Two states are faced with possible budget shortfalls when their billionaires move out-of-state. David Tepper, billionaire hedge-fund manager moved to sunny Florida last year with his money and his company, Appaloosa Management, Bloomberg Business reports. While Connecticut recently experienced the departure of billionaires Thomas Peterffy and C. Dean Metropoulos to Florida as well, the Hartford Courant reports.
Why Florida? It’s anyone’s guess. Perhaps, the allure of sipping mai tais and relaxing on the miles of Florida coastal beaches is too strong. Considering the myriad of reasons one might move to Florida - weather, local industry and family - the fact that Florida does not impose a state individual income tax or an estate tax doesn’t hurt. Both New Jersey and Connecticut have a state individual income tax and estate tax. New Jersey additionally imposes an inheritance tax.
Could a state’s tax environment be the deciding factor? A report compiled by New Jersey Business & Industry Association argues just that. The report finds that between 2005 to 2014, an exodus of 2 million New Jersey residents occurred which resulted in a loss of $18 billion of adjusted gross income in New Jersey. The group cites to New Jersey’s high state taxes as the reason behind the migration with people leaving New Jersey for “more favorable” tax environments, reports NJ.com.
This is bad news for New Jersey and Connecticut who rely heavily on individual income tax to fund their budget. In New Jersey, the super-wealthy contribute about a third of individual income tax revenues which comprise 40 percent of the state’s revenue. “A one percent error in estimating individual income tax revenues can be a $140 million mistake,” reports Bloomberg Business. Connecticut also relies on their millionaires and billionaires to fund about a third of their state’s individual income tax revenue, reports the Pew Charitable Trusts.
It’s not a surprise that despite these states facing budget shortfalls, there are proposals in these states to eliminate or reduce the estate taxes. In February, the New Jersey Senate approved S.B. 1728 that would phaseout the New Jersey estate tax in five years. Connecticut S.B. 446 proposes to eliminate the estate tax in tax years beginning on or after Jan. 1, 2017. Peterffy, 71, and Metropoulos, 69, leaving Connecticut at that stage in their life adds speculation on whether they left to avoid estate tax.
However, the debate over eliminating taxes to keep the wealthy in state is not so cut and dry. According to New Jersey’s Office of Legislative Services, the number of New Jersey “wealthy taxpayers are growing, not shrinking,” reports NJ.com. Also, California is home to the highest number of billionaires, reports Forbes. This is despite California having the largest marginal income tax rate in the country.
A proponent of the “tax flight myth”, Michael Mazerov, of the Center of Budget and Policy Priorities, argues that “the studies and statistics show that cutting income taxes or estate and inheritance taxes in the hopes of keeping more wealthy people in the state is a fool's errand,” reasoning that doing so would put potential tax dollars in the pockets of people that would nevertheless leave the state for other reasons, reports NJ.com.
Is an unfavorable tax environment the major contributing reason people move out-of-state? That is the question people feel strongly and differently about.
Continue the discussion on Bloomberg BNA's State Tax Group on LinkedIn: Is tax flight a myth?
For more information about estate taxes, check out Bloomberg BNA’s Estate, Gifts and Trust Tax Navigator by signing up for a free trial of the Bloomberg BNA Premier State Tax Library today.
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