In early April, the New York state legislature passed a $212 billion budget for 2022. Among spending cuts, it includes tax increases on the wealthy. Others have done the same – New Jersey raised that top rate from 8.97% to 10.75% for those making a million dollars or more. 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, 1% is critical to state revenues, paying up to nearly 50% of total state income taxes.
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 make money.
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 relocate easier officially, and that could have serious repercussions for state revenues. Will the wealthy flee cities and states with high taxes?
In the early months of the pandemic, state lawmakers warned of an unprecedented fiscal crisis in nearly every state. The Brookings Institution estimated revenues are falling by $155 billion in 2020 and $167 billion in 2021. More complete data later showed that states ended the 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. Among spending cuts, a number of states have either passed bills or are considering tax hikes on the wealthy to balance their budgets.
New York’s tax increase, maybe the most rigorous, involving several tiers, starting for those earning one million to $25 million and above. They expire in 2027. You also can’t ignore the evidence of 15 to 20% 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. 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. The millionaire tax in 2004 didn’t do anything. The millionaire tax in 2012, which was more significant, had minor migration effects.
To the extent that there is an effect, it is mostly driven by people finding ways to 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. Most media outlets covered it, and although he never explicitly said why he made a move, many assumed it was for tax reasons. Tepper moved back in September 2020.
The idea that tax policy affects the allocation decisions of wealthy individuals has a 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. According to some studies, 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 primary consideration.
Rich or not, more than two-thirds live in the state in which they were born, and 1.5-2% 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.
Over the past decade or so, with respect to the exodus of California, markets like Phenix, Las Vegas, 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 workers from San Francisco or Los Angeles to a no income tax Reno or Las Vegas are just enormous.
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 6% 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, and New York City’s budget generated a surplus of $3.4 billion instead of the initially projected $4.2 billion deficit.
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 move in and out of those living in the wealthiest zip codes to other zip codes. Except for in the Bay Area, their net domestic exits increased 178% for the entire area and 649% for San Francisco alone, compared to 2019.
But it doesn’t appear people were escaping the high taxes. Nearly 80% stayed in the state. That’s why looking at plummeting rent prices only tells part of the story.
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?
There is now an emotional component to 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.