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Minnesota’s Out-Migration
Compounds State Budget Woes
Contents
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Minnesota’s Out-Migration Compounds State Budget Woes | 1
Minnesota’s Out-Migration Compounds State Budget Woes
Executive Summary
The latest revenue forecast for Minnesota’s state budget
revealed a $1.16 billion shortfall for the current biennium. Of
the total shortfall, $827 million (70 percent) is due to lower
individual income tax collections. In this study, we demonstrate
that a significant long-term driver of lower individual income tax
revenue is the out-migration of Minnesota’s residents to other
states— not just “snow birds” in search of warmer weather, but
also individuals gravitating to a friendlier tax climate.
Where are Minnesota’s out-migrants going and why? According
to the Internal Revenue Service (IRS), between 1995 and 2007,
the top five states are Florida (21,256), Arizona (19,605),
Wisconsin (9,449), Colorado (6,894) and Texas (6,551)—
states with far more competitive state tax structures.
Why should policymakers care about out-migration? These
understanding of Minnesota’s migration patterns is essential to
understanding progress on much larger public policy issues.
Out-migration represents a relatively recent development for
Minnesota. Between 1991 and 2001, Minnesota gained 104,295
residents from other states, according to the U.S. Department
of Commerce’s Census Bureau. In 2002, however, the trend
abruptly reversed. Between 2002 and 2009, Minnesota lost
54,113 residents to other states. Clearly Minnesota now has a
severe out-migration problem.
Of course, when someone leaves, state and local governments
don’t just lose income and taxes for one year, but for all future
years as well. Compounding these figures over the thirteen years
assessed in this study, Minnesota has lost $22,703,034,000 in
net income and $2,548,131,000 in state and local tax revenue
due to out-migration. Surely these higher tax collections would
have helped Minnesota’s state and local governments during
out-migrants also take their incomes with them. Between 1995
the current economic downturn.
and 2007, the total amount of income leaving the state was at
What can policymakers do about out-migration? Understanding
least $3,698,692,000. More disturbingly, income left Minnesota
in every year—even in years when more people moved in than
moved out—which suggests that people with higher-than-
why folks are leaving the state is the first step in reversing it.
One way to do this is to compare various aspects of Minnesota
with those of destination states. The data shows that people
average incomes have been leaving the state. Had this income
with higher-than-average incomes are leaving Minnesota for
stayed in Minnesota, state and local governments would have
states where taxes are lower (especially income taxes), union
collected an estimated $423,317,000 in additional taxes.
membership is lower, population density is higher, cost of
Economists have long studied migration between the states
housing is lower, and the weather is warmer.
because migration is the ultimate expression of citizens “voting
Clearly, not all of these variables can be addressed by
with their feet.” In other words, more people moving into a state
policymakers—weather cannot be changed through
is a good sign of social and economic progress, whereas more
legislative action. Most variables, however, can be affected by
people leaving a state is not a healthy sign. Therefore, a thorough
policymakers on an annual basis—tax burdens can be reduced.
Freedom Foundation of Minnesota | 2
and even then, will take years to establish measurable change
such as union membership, population density and cost
of housing. Minnesota should work toward reducing the
tax burden via reductions in the income tax which would
encourage both people and their incomes to stay in Minnesota
or move into the state. Both Florida, with no income tax, and
Arizona have lower tax burdens.
Chart 2
Minnesota’s Net Population Gain/Loss to Other States
July 1, 1991 to July 1, 2009
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Indeed, some variables can only be influenced by legislation
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While identifying specific remedies for each of these issues
is beyond the scope of this study, without action by the legislature
and the governor, out-migration will surely continue reducing
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the ability of both the private and public sector to ensure
54,113 residents to other states. Chart 2 shows that over half the
Minnesota’s economy remains strong and vibrant.
gain in residents between 1991 and 2001 has already been lost.
Chart 1
Minnesota’s Net Domestic Migration
Clearly Minnesota now has a severe out-migration problem.
While the Census Bureau data is comprehensive, it is also
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July 1, 1991 to July 1, 2009
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very shallow. Fortunately, the Internal Revenue Service (IRS)
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provides an annual snapshot of taxpayer migration via tax returns
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which provides for a much richer picture of migrants.ii The IRS
has access to actual tax returns, an accurate proxy for the number
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of households; it also provides the number of exemptions,
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which is a proxy for the number of people in the household and
their reported Adjusted Gross Income (AGI), which is a proxy
for household income.
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Table 2 shows the IRS’s aggregate migration for the state of
The most comprehensive data available on domestic migration
left the state while 44,158 taxpayers entered the state—a net loss
comes from the U.S. Department of Commerce’s Census
of 4,428 taxpayers. Overall, Minnesota also lost 6,233 exemptions
Bureau.i Chart 1 and Table 1 show that between 1991 and
and $378,757,000 in AGI.
2001, Minnesota gained 104,295 residents from other states.
However, in 2002, Minnesota’s in-migration quickly reversed
into out-migration. Between 2002 and 2009, Minnesota has lost
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Minnesota. In 2007 (the latest data available), 48,586 taxpayers
For the entire period between 1995 and 2007, Minnesota has
lost 18,961 taxpayers, 4,352 exemptions and $3,698,692,000 in
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Minnesota’s Out-Migration Compounds State Budget Woes | 3
AGI (nominal dollars). More disturbingly, as shown in Chart 3,
(6,215), California (5,413), and Texas (4,293). On the other
AGI was negative in every year of this period—despite both the
hand, the top taxpayer in-migrant states are Iowa (9,634),
Census and IRS data showing net in-migration of people. This
North Dakota (7,620), Illinois (6,311), Wisconsin (5,219) and
suggests that people with higher-than-average incomes have
Michigan (4,490). Overall, Minnesota loses taxpayers to 33
been leaving the state.
states while gaining taxpayers from only 17 states.
Table 1
Minnesota’s Net Domestic Migration
As shown in Table 3b, the top exemption (people) out-migrant
states are Florida (21,256), Arizona (19,605), Wisconsin
July 1, 1991 to July 1, 2008
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(9,449), Colorado (6,894) and Texas (6,551). On the other
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North Dakota (16,565), Iowa (14,105), Michigan (7,893) and
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California (5,178). Overall, Minnesota loses exemptions to 27
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states are Florida ($1,965,013,000), Arizona ($927,374,000),
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Wisconsin ($384,711,000), California ($297,677,000)
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and Texas ($275,469,000). On the other hand, the top
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AGI in-migrant states are Illinois ($391,171,000), North
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($158,471,000) and Ohio ($121,705,000). Overall, Minnesota
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states while gaining exemptions from 23 states.
As shown in Table 3c, the top AGI (income) out-migrant
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These out-migrants also take their incomes and purchasing
power with them. As shown in Table 4, between 1995 and
2007, the total amount of AGI leaving the state was at least
$3,698,692,000 (nominal dollars). The greatest out-flow of AGI
The IRS data also provides state-by-state migrant data which is
was in 2007 at $378,757,000. Not one year during this period
useful in determining where out-migrants are going and where
saw a net in-flow of AGI into Minnesota.
in-migrants are coming from. Tables 3a, 3b and 3c ranks the
net migration totals for the years 1995 to 2007 for taxpayers,
exemptions and AGI, respectively.
Had this income stayed in Minnesota, state and local
governments
would
have
collected
an
estimated
$423,317,000 in higher taxes over this period. This not
As shown in Table 3a, the top taxpayer (household) out-migrant
only includes higher income taxes, but also higher sales and
states are Arizona (12,092), Florida (11,790), Colorado
property taxes.
Freedom Foundation of Minnesota | 4
Table 2
Minnesota’s Net Taxpayer Migration
Tax Years 1995 to 2007
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Of course, when someone leaves, the lost revenue to state and
5, one way to do this is by comparing various characteristics of
local government isn’t limited to the year the person left. It’s lost
Minnesota versus the destination states.iii In economic terms,
for every year moving forward, too. Compounding the tax losses
out-migrants are expressing their “revealed preferences” by
over the thirteen years considered above, the total tax losses
moving to another state more in line with their preferences
come to roughly $2,548,131,000 (not adjusted for inflation).
via six common variables used in migration studies—state and
Chart 3
Minnesota’s Net Income Gain/Loss to Other States
local tax burdens, income tax burdens, union membership,
1995 to 2007
population density, cost-of-housing and average temperature.iv
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and values. We compare Minnesota to these destination states
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State and Local Tax Burden: This variable measures total state
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and local taxes collected as a percent of personal income as
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averaged over the 1995 to 2007 period.v Minnesota’s average
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tax burden was 11.47 percent. Taxpayers left for states where
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Reversing Minnesota’s out-migration problem requires an
understanding of why residents are leaving. As shown in Table
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Minnesota’s Out-Migration Compounds State Budget Woes | 5
Table 3a
Net Minnesota Migration to Other States
Sorted by Taxpayers (Households)
Table 3b
Net Minnesota Migration to Other States
Sorted by Exemptions (People)
Tax Years 1995 to 2007
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Freedom Foundation of Minnesota | 6
Table 3c
Net Minnesota Migration to Other States
Sorted by AGI (Income)
tax burdens were 12.45 percent lower (10.04 percent), while
exemptions were 12.01 percent lower (10.09 percent) and AGI
Tax Years 1995 to 2007
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was 12.62 percent lower (10.02 percent).vi Overall, AGI was
most sensitive to state and local tax burdens.
Income Tax Burden: This variable measures total state and
local income taxes collected as a percent of personal income
as averaged over the years 1995 to 2007.vii Minnesota’s average
income tax burden was 3.42 percent. Taxpayers left for states
where income tax burdens were a whopping 55.09 percent
lower (1.53 percent), while exemptions were 57.58 percent
lower (1.45 percent) and AGI was 64.46 percent lower (1.21
percent). Overall, AGI was the most sensitive to state and local
income tax burdens.
Union Membership: This variable measures the percent
of the state’s employed labor forces who are members of a
union as averaged over the years 1995 to 2007.viii Minnesota’s
average union membership was 18 percent. Taxpayers left
for states where union membership was 46.21 percent lower
(9.7 percent), while exemptions were 49.99 percent lower
(9 percent) and AGI was 50.71 percent lower (8.8 percent).
Overall, AGI was most sensitive to union membership.
Population Density: This variable measures total population
divided by land area and is as averaged over the years 1995 to
2007.ix Minnesota’s population density was 62.2 people per
square mile. Taxpayers left for states where the population
density was 275.34 percent higher (233.3 people per square
mile), while exemptions were 169.15 percent higher (167.3
M,'4F#'M*C(#/'-%"'+F#'$#/+,)*+,%)'/+*+#/'*"#'B*/#$'%)'+F#'S#,=F+#$'*M#"*=#'
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2%&&#"K#>/'b("#*('%-'0K%)%&,K'8)*CJ/,/;
Minnesota’s Out-Migration Compounds State Budget Woes | 7
people per square mile) and AGI was 190.51 percent higher
where temperatures were 48.61 percent higher (62.8 degrees),
(180.6 people per square mile). Overall, exemptions had the
while exemptions were 49.27 percent higher (63.1 degrees)
smallest increase in population density.
and AGI was 52.06 percent higher (64.2 degrees). Overall, AGI
Table 4
Estimated State and Local Taxes Lost Due to Migration
was most sensitive to temperature.
Tax Years 1995 to 2007
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People are most inclined to move where taxes are lower
(especially income taxes), union membership is lower,
population density is higher, the cost of housing is lower, and
the weather is warmer. Additionally, AGI is the most sensitive
variable when it comes to state and local tax (and income tax)
burdens, union membership and average temperature.
The data shows that people with higher than average incomes
are leaving Minnesota for states that fit these characteristics—
especially Florida and Arizona. More specifically, Minnesota
should work toward reducing the state and local tax burden
via reductions in the income tax which would encourage both
people and income to stay in Minnesota or move into the state.
Clearly, not all of these variables can be addressed by
Cost of Housing: This variable measures the median cost
policymakers—weather cannot be changed through legislative
of housing as reported from the 2000 Census. Minnesota’s
action. Most variables, however, can be affected by policymakers
median cost of housing was $122,400. Taxpayers left for states
on an annual basis—tax burdens can be reduced. Indeed, some
where the cost of housing was 8.16 percent higher ($132,393).
variables can only be influenced by legislation and even then
However, for exemptions the cost of housing was 4.53 percent
will take years to establish measurable change such as union
lower ($116,852) and AGI was 1.56 percent lower ($120,496).
membership, population density and cost of housing.
x
Overall, exemptions were most sensitive to cost of housing.
While identifying specific remedies for each of these issues is
Average Temperature: This variable measures the annual average
of the daily mean temperature.xi Minnesota’s temperature by this
beyond the scope of this study, without action, out-migration
measure was 42.3 degrees Fahrenheit. Taxpayers left for states
public sector to ensure Minnesota’s economy remains strong
will continue to reduce the ability of both the private and
and vibrant.
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Freedom Foundation of Minnesota | 8
Table 5
Netted Values of Key Variables
Tax Years 1995 to 2007
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data fidelity which is higher in the state-level migration data
The IRS data used in this study is derived from the calendar year
than the county-level migration data.
(CY) 1995 to 2005 State-to-State Migration Data-Set (SSMD) that
is published annually by the Statistics of Income Division (SOI)
of the Internal Revenue Service (IRS). To qualify for inclusion in
the SSMD, the IRS compares address information supplied on the
taxpayer’s tax form between two years. If the address is different in
Year 2 from Year 1, then the taxpayer is classified as a “migrant;”
otherwise, the taxpayer is classified as a “non-migrant.”
The IRS is required by law to ensure that its data products do
not reveal the identity of any taxpayer. In the SSMD, the data
suppression affects its “data fidelity”—to borrow a musical term. In
music, the term “recording fidelity” describes a recording’s ability
to capture as much of the total sound as possible, i.e., the lower the
recording fidelity, then the lower the recorded sound quality.
Analogous to this is the data fidelity within the SSMD. For
example, if only a single taxpayer moved from state A to state
B, it would be relatively simple (for those with the knowhow) to identify that taxpayer. Therefore, the IRS lumps all
such taxpayers into a residual category in order to prevent
identification. As a result, the exact movement of all taxpayers is
unknown. The percentage that is shown represents the SSMD’s
The major strength of the SSMD is that it is based on actual
data—not a survey—that is enforced with criminal penalties.xii
This makes the CCMD especially reliable as a data source given
people’s incentive to be truthful in their data reporting. In addition,
the SSMD includes reported AGI which allows researchers to not
only track population flows, but also income flows.
On the other hand, the major weakness of the SSMD is that it
excludes certain segments of the population. First, it excludes
low-income groups such as students, welfare-recipients and
the elderly because the standard deduction and exemptions
are greater than their income. Second, it under-represents the
very wealthy because they are more likely to request a filing
extension and miss the late September cut-off for inclusion into
the data-set. Finally, it may miss taxpayers who have changed
filing status—especially from “married filing joint” to “married
filing separately.” ■
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About the Authors
J. Scott Moody
J. Scott Moody has worked as a tax policy economist for over
ten years and is the author, co-author and editor of over 100
studies and books. He has testified twice before the House Ways
and Means Committee of the U.S. Congress. Scott received
About the Freedom
Foundation
The Freedom Foundation of Minnesota is an independent,
non-profit educational and research organization that actively
advocates the principles of individual freedom, personal
responsibility, economic freedom, and limited government.
his Bachelor of Arts in Economics from Wingate University
By focusing on some of the most difficult public policy issues
(Wingate, North Carolina). He received his master of Arts in
facing Minnesota, we seek to foster greater understanding of the
Economics from George Mason University (Fairfax, VA).
principles of a free society among leaders in government, the
media, and the citizenry. Founded in 2006, we hope to create a
Dr. Wendy P. Warcholik
better and more vibrant future for every Minnesotan by helping
Dr. Wendy P. Warcholik has worked as an economist in public
shape sound public policy.
policy settings for over ten years. She has extensive experience
As an independent, non-profit 501(c)(3) organization, the
in applying statistical and econometric tools in public policy
paradigms. Her professional experience includes positions as
Economists at the Bureau of Economic Analysis in Washington,
D.C., Chief Forecasting Economist for the Commonwealth of
Virginia’s Department of Medical Assistance Services and Adjunct
Scholar with The Tax Foundation. Additionally, she has taught
numerous economics classes to MBA students. She received her
Ph.D. in Economics from George Mason University.
Freedom Foundation of Minnesota does not accept any
government grants or funding. Instead, we are proud to earn
the trust and support of generous individuals, foundations, and
corporations.
ABOUT THE FREEDOM FOUNDATION
The Freedom Foundation of Minnesota is an independent, non-profit educational and research organization that actively
advocates the principles of individual freedom, personal responsibility, economic freedom, and limited government.
By focusing on some of the most difficult public policy issues facing Minnesota, we seek to foster greater understanding of the
principles of a free society among leaders in government, the media, and the citizenry. Founded in 2006, we hope to create a
better and more vibrant future for every Minnesotan by helping shape sound public policy. We will accomplish this important
goal not by publishing lengthy, academic books and reports that no one reads. Instead, we tackle issues important to every
ABOUT THE FREEDOM FOUNDATION
Minnesotan and provide real-time, proven research and policy alternatives to help further the debate.
The
Foundation
of Minnesota
an independent,
non-profit
educational
researchdoes
organization
As
anFreedom
independent,
non-profit
501(c)(3) isorganization,
the Freedom
Foundation
of and
Minnesota
not acceptthat
anyactively
government
advocates
the
principles
of
individual
freedom,
personal
responsibility,
economic
freedom,
and
limited
government.
grants or funding. Instead, we are proud to earn the trust and support of generous individuals, foundations, and corporations.
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