Carl Icahn has already left New York. Dan Sundheim is planning to leave. Larry Fink is staying, but is worried about its future.
New York was struggling to retain some of the world’s richest people and the firms they operate even before Governor Andrew Cuomo and state lawmakers hiked taxes on millionaires and billionaires. Wall Street’s biggest names—including Goldman Sachs Group Inc., Apollo Global Management Inc. and Point72 Asset Management—are taking steps to expand elsewhere, especially Florida.
Key to the Sunshine State’s allure is its income tax—it doesn’t levy any. By contrast, New York City’s wealthiest now face the highest state and local rates in the U.S.
“There definitely is an unprecedented migration of high-net-worth taxpayers from New York City, and some of them are taking their businesses with them,” said Timothy Noonan, a law partner at Hodgson Russ who specializes in tax residency issues. “With rates set to go up, they are ready to get out.”
When hedge fund billionaire David Tepper left New Jersey in 2015 for Miami, his move prompted consternation over the size of the hole the Garden State’s biggest taxpayer would leave in its budget (he returned in 2020, paying an estimated $120 million to the state last year). Now, neighboring New York faces a bigger loss in revenue if an exodus to Florida accelerates among the financial industry’s upper echelon.
To be sure, even if some of the wealthy leave permanently, the fiscal impact would be relatively small compared with the threat of millions of tourists and office workers staying away from Manhattan. What’s more, rich taxpayers who fled during Covid-19 may find it difficult to stay away. And at least some members of the top 0.1% were already returning this spring, as Florida gets hotter and more humid.
With residents busy getting vaccinated and betting on a post-pandemic boom, there’s some hope that New York may once again find a way to bounce back after a crisis.
But if New York City’s crown as the financial capital of the world starts to slip, the first signs will be in the investing business. While banking dealmakers and hotshot advisers may eventually go back to meeting clients face-to-face, hedge fund managers can—at least in theory—execute trades as easily from a Palm Beach mansion as a Midtown Manhattan high-rise.
The $42 billion Elliott Management Corp. has seen several of its highest-paid executives leave Manhattan. Jesse Cohn, managing partner at the firm, and Jon Pollock, the company’s co-chief investment officer, have moved near its new headquarters in West Palm Beach. Paul Singer—Elliott’s founder—has also left the city, but is staying in the Northeast.
Other hedge fund titans are also moving to Florida permanently. Scott Shleifer, co-founder of the private equity unit at the $40 billion Tiger Global Management, bought a $132 million house in Palm Beach, where he plans to relocate. Sundheim, who runs the $20 billion D1 Capital Partners, is relocating near his new office in Miami.
New Yorkers, rich or otherwise, have been moving to Florida for decades, particularly as they got older. The tax savings from such moves were boosted in 2018, after the passage of a Republican reform that capped the state and local tax deduction at $10,000. The new law meant the wealthy could no longer lower their federal taxes by deducting millions of dollars in state and local levies—a change that made states without an income tax like Florida and Texas more appealing.
Some rich New Yorkers, like Icahn, did move to Florida in the aftermath, but the total number of rich taxpayers in New York held steady, and tax revenues kept rising.
“We’ve had high taxes and it hasn’t driven all the multi-millionaires out,” said George Sweeting, deputy director of the city's Independent Budget Office. The question is whether that may change, he said. “We don’t know what the limit is. At what point does it become more than people are willing to pay? Theoretically there is some point there.”
Hedge fund partners who move to Florida, but keep staff and operations in New York, will still owe some tax in the Empire state. And larger firms find it more difficult to disentangle themselves from the city, said Steven Winter, a partner at Grant Thornton.
One of Winter’s clients, a hedge fund principal, just moved himself to Florida, gave up the firm’s New York City office space, and shifted all his employees to remote work. It’s “easier to do when you have a workforce that’s only 15 to 20 people,” he said, while it’s “harder to do for 50 or greater” employees.
Icahn, the 85-year-old activist investor who moved from New York to Florida in 2019, named a new chief executive for his firm this month. He told the Wall Street Journal that his current CEO and chief financial officer were both leaving the company because neither planned to follow Icahn to the Miami area.
Taxes are an important part of the discussions for smaller firms. Take the example of a manager who makes $10 million per year. In New York City, they would have paid more than $1.1 million in state and local taxes last year, and more like $1.2 million this year after the tax hike. By moving to Florida, the manager avoids that charge every year, as well as about $400,000 annually that their firm owes to the city’s 4% unincorporated business tax.
The savings are even bigger for the most successful managers. In addition to hiking the top rate on single filers earning more than $1.1 million—from 8.82% to 9.65% — the state added two new brackets: income above $5 million will be taxed at 10.3% and $25 million at 10.9%. Adding these to the city’s top rate of 3.88%, rich New York City residents now face marginal rates of 13.5% to 14.8%, surpassing the 13.3% top rate in California, previously the U.S.’s highest.
In approving the tax hike, Cuomo said he “fully” expects the blow to be offset by a repeal of the cap on state and local tax, or SALT, deductions. “When SALT is repealed, the taxes will be going down,” he said.
President Joe Biden has not proposed ending the SALT cap, but a bipartisan group of lawmakers is pushing for repeal. Critics of the effort, including New York Representative Alexandria Ocasio-Cortez, have argued that an end to the SALT cap would be expensive—costing $88.7 billion per year, according to the Joint Committee on Taxation—and mainly benefit the rich.
Hodgson Russ’s Noonan estimates the number of rich New Yorkers seeking to leave is about 20 times greater now than after the Republican tax bill that passed in late 2017. Taxpayers looking to move are also a more diverse group, he said, including parents with children and millennials.
There is little data available yet on how many people have, in fact, moved permanently out of New York. But under its progressive income tax regime, the loss of even a small number of high-earning taxpayers can have a noticeable impact.
Statewide, taxpayers earning $10 million or more paid 17% of income taxes in 2018, or $8.1 billion. In New York City, about 1,800 people earned at least $10 million in 2018, and they were responsible for 18.5% of the city’s income tax revenues, or about $2.1 billion.
But these sums are relatively small compared to the city’s and state’s massive budgets. Property taxes—the city’s largest source of revenue—grew steadily for decades until Covid-19 devastated real estate values. In the coming fiscal year, the Independent Budget Office expects property taxes to drop by 3.3%—the first decline since 1998.
Meanwhile, the relocation of some rich people from New York has barely dented income tax revenue. In January, the city projected income tax revenues will fall 6% in the 2021 fiscal year, to $12.7 billion, but then rebound by 6% to $13.5 billion, “a near return to pre-pandemic ERA levels.” Recent tax collections suggest those projections may be conservative, with the city income tax continuing to bring in $13.6 billion in the last 12 months as of February.
Even though Covid-19 threw more than 900,000 New Yorkers out of work last year, revenues held up as more highly paid workers kept their jobs and the stock market rebounded.
The city also got a “shot in the arm” from the Biden administration’s $1.9 trillion stimulus bill, finance commissioner Sherif Soliman said at a March 24 City Council hearing, also citing the city’s mass vaccination campaign as a reason to be upbeat about the future. “While we acknowledge that we face a tough road ahead, we are optimistic for a full recovery for the benefit of all New Yorkers,” he said.
This article was provided by Bloomberg News.
