Trump tax changes raise fears the rich will flee New York
New cap on local tax deductions increases appeal of states like Florida
Brian Cushman, a Manhattan property agent who has built a business moving people into luxury Tribeca apartments, is developing a new sideline: shuttling wealthy New Yorkers to Florida.
Mr Cushman has relocated three in recent months — two bankers and an entrepreneur. He expects more to follow after the April 15 tax deadline makes clear the full impact on New Yorkers of the 2017 Trump tax reform.
That law lavished tax cuts on most Americans, as the president has repeatedly reminded voters. Yet one way it afforded those cuts was by setting a $10,000 limit on the amount of state and local taxes that households could deduct from their federal taxes. That cap on so-called Salt deductions threatens a hefty bill for many wealthy New Yorkers, who pay as much as 12.7 per cent in state and local taxes. Florida, by contrast, has no personal income tax.
“If I can save 13 per cent in city and state taxes, why not?” Mr Cushman explained, setting out his clients’ rationale for leaving. “With the amount of money they’re saving, it easily covers the kids’ private schools.”
A lawyer who represents hedge fund clients predicted many people would move after seeing their 2018 tax filings, saying: “People owe a lot more than they think they do.”
Just how many wealthy New Yorkers are fleeing due to Salt is debatable. Moody’s Investors Service recently reported it had found “no discernible signs yet” that the tax change was contributing to any outward migration.
Still, talk of an exodus to low-tax states is in full flight.
John Paulson, the hedge fund investor who made billions of dollars in the financial crisis, told the FT he planned to move from midtown Manhattan to the low-tax US commonwealth of Puerto Rico — and suggested others follow suit.
“Given the extremely high New York taxes, and the loss of deductibility, it makes sense for individuals in New York to look at other jurisdictions with no or much lower state taxes,” Mr Paulson told the Financial Times.
In February, Andrew Cuomo, the New York governor, blamed Salt-related departures for a $2.3bn revenue shortfall.
“I fear that Salt is already causing people to leave our state,” Mr Cuomo said, noting New York’s reliance on wealthy residents to fund its budget. “Less than 100,000 people pay half the taxes. They leave, we have a big problem very quickly.”
Real estate executives see Salt as a factor behind the city’s sagging luxury property market. Several cited it this month — alongside a glut of new developments — as they reported a drop in sales and forecast further declines ahead.
“The lack of tax deductibility has taken away one of the main incentives to home ownership,” said Pam Liebman, chief executive of Corcoran. “It doesn’t bode well for the future of buying in a lot of people’s minds.”
Meanwhile, Florida — famed for its beaches as well as its lack of an income tax — is increasingly a subject of cocktail conversation among the affluent.
“There is definitely more activity around that,” said Ken Correa, a wealth manager who oversees 140 UBS financial advisers in the New York area. Asked who was inquiring about such a move, he replied: “Lots of people.”
New York is not the only US state at risk of losing residents to high taxes. In 2016, billionaire hedge fund manager David Tepper, New Jersey’s single-largest taxpayer, left for Florida. Mr Tepper’s tax payments were said to be so large that the state’s governor, Chris Christie, was notified when his cheques arrived at the Treasury. Connecticut has in recent years lost hedge fund managers Paul Tudor Jones and Edward Lampert to Florida.
The fact that so many of the high-tax states, including California, are Democratic leaning has prompted Mr Cuomo to blast Mr Trump’s tax plan as a “declaration of an economic civil war.”
The issue is particularly salient in New York — and in New York City — because of its concentration of wealth and an intensifying debate over how to tax it. In discussions for the coming year’s budget, lawmakers considered an annual “pied-à-terre” tax on second homes in the city worth more than $5m. They backed off after an outcry from developers, but still targeted the rich by opting to raise taxes on the sale of homes worth $20m or more.
There may be more to come. What was supposed to be a temporary “millionaires tax” imposed in 2009, during the financial crisis, has been repeatedly extended by the state legislature. Meanwhile, Alexandria Ocasio-Cortez, the New York representative who has become a darling of progressives, has suggested soaking the rich by raising top federal tax rates to 70 per cent.
For all the panicked talk, many analysts reject Mr Cuomo’s attempt to tie a shortfall in projected tax revenue to Salt. A more likely culprit, they argued, was the Wall Street sell-off late last year.
They also question whether the wealthy will tax-shop — as Mr Paulson suggested — or instead constitute an “embedded elite” whose personal and professional ties keep them glued to a particular place, regardless of creeping tax rates. Not all New York bankers and entrepreneurs have the flexibility to base themselves elsewhere.
“Any impact is going to be marginal, take place over time, and be hard to detect amid all the other factors that generate cross-jurisdictional mobility,” said John Mollenkopf, director of the Center for Urban Research at the City University of New York, arguing that it would be years before census data could substantiate a flight of the wealthy.
In its report, Moody’s found that outward migration from New York and other high-tax states was lower than a decade ago. In many cases, those who did leave went to another high-tax state. “Jobs and demographic trends will continue to influence relocation patterns more than tax burdens,” Moody’s concluded.
Still, just because the statistics have not yet substantiated a march of tax refugees does not mean that one is not under way.
Edmund McMahon, research director of the Empire Center for Public Policy, worries that New York is facing a demographic challenge as baby boomers reach their mature years — a time when many typically leave the city.
“All things being equal, we’ve got a bulge of people getting ready to sail off to Boca Raton [in Florida],” Mr McMahon said.
The Salt reform was “another shove” to remind them that they would be better off elsewhere, he argued. At the same time, Salt and other escalating taxes threatened to dissuade younger professionals from replacing them in a city where many struggle with the cost of living.
At a recent New York dinner for young professionals, Mr McMahon said he was struck by how many said they planned to go elsewhere to start investment funds and other businesses.
“I do think this is a real danger,” he said, adding: “You’ll only know after it’s happened.”