The Great
Minnesota Exodus Tax Acts of 2013
By Robert “Bob” L. Smith, 3rd
Gift and Estate Taxes are money losers, plain & simple…
“Run, run, run for your lives – the legislature is in
session!” Is an old political admonition, that is as true today, as it was
then, especially if you’re a Minnesotan.
The Minnesota Legislature has enacted three new taxes that will combine
to devastate the Minnesota economy going forward.
They are…
1.
The new special “Edina” individual income tax
bracket of 9.85%, so named for the Wall Street Journal editorial, spoofing the
legislature for going after the Edina mid-level executives.
2.
The new lifetime, cumulative “gift” tax coupled
to the estate tax. The question is “gift” to whom? Arizona, Florida, Texas, our
neighboring states? Minnesota and Connecticut are the only two states with a
gift tax.
3.
The new ”expanded” sales tax known as the
“warehouse” tax that goes after businesses performing warehousing and
distribution functions. It’s so unique that apparently there is no other tax
like it in the country. We’re number one!
A brief review of the immediate five-state business climate is in order as a point of departure for the following analysis, along with a sketch of tax policies for individuals. States of course need a robust private economy to generate growth, jobs, and the income that makes possible state and local government taxation. What is the current state of the business climate in Minnesota compared to our sister states? A recent CNBC report on the most favorable states to do business in, ranked South Dakota first, Texas second, North Dakota third, and Nebraska fourth. Another measure, the 2013 State Business Tax Climate Index published by the Washington DC- based Tax Foundation (www.TaxFoundation.org), ranked South Dakota number two, North Dakota 28, Iowa 42, Wisconsin 43, and Minnesota 45. Minnesota with the addition of the “warehouse” tax might well nose-dive to the bottom five next year.
With respect to individual income taxes it is similarly dismal. South Dakota locally and Florida and Texas in the southeast and southwest, respectively, have no state personal income taxes. Arizona has very low individual tax rates. Tennessee taxes only dividends and interest. Wisconsin and North Carolina have moved to, or are planning to move to, lower rates.
Federal individual income tax data (AGI) were formulated for
a single person, over age 65 with social security, a modest pension, an IRA and
some investment income. These identical data were then run by a tax accountant
for each state. What a retiree might be dealing with in Minnesota, as compared
to other states, is as follows: the comparable retiree in Arizona 61% less,
North Dakota 73% less, Iowa 37% less, Wisconsin 36% less. Nebraska 9% less (See
Table 1. Florida, Arizona, and Texas are added here as they receive the most
“out-migration” from Minnesota.)
Now if state, gift, estate and inheritance taxes are added the picture becomes even gloomier. Forbes magazine this past year listed Minnesota as one of the states you do not want to die in. And, Forbes reinforced it for the current year. None of our neighboring states were listed. Iowa does have a somewhat outmoded inheritance tax, but it exempts lineal heirs such as children and grandchildren from the tax so that for practical purposes it has no such tax. Minnesota now has a cumulative gift tax combined with an estate tax that results in Minnesota having the worst, most onerous gift & estate taxes in the nation. Sorry, Connecticut, we have ousted you from your number one position.
Estate taxes are being phased out around the country. North
Carolina just repealed theirs. Indiana has no estate tax and is phasing out
their inheritance tax overtime. Tennessee eliminated its gift tax last year and
is phasing out their estate tax by year end 2015. That leaves about a dozen
plus states with estate taxes and a half dozen with inheritance taxes, two of
which have both.
The Tennessee case is of special interest in terms of its
potential lessons for Minnesota. Tennessee as a state had many good things
going for it, including the fact that both political parties were strongly
pro-growth. Nevertheless their economy continued to underperform. Why? A study
dated March 2012 by Arthur B. Laffer and Wayne H. Winegarden, “The Economic
Consequences of Tennessee’s Gift and Estate Tax,” supplied a convincing answer.
The authors said that “Had Tennessee eliminated its gift and estate tax ten
years ago, Tennessee’s economy would have been over 14% larger in 2010, and
there would have been 200,000 to 220,000 more jobs in the state. And, the more
robust economic growth would have benefited state and local government revenues
adding between $7B and$7.3B to state and local coffers.”
A 14% larger economy and thousands more jobs over the next
decade certainly would be a godsend for Minnesota. Adjusting for population, a
rough bonus of $5.8B to $6B in revenues for state and local governments would
be the result, an outcome that should obviously appeal to both the legislative
and executive branches.
Minnesota is currently at the beginning of the gift tax
debate rather than at the end. We have a chance to avoid a repeat of the
Tennessee debacle. Connecticut is the only other state in the nation to have a
gift tax and their exemption is twice that of Minnesota ($2M as opposed to
$1M). The estate tax needs to go as well. Adding a gift tax to our estate tax
at this economic juncture is counter-productive - indeed it is tantamount,
along with the warehouse tax, to an economic suicide pact.
The Federal gift and estate tax exemption currently at
$5.25M is substantially above that of Minnesota’s. Illinois’s is four times
larger. Iowa’s inheritance tax (no estate tax) is zero for lineal heirs.
Nebraska has no estate tax but a minimal inheritance tax for immediate relatives
(See Table 2.) It does the average Minnesotan little good to have the federal
death tax rate curtailed if the state steps in to negate the benefit of raising
the federal exemption. It especially does Minnesota little good if other states
do not follow suit and in fact reduce or eliminate their estate taxes. Again
Arizona, Florida, Texas, North & South Dakota, and Wisconsin have no estate
or inheritance taxes.
There is much more to the three new Minnesota taxes than
just the negative economic effects. There also is the human side of this issue.
The taxes hit hard at the senior citizens, their children and their
grandchildren. Seniors will be hit hard because some will increasingly face the
tough decision to leave Minnesota and their families for states that offer a
safe haven from gift and estate taxation. Seniors want to be near their
families but they also want to leave their children something. They have worked
hard to achieve that end. When seniors feel more secure and even modestly
affluent, the so-called “wealth effect,” they spend more which means more
economic activity. Mr. Laffer states the wealth effect by one estimate may be
as much as nine cents in expenditure for each dollar of wealth – that is, a
senior may spend around one-tenth of their perceived wealth over the long-term.
If they feel poorer, seniors may spend significantly less. Meanwhile the most
ambitious young people, the entrepreneurs and the young professionals, may move
to the west, or the Sun Belt, to escape the confiscatory taxes that cramp their
aspirations.
Losing wealth (and people) to other states is obviously not
good for Minnesota. Dislocating families is not pretty. Over taxing the
so-called “rich” may be short-run good politics, but it has negative long-term
human and economic consequences. Mr. Laffer points out that gift and estate
taxes do not re-distribute wealth; they merely re-distribute population. Voting
with one’s feet is not the referendum we want for Minnesota. The more wealth
that flees the state, the less revenue there is to tax and the less attractive
we are for the ambitious young and all but the most highly affluent seniors.
As for businesses, let’s not kill the geese that lay the
golden eggs. The warehouse tax does not bode well for the Minnesota business
climate and job creation. Nice politics, not so nice when the tax revenues
slip. The warehouse tax is one of the worst measures passed by the Minnesota
legislature in recent years and there is an overwhelming case for its repeal.
We as a nation want to bring back offshore businesses and
their capital. We as Minnesotans should want to repatriate ex-residents and
their funds that moved to other states to escape overwhelming taxation. One way
to begin is by creating a tax friendlier place to enjoy living in and at all
costs we should discourage further “out-migration.” We really need to put an
end to the politics of class warfare. We will all lose if our most enterprising
fellow citizens and prominent businesses leave the state. We will all benefit
from sound economic policies and reasonable taxation.
Gift and Estate Taxes are money losers, plain and simple.
They cost state and local governments lost tax revenues in amounts greater than
gift and estate taxes bring in. The Wall Street Journal Estate Tax Editorial of
August 20, 2013, awarded us – Minnesota – the grand prize for (tax) self-abuse.
Why should we shoot our self in the foot and in the state wallet? We do not
need to repeat Connecticut and Tennessee’s economic fiascos. Out with gift and
estate taxes!
The Legislature ought to repeal the gift tax in its
entirety, and, for good measure ought to enact a phase-out of Estate Taxes over
a three year period. This did not occur during the September 13, 2013 Special
Session. The Governor and the Majority and Minority Leadership of both
Chambers need to come out with an unequivocal position that these taxes will be
eliminated in the 2014 Session.
Table 1
2012 State Individual
Income Tax Comparison (Minnesota = 100)
State
|
Percentile
|
Difference
|
Minnesota
|
100
|
---
|
Wisconsin
|
64
|
-36%
|
North Dakota
|
27
|
-73%
|
South Dakota
|
No Tax
|
---
|
Iowa
|
63
|
-37%
|
Nebraska
|
91
|
-9%
|
Arizona
|
39
|
-61%
|
Texas
|
No Tax
|
---
|
Florida
|
No Tax
|
---
|
*A single person over 65 years old with a pension, social
security, IRA & some investment income.
Table 2
2012 Estate & Inheritance Tax Comparisons ($3,000,000
Estate, Non-business, non-farm,
4 children as heirs)
Entity
Federal
|
Estimated Estate Tax Owed - Non-business, non-farm
|
Minnesota (a)
|
$182,000
|
Wisconsin
|
None
|
North Dakota
|
None
|
South Dakota
|
None
|
Iowa (b)
|
None
|
Nebraska (c)
|
$28,400
|
Arizona
|
None
|
Texas
|
None
|
Florida
|
None
|
(b) Iowa Lineal Heirs Exempt
(c) Nebraska 1% Rate for immediate family, $40,000
exemption/recipient
No comments:
Post a Comment