belz and J. Patrick Coolican, “There’s No Evidence That Ultrarich Are Fleeing Minnesota,” Minneapolis Star Tribune, 2016.05.07].
Belz and Coolican do find some data indicating that, prior to Governor Dayton’s tax hike, Minnesota’s wealthy class wasn’t growing as quickly as South Dakota’s:
Between 2005 and 2014, the number of tax returns filed with more than $1 million in income rose on average 8 percent each year in Iowa, 8.5 percent per year in Wisconsin and 3 percent per year in Minnesota. From 1997 to 2013, South Dakota, which has no state income tax, nearly quadrupled its number of tax filers who earn more than $1 million per year [Belz and Coolican, 2016.05.07].
But note that Minnesota has had and South Dakota has resisted state income tax since well before that period. South Dakota’s higher growth rate may just mean we’re playing catch-up from a far lower percentage of wealthy residents. We still haven’t caught up: in 2015, 6.0% of Minnesota households had over a million dollars in investable assets; 5.1% of South Dakota households had comparable wealth.
Oh, and Minnesota has five billionaires; South Dakota only has one. The states with the most billionaires, California and New York, have top marginal income tax brackets of 13.3% and 8.82%, respectively.
SD’s $1-million-per-year class quadrupled in 16 years? What economic changes account for that?
Citibank? Ethanol? Sanford/Avera? Payday lending? None of those seem to be drastic enough, either on their own or combined…
Kind regards,
David
The whole state of South Dakota population barely matches up to the smallest big city. Income taxes tend to get implemented once your state earns enough demand for a population and sort of “graduates” from the really old days of settlers and sparsity.
I’m just ecstatic about the new Panera Bread coming to Rapid City. Now, that’s economic development I can really sink my teeth into.
Over here on the West side, we’re movin’ on up! – lol
Minnesotans know where they made there money and it was from people making good wages, not single parents on minimum wage ready to lose their job to a teenager who can get paid less. This is the other half of the equasion when wages go up. The wealthy get better customers and get wealthier. Sure a few will trickle into South Dakota to save on taxes but those few look like a lot to South Dakota but look like a few to Minnesota. And what good do they do South Dakota? If they are not paying income tax, not much. Are they putting up stores in our small towns with low wages to cash in on miniscule profits or break even at best. No, they are keeping their businesses in states with better paid customers.
David, I too am intrigued by that quadrupling. Whatever caused that quadrupling, it hasn’t put us over Minnesota’s millionaire percentage.
I was going to speculate that farm consolidation could have played a role, but since 1993, South Dakota has gone from 34,500 farms to 31,300.
In 1998, there were 1,100 farms classified as selling $500K+ of goods. By 2012, that class included 5,000 farms. In 2013, USDA started splitting the millionaire farms into their own category: in 2015, we had 5,900 farms doing $500K+ of business; 2,400 of them produced $1M+.
But one would think that whatever drives more farm wealth in South Dakota would have a similar effect in Minnesota, so increased farm wealth would not explain the remarkable difference of growth in millionaires in our two states.
I can also rule out the possibility that my income increased the percentage of millionaires here. However, that quadrupling does overlap nicely with the era of my work as a teacher in South Dakota. Maybe my graduates are cleaning up… ;-)
Saying that the other states increased by 8% or 8.5% in a 10-year period and that South Dakota “nearly quadrupled” in a 17-year period is comparing apples to oranges.
When you calculate South Dakota’s annual percentage rate of increase over that 17-year period it comes out slightly less than 8.5% per year. So our rate of increase in tax returns with over $1 million income is slightly higher than that of Iowa and slightly less than that of Wisconsin.
Wisconsin’s spate of wealthy out to be going through the roof the way the lege and Walker have tipped wages and benefits towards to wealthy and cut wages and got rid of the minimum wage for workers.
Oops! There goes another GOP myth.
Twin Cities Business magazine has an article stating the opposite conclusions from those in the Star Tribune.
Minnesota’s Great Wealth Migration
Causation and statistics are hard.
The logistics outlined in this article regarding what the MN Dept of Revenue tracks to determine residency sounds like a nightmare. Counting hours at the airport? Tracking what charities one gives to? “Even when Minnesota audits find nothing, they can run several thousand dollars in accounting and legal costs.”
I’ll pass on a state income tax.
Kind regards,
David
David, do we know the accounting and legal costs of enforcing sales tax?
Ror reminds us to do math! Actually, I calculate that “nearly quadrupling” from 1997 to 2013, 16 years, requires 9.5% annual growth. Much larger than Minnesota’s, but not as impressively larger than Iowa’s or Wisconsin’s as what Ror rightfully calls an apple-orange numerical comparison.
At 8%, Iowa’s millionaire class would quadruple in 19 years. At 3%, Minnesota needs 25 years just to double.
Two points on the income tax: An income tax can be as simple as doing your federal taxes and taking a small percentage for SD of your federal income tax due. Minnesota and some other states with income taxes have slight differences in how deductions are treated and what is deductible. Thus, that makes it more complicated, although the accounts that I have talked to don’t seem to think it is a big deal.
A second point about the personal income tax is that it is often viewed by companies as a positive for the state business climate. This is because if a state doesn’t have an income tax they may not have the money for infrastructure or a good education system.
The statistics on the increase in millionaire earners is somewhat flawed because it doesn’t give a complete picture of all earners. For example, one state could have a lot of incomes in the $950,000 range that wouldn’t count on the millionaires’ list.
An interesting comparison to me is Minnesota and Wisconsin. Wisconsin went the conservative route and cut taxes and state investment. Minnesota raised taxes on the wealthy and made more state investments in infrastructure and education. Minnesota’s economy is clearly outperforming Wisconsin’s economy.
Your math is off, Cory. If you don’t count the year 1997 and say that the period of 1997 to 2013 is just 16 years, the rate of increase is an even 9%, not 9.5%. And that is if there were an actual quadrupling. With a near quadrupling, the increase would be under 9%. Use the rule of 72.
Clearly Mr. Rorschach is not a fan of French Math. That is good.
http://tcbmag.com/Industries/Politics-Public-Policy/Minnesota-s-Great-Wealth-Migration
Thanks Rorschach for the apples-to-apples comparison. Makes you wonder why the article stated it so confusingly…
“David, do we know the accounting and legal costs of enforcing sales tax?”
Hi Cory,
I don’t have any stats, just an anecdote. Dad was audited by the SD Dept of Revenue shortly after building his new office building in Madison. Actually, I vaguely remember that she insisted that it wasn’t an audit, she was just sent to provide some assistance on tax compliance. Anyway, a lady came in and basically went over the receipts for all the fancy new eye doctor equipment he installed. (Retinal thickness analyzer, visual fields, autorefractor, etc.) Since he purchased those items from out-of-state companies, he had to pay use tax on them… six grand altogether, I think.
Here’s what I thought of the experience…
1) The DOR knows the type of situation that would trigger some use tax, and doesn’t bother you unless you’re in that situation.
2) The “audit” was as friendly and straight-to-the-point as it could be. “Hey did you know that you’re liable for use tax on these big purchases?” They didn’t go digging into a lot of past history about his finances and certainly didn’t ask how many days he spent inside SD.
3) He set up a payment plan with them for what he owed and they never interrupted him again.
That struck me as about as fair and efficient a process as I could imagine.
For years, you and I have discussed state income tax. We both agree that we should curb the regressive-ness of sales tax (food, heat, clothing). But I hate income tax, not because of its unfair, but because of what a nuisance it is. As a business, I have no problem filing my sales tax report every month. It takes me like one minute.
But (federal) income tax is atrocious. Every business purchase has to be tracked and categorized. Major purchases have to be depreciated. You only get half a deduction on food and entertainment if a shareholder is involved. 1099s have to be sent to any independent contractor that you’ve done more than $600 of business with. Unless they’re a corporation. Unless you paid them electronically. etc etc
Altogether, you have to hire someone just to submit your income taxes. How inefficient is that? We all waste money every year… most people so they can receive the excess money that the government has drawn in the form of a refund. Even the simplest income tax form, the 1040-EZ has arcane questions about “Earned Income Credit” and “nontaxable combat pay election”. What percentage of the working poor can fill out this form correctly on their own?
If we had a non-nuisance income tax, then I could consider supporting it. This would be a step in the right direction: “In several European countries, the government sends tax forms that are already filled out; taxpayers just need to review and sign them (or send a confirmation text message).”
But the Twin Cities Business article touched on yet another nuisance of state income tax that I hadn’t thought of… that of determining residency. I mean, look at this fun. Not only does income tax expose me to having my private financial affairs audited by either federal and state authorities… but even after I leave Minnesota, their DoR can rule that I owe them taxes because I spend too much time there with friends and family… or forgot to rescind my Kiwanis membership.
Sales tax, on the other hand, is efficient and non-nuisance. I pay my taxes whenever I buy things. There’s zero risk of a private citizen being audited for not paying sales tax. The business, just by keeping its books, knows how much sales tax to remit to the DoR. It takes a minute, and you can pay online. No need to hire someone to do it for you.
Sales tax also has the advantages of (a) collecting money from anyone who is evading the IRS (e.g. mafia, drug dealers, some undocumented immigrants), (b) collecting money from tourists visiting Wall Drug, (c) letting you save your income without penalty.
Let’s fix sales tax, rather than piling on inefficient bureaucratic nuisances.
Kind regards,
David