Wealthy New Yorkers may soon be getting the highest local tax rate in the nation. The combined city and state taxes will be fourteen point eight percent. In early April, the New York state legislature passed 212 billion dollar budget for fiscal year 2022. Among spending cuts, it includes tax increases on the wealthy. Others have done the same. New Jersey raised that top rate from eight point nine seven percent to ten point seven five percent for those making a million dollars or more. Revenues are bleeding and states have to do something. Honestly, if I had the choice of taxing the wealthy more or preventing someone from dying on the street, I would always choose the other. Raising taxes on the wealthy is contentious, while advocates say it's fair in a way to decrease inequality. Others say it'll drive the wealthy out. After all, the one percent are critical to state revenues, paying up to nearly 50 percent of total state income taxes. There is a pack mentality to wealth. When all your friends are now in Florida and you're the uncool guy or woman who is in New York. That is something that could be a tipping point for why this becomes less of a trickle, as we've seen over the past three or five years and more of a flood. If they leave, there's a huge fiscal crisis. How do you pay for all of these services? And that affects everyone. While tax flight is often talked about, it's hard to prove empirically. Someone may move for warmer weather or to get closer to family. And it just so happens that taxes are lower where they're moving. What we do know is that millionaires and billionaires are highly tied to where they live and to make money. Considering I can do what I do from here in South Florida, having no income taxes is a great draw for sure. If taxes were your soul consideration where you were doing business, you weren't in New York anyway. This again is is really different. At the early stages of the pandemic, wealthy people left to seek safety, not to save on taxes. And they have now spent over a year in their second homes and are no longer bound to their offices in New York City or San Francisco or their children's schools. Raising taxes at this fragile junction could make the decision to officially relocate easier, and that could have serious repercussions for state revenues. Will the wealthy flee cities and states with high taxes? Covid-19 pandemic has dealt a heavy blow to America's states. In the early months of the pandemic, state lawmakers were warning of unprecedented fiscal crisis in nearly every state. The Brookings Institution estimated revenues falling by 155 billion dollars in 2020 and 167 billion dollars in 2021. More complete data later showed that states ended fiscal year 2020 in better shape than initially expected, mainly thanks to federal aid and the unusual nature of the recession, where wealthy and high wage earners economic situation only got better. Even so, local government officials have remained wary. Limitations on borrowing to fund day-to-day operations left states with two options cutting expenses or raising revenue. When we talk about economic recovery, rich people don't need a recovery. They're actually richer right now than they were before. Among spending cuts, a number of states have either passed bills or are considering tax hikes on the wealthy to balance their budgets. I mean, I'm happy to to in and pay the taxes for infrastructure, for education, for technology advances. If it's not going to some of those things, it does make it a little harder to support. New York's tax increase, maybe the most rigorous, involving several tiers, starting for those earning one million to 25 million dollars and above. They expire in 2027 I lived in New York, worked in New York, and now I'm going to live and work in Florida. And obviously, one reason I'm doing that is for lower taxes. It is very easy for financial firms to move to Florida because they don't have a huge headcount. Those are the guys the hedge fund guys make are in a way more than the Wall Street guys, the biggest salaries in New York City. And so it doesn't take a lot to have a big impact on tax revenues, especially if you've been away and you say, you know what, that's what they're going to do. I'm just not going to come back. You also can't ignore the evidence of 15 to 20 percent commercial vacancy rates and lower asking rates and generally a picture that suggests the city's property taxes are going to be depressed for quite a while at the very best. Despite early reports that California was going in the same direction in January 2021, Governor Newsom rejected the policy. The state had an unprecedented year and ended with a budget surplus of 15 billion dollars. This wouldn't have been the first time the Golden State would tax the wealthy. In the 1990s, the tax cut didn't do anything to millionaire migration. Neither in or out migration was affected. The millionaire tax in 2004 didn't do anything. The millionaire tax in 2012, which was larger, had small migration effects. To the extent that there is an effect, is mostly driven by people sort of finding ways to, you know, essentially hide their money or find ways to report less income on their tax returns. In December 2015, the wealthiest man in New Jersey, David Tepper, moved to Florida. He paid so much in taxes that it's going to screw up possibly the entire state budget. It was covered by most media outlets. And although he never explicitly said why he made the move, many assumed it was for tax reasons. Frank Haines, he's a legislative budget and finance officer to the Senate Budget and Appropriations Committee of New Jersey, says, quote, We may be facing an unusual degree of income tax forecast risk if news reports are true that the person ranked by Forbes is the wealthiest man in Jersey has shifted personal and business domicile to another state. Tepper moved back in September 2020. There's just sort of one way interest and anecdotes and stories about millionaire migration, because that's a story. But when you hear the counterexample, people don't know what to make of. Young has devoted much of his career to studying the mobility of high income earners based on taxes. But he's one of the few. The idea that tax policy affects allocation decisions of wealthy individuals has long history. But the empirical evidence is limited. Unless you interview people as they're getting on their U-Haul or G650 private jet to go to Palm Beach for good, you don't know what their reasons are and how those reasons stack up. It's always hard to say people move for tax reasons. What we can do and what we are studying is the parallel causality or coincidentally of higher taxes and outmigration. According to Young, though, it's simple. Millionaires and billionaires spend a lot on trying to reduce their tax burden by hiring creative accountants and lawyers. They travel a lot, but they don't move a lot, and taxes are rarely their main consideration. I always thought about it, of course, right? I mean, taxes are important. That's John Kaiden. He's a member of Tiger 21, a peer membership network for high net worth individuals. But really, I was I was motivated to be in New York City and develop my career there. After my my marriage didn't work, I moved from New Jersey into the city. I recognized there would be additional taxes on New York and New Jersey, around the same at the state level. But I had the additional city taxes and it was worth it for me. New Jersey is my home. This is where I go to see doctors. This is where I have all my contacts. And I clearly taxes aren't going to be the motivational factor that's going to get me to move or domicile. Those sentiments are true for most Americans. Rich or not, more than two thirds live in the state in which they were born and the one and a half to two percent that do move from one state to another do it because of losing a job or family. And it's nearly as likely that those moves are from low tax states to high tax states. Of the ones that do move to a low tax state, it's primarily folks with low incomes rather than high. The reason that people are moving is largely housing prices, and then they oftentimes look like there's a lack of opportunity in that state. Anecdotal evidence tells a different story. The Boyd Company is a site selection consultancy. They help clients choose the right location to operate their business. Over the past decade or so, with respect to the exodus of California, markets like Phenix and Las Vegas and Reno and Salt Lake City have been big beneficiaries. The states that hold the line on taxes that are in this never ending game plan of borrowing, taxing and spending and the property and income tax savings for relocating worker from San Francisco or Los Angeles to a no income tax Reno or Las Vegas are just enormous. This is one of the greatest moves to the suburbs from urban areas, We expect there will be something close to an exodus from these really large cities where housing is so expensive. For months, news reports, preliminary data and anecdotes suggested that the pandemic had ravaged state budgets. And because of the mass urban exodus, states should be wary of increasing taxes on the wealthy. States took two austerity measures and spending dropped by six percent in the second quarter. In reality, many states and cities ended the year in decent shape, especially with the arrival of President Biden's American rescue plan. California had a record year in New York City's budget, generated a surplus of three point four billion dollars instead of the initially projected four point two billion dollar deficit. The wealthy and companies in New York are saying, wait a minute, we we actually were on board fixing that giant hole we had. But if we don't have the hole anymore, that's a very small hole. And you're not cutting and you're just going to tax us because there's a moral argument, well, then we don't want to be here anymore. This, for a relatively small revenue hole, has the potential to become a self-fulfilling prophecy. If you're worried about the revenue losses because people are coming back, then probably the worst thing you can do is impose very taxes that would make them not come back. As for that mass exodus, it didn't happen except for March and April patterns mimic 2019. Data collected by a number of moving companies show that the biggest inbound states were Idaho, North and South Carolina and Maine. And the biggest outbound states were New York, Illinois, California and New Jersey. Looking at regional data, California didn't experience a pronounced exit either. Just fewer people moving in moves in and out of those living in the wealthiest zip codes or similar to other zip codes. Except for in the Bay Area, their net domestic exits increased 178 percent for the entire area and 649 percent for San Francisco alone, compared to twenty nineteen. But it doesn't appear people were escaping the high taxes. Nearly 80 percent stayed in the state. That's why looking at plummeting rent prices only tells part of the story. The reason why some of the ideas about rich Californians moving away is because there's an enormous population of rich Californians. If you want to pull out like a lot of examples of them doing anything and go to California and you'll find just a an enormous base population to draw on. But you know who is leaving California are lower income folks who can't afford it. The data aside, there are plenty of anecdotes of wealthy individuals leaving urban areas. They've been gone for over a year and making it permanent will likely be easier than ever before. The question is, will it be enough to make a serious dent in New York and other states revenues? The pandemic just kind of sparked me to really think outside the box and think I can do this from anywhere even more. Since I've been down here, I've felt the swell of businesses moving down here for sure. There is now an emotional component to what was an existing financial component for why more want to leave. And again, we may find out that it was all overblown and they didn't leave the challenge is it will be too late.
