The potential savings of moving to states without an income tax were widened by the federal tax overhaul passed by Republicans and signed by Trump in 2017, which capped state and local tax deductions at $10,000. More recently, the Covid-19 pandemic has sent many wealthy Americans out of big cities like New York and San Francisco into second homes. Many are at least talking about making permanent moves, advisers say.
“A lot of people left,” Cindy Ostrager, the New York-based director of tax at Clarfeld Citizens Private Wealth, said of her ultrahigh net worth clients. “I have a lot of clients who say they’re not coming back.”
Ostrager said other clients still haven’t taken the steps to officially move away from New York, but they’re thinking about it and might pull the trigger in 2021.
The loss of wealthy taxpayers threatens to shrink city and state budgets. Hedge fund manager David Tepper was New Jersey's largest individual tax payer when he moved to Miami in 2015, prompting worries in the state capitol about lost revenue. He moved back to the Garden State earlier this year.
Legislators in both California and New York have proposed higher taxes on the very wealthy to help state budgets hit hard by Covid-19. In New Jersey, lawmakers actually raised taxes on the rich, to 10.75% from 8.97% on income above $1 million a year.
“We’re going to have to raise taxes at the end of the day in any event,” New York Governor Andrew Cuomo said on Wednesday. “But the question is, how much in taxes?”
Some, including Cuomo earlier this year, have warned that higher taxes on the wealthy could discourage rich residents from returning to the state after the pandemic is over.
Fear of rich people moving for tax reasons is overblown, says Carl Davis, research director at the left-leaning Institute on Taxation and Economic Policy, or ITEP. Studies show the wealthy actually move less often than other Americans.
“A billionaire can obviously afford to live wherever they want,” Davis said. “There’s no reason on Earth that they should choose where to spend their lives based on a state tax rate that will have zero impact on their standard of living.”
Though some wealthy residents end up leaving, the total number of millionaires in high-tax states has actually been rising. California had 91,560 tax filers with at least $1 million in income in 2018, twice as many as in Texas or Florida, according to an ITEP analysis released in September.
Even after the new tax law capped the deduction for state-and-local taxes at $10,000 starting in 2018, the millionaire population grew far faster in California, up 10.6% from the previous year, and New York, where it rose 7%, than it did in Texas, where it increased 4.3%, and Florida, up 2%.
As for Musk, he seems to be putting down roots in Texas, with Tesla constructing its new Gigafactory in Austin and SpaceX building its Starship spacecraft in Boca Chica, Texas. But even if he establishes that he’s left California, the Golden State may continue fueling his success.
“Tesla has benefited inordinately by being in California,” said Chris Hoene, executive director of the California Budget & Policy Center. Ironically that includes a tax perk — a state-funded rebate for electric cars that has helped make California one of Tesla’s largest markets. Even if Musk leaves the state as a taxpayer, Hoene said, “he is still benefiting enormously from the tax code in California from a company perspective.”
This article was provided by Bloomberg News.