Tax hikes will hurt over time

Governor Andrew Cuomo and the emboldened Democratic Legislature recently raised taxes on the state’s wealthiest taxpayers, despite the usual protestations from the business elite that the rich and the companies employing them will flee. Is there any truth to those claims? According to the academic literature, the best answer is that, in the short term, a few will leave but many more will not. Even though tax-motivated migration has been shown to be statistically significant over time, the likely lack of an immediate response gives tax-the-rich advocates license to argue credibly that threats of an abrupt, mass exodus are largely overblown. 

But what if everyone has been asking the wrong question? What if the threat to New York’s economy and budget isn’t that increasing taxes by a percentage point or two on people making more than $1 million will lead people whose lives and careers are based here to suddenly pick up and move, but that constantly pushing New York’s already high-cost, high-tax environment even further in that direction will diminish the state’s appeal tohigh-earners and their employers over the long term?

Opponents of higher taxes routinely fall into the political trap of overstating the threat of an immediate exodus of people and jobs while failing to focus on two less dramatic but much more important economic realities: first, high-income New York taxpayers don’t have to “move out” to lower their taxes; and, second, very high taxes on a comparative basis will, over time, suppress incremental investment in New York, specifically decisions to expand existing footprints and create new jobs in the state. 

Let’s first take the question of moving. Many people assume that a New York taxpayer must sell or move out to lower her or his tax bill, but that’s simply not the case. In fact, you can achieve the same objective while remaining a “New York taxpayer” by shifting your residency for tax purposes and filing your New York taxes as a non-resident. The difference is crucial to the state’s tax base: non-residents pay tax only on their New York-source income (typically including wages or rents, but not most investment income) while residents pay tax on all their income (including investment income) from everywhere. Guess what kind of income makes up the bulk of taxable income at the high end? 

Shifting residency may not be easy, but it is readily achievable with help from a good tax advisor and careful attention to detail. Wealthy New Yorkers may have one or more homes outside the state and can arrange their lives to stay out of New York for at least 183 days a year, a strong start to qualifying as non-resident taxpayers. They can still return for the nice weather, while spending the colder months low-tax Sun Belt states such as Florida. No moving vans required! When you next read a news article that identifies some hedge fund billionaire as a loyal New York taxpayer, remember that no one outside the state Tax Department really knows whether any individual taxpayer is filing as a resident or non-resident.

Need evidence that this is a real issue? New York has seen a steady but ominous increase in the proportion of high-income taxpayers filing as non-residents over the past few decades. As E.J. McMahon of the Empire Center has testified before the Legislature, from 2009 to 2018, the latest year for which data are available, the number of resident taxable returns showing incomes above $1 million increased by 92 percent while the number of non-resident returns above $1 million increased by 137 percent. Does anyone think that the new higher tax rates are likely to arrest or reverse this trend? And, while one limiting factor in tax-flight has long been that many high earners are tied to New York-based jobs, the trend towards remote work, accelerated by the pandemic, will make it easier for more people to move elsewhere in the future.

While the trend toward non-resident tax filing at the high end is real and troubling, the potential for diminished marginal investment in New York, while difficult to prove in advance, could have dire long-term implications. 

There are many reasons that rich people or companies already in New York won’t move out of state the moment taxes tick up, such as longstanding relationships with friends and colleagues or having children in school. But when a company or individual decides where to invest or locate in the first place, they factor in costs, including taxes, and each incremental increase in taxes may reduce the proportion who choose New York. Similarly, businesses that already have offices in New York and elsewhere could direct more of their investment and expansion to other states as well. The emergence of global markets and supply chains, high-speed communications, and remote work makes choosing against New York easier than ever.

What evidence do we have that New York was already under-performing before the recent tax hikes? Obvious metrics of economic vitality include the creation of new high-income taxpayers and changes in their income. Sadly, New York has lagged the nation for years. As McMahon of the Empire Center also noted, “since the Great Recession low point of 2009, New York’s share of the nation’s income millionaires has fallen, and their incomes have increased more slowly than those of similarly high earners in other states.” If New York attracted and retain millionaires at the same rate as the rest of the country between 2009 and 2018, its state tax revenues would be greater by $4 billion per year, according to McMahon’s calculationusing official federal and state tax return data. Strangely enough, that’s almost precisely the size of the recent tax increase.

Where are we heading? It will take years to sort out, but my bet is that New York will continue to lag the nation in economic vitality, placing ever-increasing pressure on a shrinking cohort of high-end taxpayers to foot the bill for an expansive public sector. For a worst-cast scenario, look at upstate New York, where most of the leading “private” employers (and highest-paid employees) are directly or indirectly tied to the public and nonprofit sectors, such as higher education, health care institutions, regulated public utilities, and well-connected firms that routinely shake down government for subsidies and tax breaks. Meanwhile, downstate New York, which has also lost much of its manufacturing sector, has replaced that with private-sector growth in white-collar industries such as finance, technology, professional services, consulting and communications. The tax bases of New York City and the state are dependent on continuing to attract and retain these ever-more dispersed firms [ASE6]and their increasingly mobile employees. Tourism and entertainment are nice, even important, but won’t pay all the bills.

So, yes, most rich New Yorkers aren’t likely to run for the exits in response to Albany’s latest tax hikes. But a slow, deliberate walk over time will hurt just the same.

Andrew Sidamon-Eristoff, a former member of the New York City Council, has served as New York City Commissioner of Finance, New York State Tax Commissioner and New Jersey State Treasurer.