This post originally appeared at https://www.badgerinstitute.org/minnesota-and-illinois-losing-billions-in-income-as-residents-flee-high-taxes/

Mediocre Wisconsin looks good in comparison to tax hells to the west and south

Wisconsin is hardly a taxpayer’s paradise, unless you look to its neighboring states to the south and the west.

People are leaving Illinois, Minnesota and Iowa and, according to a new study by the Tax Foundation, the loss of state revenue and the population migration are closely tied to punitive tax structures in those states.

The three states ranked in the lowest third of states nationally in a ranking of states determined by a combined loss of residents, income tax filers and a loss of adjusted gross income based on that migration, between 2021 and 2022, according to the study.

In that year, Illinois lost 87,311 residents, 45,460 income tax filers and $9.84 billion in adjusted gross income ranking 47 out of 50 states and the District of Columbia in the study of taxes and interstate migration. At the same time, Illinois ranked 37^th in the Tax Foundation’s most recent State Business Tax Climate Index because, while it has low individual income taxes, its corporate, sales and property taxes are all very high.

By comparison, Wisconsin had a gain of 817 residents, but a loss of 1,019 income tax filers and a net loss of $310 million in adjusted gross income during the same period, the study found. The state ranks 24^th on the Tax Climate Index.

“Overall, states with lower taxes and sound tax structures experienced stronger inbound migration than states with higher taxes and more burdensome tax structures,” senior policy analyst Andrey Yushkov said in his report. “It is clear from the 2021-2022 IRS migration data that there is a strong positive relationship between state tax competitiveness and net migration.”

Minnesota and Iowa, ranked 38^th and 37^th respectively in the new study, are moving in very different directions. Minnesota lost 13,455 people, 8,278 income tax filers and $2.19 billion adjusted gross income, while Iowa lost 5,444 people, 4,948 income tax filers and $520 million in adjusted gross income, according to the study.

However, this year Iowa — presently 33^rd on the State Business Tax Index — dropped its top marginal income tax rate to 6% from 8.53%, reduced its top corporate income tax rate to 8.4% from 9.8% and streamlined its tax rate schedule from nine brackets to four, according to the study.

Contrast (Iowa) with Minnesota under Gov. Tim Walz, one of the few states in the country to raise taxes despite a $17.6 billion surplus, padded by billions in federal COVID handouts, according to a Tax Foundation analysis in early August. Minnesota ranks 44^th on the Tax Foundation State Business Tax Climate, partly because it has very high corporate and individual income taxes.

“A year from now I would expect Iowa to be doing much better heading into the future,” Yushkov told the Badger Institute. “I would also expect that a year from now Minnesota will be doing worse, continuing to lose residents. I’d expect Wisconsin to benefit from that.”

Yushkov made clear that the Tax Foundation studies tax policies without a political component. He also made clear that states like Illinois and Minnesota, with progressive Democrats in the governor’s office, have less favorable tax climates, while Iowa, with a Republican Governor and Wisconsin, with a progressive governor, but Republican legislative majorities.

“Wisconsin is somewhere in the middle, but doing much better than most of its neighbors,” Yushkov said.

Nationally, of the 10 states that gained the greatest number of income tax filers, eight of them have no individual income taxes on wage and salary income, have a flat income tax or are moving to a flat tax, according to the study.

Of the 26 states with a net increase in income tax filers, 16 had a top marginal income tax rate below the national median, the study said. Seventeen of the top 25 states in the Tax Climate Index gained tax filers during the 2021-22 study period.

Conversely, 18 of the bottom 25 of the Tax Climate Index lost tax filers.

Yushkov found that 26 states gained income tax filers in 2021-22 led by Florida with 125,551, Texas with 88,216 and North Carolina with 43,653.

California’s net loss of 144,203 tax filers led the 24 states with a net loss, followed by New York with 108,586 and Illinois with 45,460.

Not surprisingly, those three states lost the most net adjusted gross income, California losing $23.8 billion, New York $14.1 billion, and Illinois $9.8 billion, according to the study. These were the three least attractive destinations for income tax filers making at least $200,000 in adjusted gross income.

Two of those states — New York and California — have steep progressive tax codes, another indicator in the movement of population, according to the study. “States that structure their tax codes in this manner have consistently lost higher-income residents to lower-tax states, and not only the residents, but also any associated tax revenue and entrepreneurial activity that goes along with them,” the study said.

Yushkov stressed that taxes are just one of a welter of reasons Americans move. But there is a pronounced trend in the data that suggests the higher the income earned by a taxpayer, the greater importance that is placed on a favorable tax climate, he said.

“States that prioritize structurally sound tax policy improvements will reap the economic benefits that come with creating an attractive fiscal landscape in which all individuals and businesses have the opportunity to thrive,” the study said.

Mark Lisheron is the Managing Editor of the Badger Institute. Permission to reprint is granted as long as the author and Badger Institute are properly cited.

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