Amid widening income inequality and a glut of federal spending to address the pandemic, tax policy is now taking up some prime real estate in the daily news cycle. Advisers say it’s making many New York-based millionaires and billionaires’ think again on whether Manhattan and the Hamptons are the best places for them to live.
After campaigning on more taxes for corporations and households making at least $400,000 a year, President Joe Biden recently unveiled his infrastructure plan. The $2.3 trillion proposal would, among other things, raise the corporate income-tax rate to 28% from 21%.
New York State is also poised to increase state income taxes for people making at least $1 million. The new rates, combined with New York City’s top rate, will create the highest tax rates in the country. As of Thursday, the budget deal with the tax hikes awaited Gov. Andrew Cuomo’s signature.
‘If tax monies improve our society and our economy, those same individuals will be, in effect, among the main beneficiaries.’
— JPMorgan Chase Chairman and CEO Jamie Dimon
There’s been tax action elsewhere too. Lawmakers in Hawaii considered a bid to raise the top state rate to 16%. That would have been the country’s highest rate, but the bill seems stalled. Some Minnesota lawmakers also want rich residents to pay more state taxes. The top rate there is 9.85%.
In September, New Jersey lawmakers reached a deal to have the state’s top rate of 10.75% apply sooner, starting at households of $1 million instead of $5 million. Washington state is considering a tax on billionaires.
Democrats could acknowledge that a “healthy fear” of big government is “not irrational,” he wrote. Republicans could acknowledge that if spending is done wisely on matters like infrastructure and education, it’s a good idea, he added.
“And that may very well mean higher taxes for the wealthy,” Dimon wrote in his 66-page letter. “Should that happen, the wealthy should keep in mind that if tax monies improve our society and our economy, those same individuals will be, in effect, among the main beneficiaries.”
Dimon, worth $1.9 billion, is a New York resident himself, according to Forbes’ newly-released 2021 edition of its billionaires list. A JPMorgan Chase spokeswoman said the company declined to comment beyond the letter.
‘A tax falling on higher earners can backfire if they have mobility to leave the state entirely. The great fear is they move permanently.’
— Jared Walczak, vice president of state projects at the Tax Foundation
Jared Walczak, vice president of state projects at the Tax Foundation, a right-leaning think tank, says states ought to tread carefully if they want to hold onto their wealthier residents, who often provide an outsized chunk of tax revenue.
“A tax falling on higher earners can backfire if they have mobility to leave the state entirely,” Walczak said. “The great fear is they move permanently.”
The pandemic highlighted the ease of that mobility, he said. “Suddenly, your job can follow you, rather than you follow your job.”
Tax burdens are just one reason playing into a person’s decision to stay or go, he said. “For those who are tax sensitive, there’s never been a better time to move to a lower tax jurisdiction.”
Exhibit A: Tesla
CEO Elon Musk decamping from California to Texas, a state with no income tax. Musk is the world’s second richest man, with a $151 billion net worth that’s behind Amazon
CEO Jeff Bezos’ $177 billion.
Walczak pointed to research, like a New Jersey State Treasury Department’s review of its original so-called “millionaires tax” in 2004, an 8.97% tax on households making at least $500,000 a year. Around 20,000 taxpayers left the state after it was enacted, taking $2.5 billion of income with them, the study said.
43% of billionaires aged 65 and older who originally lived in an estate-tax state moved to a state without the laws.
— Federal Reserve Bank of San Francisco and University of California, Berkeley study
Frederick Peters, chief executive of Madison Avenue-based Warburg Realty, told the Financial Times: “If you feel like your city is treating you like the enemy and you already own a place in Palm Beach, it seems a maladroit moment.” He added: “The rich shouldn’t feel like the enemy. They should feel like partners.”
What’s more, it’s not just income-tax laws that can make a difference. The elite are keenly attuned to the estate-tax laws where they live. Some 43% of billionaires aged 65 and older who originally lived in an estate-tax state moved to a state without the laws, according to a study from researchers at the Federal Reserve Bank of San Francisco and University of California, Berkeley.
Others, however, are skeptical about a mass exodus of the millionaire monied class. Cristobal Young, a Cornell University professor and author of “The Myth of Millionaire Tax Flight,” writes in his 2017 book: “Moving is a young person’s game, but earning income in the top bracket is not. Migration overwhelmingly occurs when people are establishing their careers.”
Young sifted through 45 million tax records of people making at least $1 million. “People almost never move when they are at the advanced career stage,” he added, “a time when they are most likely to face a millionaire tax.”
Clients are more open to moving to a state with a low tax jurisdiction, such as Texas, Florida and Nevada.
— Bill McDevitt, the director of WilkinGuttenplan’s tax department
Soon after news broke on New York’s budget deal, clients started asking questions again about moving to lower tax states, said Bill McDevitt, the director of the tax department at WilkinGuttenplan, a New York- and New Jersey-based accounting and advisory firm.
“Folks are opening their minds to being somewhere that’s a low tax jurisdiction,” McDevitt said. Some of the places that often come up are Texas, Florida and Nevada, he added.
There are a lot of factors that hold people back. Nearby grandkids are a “big anchor” and so is a nearby business, he said.
But there are issues can push them towards it. McDevitt saw it start with the $10,000 federal deduction cap on state and local taxes that will be in effect until 2025. Then there was the pandemic’s mass experiment in working remotely and now there’s the bubbling talk of more taxes.
McDevitt said many of his clients talk about moving state, but few do. “It doesn’t happen as a landslide, more like erosion,” he said.