Has Latest New York ‘Tax Flight’ Begun?

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By Gerald B. Silverman and Che Odom

The “tax flight” that New York feared would result from the new federal tax law may have begun.

Stonepeak Infrastructure Partners, a $15-billion firm led by former Blackstone Group LP dealmakers, is planning to open an office in Austin, Texas, in part to protect its executives from potentially higher New York state taxes, according to a memo sent to investors that was obtained by Bloomberg News.

New York businesses, anti-tax conservatives, and leading tax practitioners aren’t surprised and predict more, similar moves in the future.

“The lure of New York in the past has been access to financial and professional support, but I can see Austin and cities like it offering significant competition to New York in this area along with lower taxes,” Peter L. Faber, partner at McDermott Will & Emery, told Bloomberg Tax in an email. “I am not sure what states like New York can do to counter this trend except to control government spending and lower taxes.”

Other tax policy analysts are skeptical that a tax flight is underway. They say the concern is exaggerated, and well-to-do taxpayers are too comfortable where they are to relocate to Florida or other low- to no-income-tax states.

Working Around Deduction Limit

However, Gov. Andrew M. Cuomo (D) and state policymakers have feared that the new $10,000 federal cap on the state and local tax (SALT) deduction would cause mobile high-income taxpayers to flee the state, causing lower revenue for state and local governments. In response, Cuomo signed legislation to create two workarounds that he hoped would stem the bleeding.

“The federal government passed a disastrous tax bill that specifically targeted New York and other Democratic states with the elimination of full state and local tax deductibility—a basic tenet of tax law since the creation of the modern federal income tax,” Morris Peters, a spokesman for the state Division of the Budget, told Bloomberg Tax in an email. “Gov. Cuomo took action in the state budget by providing new opportunities for tax deductions and creating a new option for employers to help their employees maximize deductibility. New York will continue to lead the fight and do everything we can to protect New York’s competitiveness and ensure our state isn’t being used as a piggy bank.”

Ken Pokalsky, vice president of the Business Council of New York State, said the state needs to address other tax increases that have resulted from conformity between the state and federal tax codes.

“Then the state can do what we’ve been proposing for years and address other state-imposed costs that impair our ability to compete with other states,” he said. “Until all leaders recognize that high taxes and overly burdensome regulations severely limit economic growth, we will unfortunately continue to see headlines like this one.”

Following New York’s Lead

In addition to New York, New Jersey and Connecticut have enacted laws to help taxpayers mitigate the impact of the SALT deduction cap. The states allow taxpayers to make contributions to state charities that will pay for education and health services in exchange for a corresponding tax credit. California and Rhode Island lawmakers are working on a similar measure, while Illinois lawmakers recently failed to pass their bill before the end of their legislative session.

The charity workaround might fail to pass muster with the Internal Revenue Service, which warned taxpayers in workaround states such as New York and New Jersey to proceed with caution when making donations to state-sponsored charitable funds designed to circumvent the $10,000 cap. The IRS said it intends to propose regulations addressing the deductibility of state and local tax payments for federal income tax purposes.

As an alternative, New York is allowing employers of wage earners to elect to pay a deductible payroll tax, replacing their employees’ income tax burden.

Revenue From Top 1 Percent

E.J. McMahon, research director at the conservative-leaning Empire Center for Public Policy, said the highest-earning 1 percent of New York state taxpayers generate more than 40 percent of state personal income tax receipts.

McMahon has been predicting tax flight by high-income hedge fund managers and other professionals since the 2017 federal tax act ( Pub. L. No. 115-97) was enacted. The combined federal, state, and city marginal tax rate on the wealthiest New York City taxpayers will be the highest in 30 years as a result of the SALT deduction cap, according to McMahon.

“We are likely to see more of this kind of move by smaller, specialized, or niche partnerships like Stonepeak, which have more flexibility to relocate,” he told Bloomberg Tax in an email.

No Others Moving Yet

Faber, whose practice includes corporate and business tax planning, said he hasn’t seen other moves similar to Stonepeak’s, but he expects to see more in the future.

The loss of the SALT deduction “will also make it harder for large companies to recruit people to come to New York,” he said. “The cost of living here is already quite high and the loss of the deduction will make it even higher. This may encourage larger companies that don’t plan to move entirely to expand in low-tax states rather than in New York.”

“Unfortunately, I don’t think that the various workarounds that the states have adopted or are considering are going to solve the problem,” Faber said. “They either don’t work or will have a minimal impact if they do.”

Michael Leachman, director of state fiscal research at the liberal-leaning Center on Budget and Policy Priorities, told Bloomberg Tax that cries predicting an exodus as a result of higher tax are expected and the worry is overblown.

“Is it true that they would leave in significant numbers?” Leachman said. “No, this has been studied extensively.”

‘Fight Every Day’

When Cuomo signed the tax workarounds into law in April, he said “I fight every day with businesses who say ‘well, I got a call from South Carolina, I got a call from Texas.’”

“‘They said if I move down there I save this, this, and this,’” Cuomo said. “I talk to homeowners who say ‘you know what, I can’t pay these property taxes anymore, if I move down to this state I save this, this, and this.’ I say the only problem is you then have to live in that state. And there’s no state that can compare to New York.” But that is what Washington Republicans “are trying to do. They are trying to put us at a long-term competitive disadvantage.”

‘Living Comfortably’

Concerns over tax migrants get a lot of attention when tax burdens increase, Carl Davis, research director at the liberal-leaning Institute on Taxation and Economic Policy, told Bloomberg Tax.

“High-income earners tend to move less often than everyone else because they are already living comfortably,” Davis said. “There is no need for them to uproot their lives in search of a tax savings that will not meaningfully impact their quality of life.”

Academic research shows that taxes don’t have a significant impact on migration, Davis said.

Business owners tend to stay put because they have developed a network of strong ties to their local communities, Leachman said. “They are less likely to move than non-business owners,” he said.

To contact the reporter on this story: Gerald B. Silverman in Albany, N.Y., at gsilverman@bloomberglaw.com and Che Odom in Washington at codom@bloombergtax.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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