“Millionaires Taxes” Cause Wealthy to Flee Blue States
“Millionaires Taxes” Cause Wealthy to Flee and States Like NY, NJ and CA Lose Revenues
In an op-ed in the Wall Street Journal, prominent economists Arthur Laffer and Stephen Moore estimate 800,000 millionaires will leave New York and California over the next three (3) years as a result of unfavorable tax measures.
"In years to come, millions of people, thousands of businesses and tens of billions of dollars of net income will flee high-tax blue states for low-tax red states," they said. They estimate an additional 500,000 wealthy taxpayers will flee New Jersey, Connecticut and Minnesota.
The misnomers and misinformation about taxation of millionaires and millionaire flight abound. There are very, very few millionaires. And there are even fewer who reach that auspicious threshold year-after-year. Thus, “most” millionaires stay put, because—well—they aren’t really millionaires—they just had a major event like the sale of a business or a few good years where they reaped a harvest sown for decades. On average, about 2.4% of all millionaires relocate and move between states year-over-year. While statistical surveys are still out on the issue, it is commonly understood by economists and policy wonks that the 2.4% making the move is made up almost entirely of the real millionaires – the David Tepper types and the robust small business-owners.
These are the very, very, very few who are perennial millionaires—that esteemed group that pay the majority of the individual taxes for the entire State. And their departure hits the State’s pocketbook hard.
“But in general and for most people, earning a million dollars a year is a temporary situation,” Charles Varner, Cristobal Young and Allen Prohofsky note in a Stanford working paper by the University’s Center on Poverty and Inequality. “It is more of a spike in earnings than their usual, year-to-year income. For most people, the (millionaire) tax falls on a few unusually good years of earnings. This helps explain why we see so little responsiveness to the tax.”
In the 12 months ended July 1, 2017, the State of New York lost a net 190,508 residents (bringing the total loss to 1 million people since 2010 – the largest of any state).
New York tried a millionaire’s tax in 2009 on individuals earning over $1 million or couples earning over $2 million. This “temporary” measure created a “surcharge” that is still on the books, with a millionaire tax rate of 8.82% in New York that raises about $3.5 billion per year.
Yet, the government in Albany continues to fail to reign in spending year-after-year, and runs budget shortfalls, and every year capital outmigration occurs, with a small percentage reduction in wealth leaving New York. This leak is troubling, because there is a tipping point where the tax-and-spend policies run out of fuel and produce enormous deficits. With the wealthiest of the wealthy already gone, there is no way to plug the leak and boost spending once the coffers are empty.
The above-referenced study by Stephen Moore and Arthur Laffer tracked migration and outmigration by state. They found that from 2006 to 2015, the biggest net migration losses were from high-taxing states such as New York (1.38 million), California (1.1 million), Illinois (690,000), Michigan (593,000) and New Jersey (525,000). By contrast, the states with the biggest net inflow of people were Texas (1.47 million), Florida (779,000), North Carolina (609,000), Arizona (450,000) and Georgia (378,000). Each of these are low-taxing red states.
New Jersey has imposed a new multi-millionaire’s tax—a 10.75% rate on $5-million-plus earners, retroactive to Jan. 1. “How many people will say ‘I’ve had enough,’ and are going to flee?” says Jeffrey Schechter, a tax lawyer at Cole Schotz in Hackensack, N.J.
The State of New Jersey lost 2 million residents between 2005 and 2014, earning a combined $18 billion in net adjusted gross income, which equates to about $2 bn per year of lost revenues. The State raises $32 bn per year from state tax impositions. Over 9 years, the state lost $18 bn. Spread out evenly, the state is losing about 6.5% of its total annual budget each year due to millionaire flight, or $2 bn/year of tax revenues that has left our state for Florida and Texas.
Trying to tax the rich more to raise the $2bn/yr lost just doesn’t work, because the State can’t raise taxes high enough to cover the gap, and the state also can’t account for the increasing outmigration.
Tom Moran of the Star Ledger reported on David Tepper’s famous move from New Jersey to Florida. He said, “Florida has no income tax, while New Jersey's top rate is 9 percent. So if Tepper earns $500 million this year - a modest sum for him -- the move south could save him about $45 million.”
If you are a business-owner who is less than thrilled with the tax situation in State, you might consider becoming a renter.
New Jersey has an “exit tax” where they will withhold 8.7% of the profit or 2% of the selling price when you sell your home and move out of state, to ensure payment of state taxes in the year of your departure. N.J.S.A.54A:1-1 et seq. New Jersey originally passed this legislation under the guidance of former Governor Jim McGreevy. At the time, the objective was to ensure that anyone moving out of state could not do so without first paying taxes on income gained from the sale of their home.
New Jersey, like New York, also uses a “residency-based model” to capture taxes from those who move in a given year or claim residency elsewhere when they still have ties to New Jersey — and residency tax audits are a not-too-thinly-veiled threat against those with economic ties to multiple states who shun the byzantine New Jersey tax structure. “You can’t just change your driver’s license and spend 183 days a year in the non-tax jurisdiction; you have to be able to prove your intention to reside there permanently,” says Schechter, who has written a guide called The Road To Florida.
Who else might be looking to make a move in 2018?
New Jersey is home to nine (9) billionaires who collectively have amassed a net worth of over $40 bn and pay a sizable percentage of the State’s total budget each year through their tax dollars:
- #121 Donald Newhouse, 88 years old, $12.3B, media, Somerset County; president of Advance Publications and oversees the newspaper business that his father Sam built up from the daily The Staten Island Advance. He attended Syracuse University.
- #404 John Overdeck, 48 years old, $4.9B, hedge funds, Millburn; co-founder of Two Sigma Investments, a quantitative trading powerhouse with $45 billion under management. He holds a Masters of Science from Stanford.
- #499 Rocco Commisso, 68 years old, $4.3B, telecom, Saddle River; founder and CEO of cable company Mediacom, based in Chester, N.Y.
- #629 Peter Kellogg, 75 years old, $3.6B, investments, Short Hills; sold brokerage house Spear, Leeds & Kellogg to Goldman Sachs for $6.5 billion in cash and stock in 2000. Peter is a big advocate of skiing and snowboarding and has donated more than $4 million to assist our U.S. Olympic hopefuls in fulfilling their dreams. He holds a bachelors degree in science from Babson College.
- #729 Leon G. Cooperman, 74 years old, $3.2B, hedge funds, Short Hills; built up Goldman Sachs' asset management division, GSAM, in his quarter century with the investment bank. Cooperman has a science degree from Hunter College and an MBA from Columbia Business School.
- #965 Larry Robbins, 48 years old, $2.5B, hedge funds, Alpine; founder and CEO of Glenview Capital Management, a New York hedge fund that oversees some $11.8 billion.
- #1477 Melih Abdulhayoglu, 50 years old, $1.6B, internet security, Clifton; founded Comodo in 1998 in the U.K., which produces digital security products, notably SSL certificates for websites.
- #1867 Michael Price, 65 years old, $1.2B, investments, Far Hills; runs MFP Investors, a New York-based hedge fund. He holds a bachelor’s in science from the University of Oklahoma.
- #2124 Duncan MacMillan, 80 years old, $1B, Bloomberg LP, Princeton; cofounded financial data and media company Bloomberg LP in 1981 with Mike Bloomberg, Thomas Secunda and Charles Zegar.
Wealthy Californians are fed up with ever-increasing tax impositions. In one high-profile example of outrage over high state taxes, professional golfer Phil Mickelson recently slammed California’s taxes and threated to leave the state. “If you add up all the federal and you look at the disability and the unemployment and the Social Security and the state, my tax rate's 62, 63 percent,” Mickelson said.
In California, high-earners in theory keep 46.6 percent of their incomes, down from 55.4 percent just six years ago. However, if the high-earners move to Florida or Texas, they could keep 60.6 percent of their earned income.
Even progressive Democrats who advocate for tax-and-spend measures—like Gov. Andrew Cuomo—recognize the hard reality that: “If you lose the taxpayers, you lose the revenue,” as Cuomo noted in December. Democrats favoring increased state taxes on the wealthy have to recognize, on the one hand, that these measures invariably fall short of projections and don’t fund the budget after-all, and on the other hand, they drive out the taxpayers that bear the lion’s share of the tax burden – creating both short-term and long-term holes in the state’s economic forecast.
Jed Kolko, Indeed’s chief economist made a statement recently that according to the latest Census Bureau data, from July 2016 to July 2017, "more people moved out of California to other states than moved in from other states. In other words, California lost people due to domestic migration."
During that 12-month period, California saw a net loss of just over 138,000 people, while Texas had a net increase of more than 79,000 people. Arizona gained more than 63,000 residents, and Nevada gained more than 38,000. Tax-and-spend measures cause outmigration in blue states, causing blue states to get a little bluer, and also cause these states to get much poorer on a per capita basis. But, the bigger problem is when these progressive measures drive out the profit-making corporations and job providers, they create an unavoidable trap in which the tax burden ends up being borne by the poor, not the wealthy.
Prop. 30 raised the state’s top income tax rate by more than 29%, increasing it three percentage points from 10.3% to 13.3%, which is now the highest state income tax rate in the nation. Prop. 30 also hiked the tax rate on income between $300,000 and $500,000 by two percentage points (a 21.5% rate increase) and raised the rate on income between $500,000 and $1,000,000 by three percentage points (a more than 32% rate hike).
In 2016, California voters extended the Prop. 30 income tax increases, which were originally scheduled to expire in 2019, until 2030. There will be an effort to extend those income tax hikes yet again prior to their expiration in 2030.
According to new research released by Charles Varner, associate director of the Stanford Center on Poverty and Inequality, California lost an estimated 138 high-income individuals following passage of the Proposition 30 income tax increase championed by Gov. Jerry Brown (D) and approved by Golden State voters in 2012. One reason we wanted to update our previous paper is that this tax change in 2012 is the largest state tax change that we have seen in the U.S. for the last three decades,” Varner said.
In Massachusetts, state lawmakers referred a “millionaires’ tax” to the 2018 ballot under Initiative Petition 15-17 (IP 15-17) where income over $1,000,000 would be subject to a 4% surtax on top of the commonwealth’s existing 5.10% flat income tax rate. 19,600 Massachusetts filers and 10,000 small business Sch. C filers would be affected by the new tax, 900 of whom are projected to make $10 million annually and would contribute 53 percent of the revenues from the new tax law – if they stay in Massachusetts. If 1/3 of these left, the state would experience a $750 million deficit instead of added revenues. The Beacon Hill Institute found that the surtax could cost the state more than 9,000 private sector jobs and $405 million in disposable income.
In a strange plot twist, in Anderson v. Attorney General, Slip. Op. SJC-12422 (June 18, 2018), the Mass. Supreme Court blocked the ballot initiative and the measure is no longer slated to go to the 2018 ballot in November. The Supreme Judicial Court ruled on Monday, July 9th, that the ballot question was improper constitutionally because it mixed together subjects which are not “related or mutually dependent.”
In layman’s terms, the government cannot bypass enacting comprehensive legislation, subject to public comment and review, by putting a comprehensive overhaul of the tax system to a vote on the ballot, without any detail on how the law would work, placing a voter in the untenable position of addressing without sufficient detail how taxes would be levied for a series of unrelated measures through a progressive graduated wealth tax. Even though this could be done by a bill, it could not proceed by way of ballot.
“Including it on the ballot would place a reasonable voter in the ‘untenable position of casting a single vote on two or more dissimilar subjects,’” states the court’s decision, written by Justice Frank Gaziano.
Graziano did not say so explicitly, but one could imagine a voter who favored raising revenue for education and raising revenue for transportation but objected to the graduated income tax approach. To vote against the ballot initiative would be to “throw the baby out with the bath water.” To vote for the ballot initiative would be to reluctantly accept the graduated income tax approach to get the other benefits signed into law. Either way, the voter would be making a compromise vote, which is the business of legislators and legislative committees, not regular everyday citizens who are not armed with a voice in their caucus, and without legislative aides to parse and propose language to solve such problems.
The SJC interpreted the substance of IP 15-17 in this light and in so doing noted that, "it is immediately apparent … that the three provisions [graduated income tax, revenue for education and revenue for transportation] are not mutually dependent." The SJC reasoned that these three subjects could all proceed as coherent stand-alone initiatives, as, in fact, the graduated income tax proposal had five times previously. The majority of the SJC concluded that, "because the provisions here can 'exist independently' they are not 'mutually dependent.'”
The Massachusetts “fair share” tax imposes a 4% surcharge on personal income in excess of $1 million. Boston is home to the “Boston Tea Party” and many important milestones in the Revolutionary War. The character of “Boston Strong” is that of a resilient, independent community of citizens with great pride and temerity of spirit. But, American values include the idea that this is the “land of opportunity” as well as a bastion for the idea that we help our less fortunate brothers economically through our laws and institutions. The “fair share” tax is a concept or proposal that puts these fundamental American values at odds and places them in competition.
It is worth noting that while Section 8 of Article One of the U.S. Constitution empowers Congress “to lay and collect Taxes, Duties, Imposts and Excises…” there was no provision at all for federal income taxes in 1791 when the Constitution was ratified. It took another 122 years for that to happen with ratification of the 16th Amendment in 1913. And, perhaps more than any other idea, America was founded on freedom from the imposition of excises on productive labor by overbearing governments who did not give the people a voice in how the government was funded. James Otis’s famous exclamation “taxation without representation is tyranny!” became the motto of the American Revolution, which was borne out of a tax revolt.
Regressive taxes like the “millionaires tax” redistribute wealth and resources from profitable and efficient sources to other areas where those resources ostensibly confer a public benefit. There is no constitutional problem with measures of this variety, so long as they are backed-up by the will of the people and are properly implemented through representative democracy.
The ballot initiative gives the people a voice. But, when a ballot initiative asks a question that ignores the mode of implementation and places citizens in the role of representatives who must “vote” on a patchwork of desired initiatives, but does so without any color as to how the law would actually be written or implemented and without the ability by the voter to participate in debate and in committees where laws can be revised and rewritten is akin to asking our colonial forefathers to “trust the crown.”
When Governor Martin O’Malley was Governor, Maryland enacted a millionaires’ tax which imposed a 6.25% tax rate on incomes greater than $1 million per year. In an outmigration study by the anti-tax group Change Maryland, the authors found that a net 31,000 residents left the state between 2007 and 2010, the tenure of a "millionaire's tax" pushed through by Gov. Martin O'Malley.
The Change Maryland study found that the tax cost Maryland $1.7 billion in lost tax revenues. A county-by-county analysis by Change Maryland also found that the state’s wealthiest counties also had some of the largest population outflows.
Maryland presents an interesting case study since it has the highest concentration of millionaires in the country. According to the Wealth & Affluent Monitor published by Phoenix Marketing International.
Forbes and other rankings continue to show that Ted Lerner of Chevy Chase, developer and founder of Lerner Enterprises and Washington Nationals owner, is the richest man in Maryland. He is No. 294 on the most recent Forbes list with a net worth of $5.3 billion. In 1952 Lerner borrowed $250 from his wife to start a real estate company, selling homes for developers. Now he owns 20 million square feet of commercial and retail space, plus hotels, and 7,000 apartments.
Rep. David McSweeney’s argued that the state of Illinois is “on the precipice of a financial disaster.” Meanwhile, Democratic gubernatorial candidate J. B. Pritzker is calling for a progressive income tax or “millionaire’s tax” to stem the incoming tide of state insolvency.
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