Hedge funds are ready to leave New York and move to Florida

Photographer: Nisian Hughes / Stone RF / Getty Images

Carl Icahn has already left New York. Dan Sundheim plans to leave. Larry Fink stays, but is worried about his future.

New York was struggling to retain some of the world’s richest people and businesses operating even before Gov. Andrew Cuomo and state lawmakers raised taxes on millionaires and billionaires. Top Wall Street names, including Goldman Sachs Group Inc., Apollo Global Management Inc. and Point72 Asset Management, are taking steps to expand elsewhere, especially in Florida.

The key to Sunshine State’s appeal is its income tax, which it charges no. By contrast, New York City’s wealthiest now face the highest local and state rates in the U.S.

“There’s definitely an unprecedented migration of taxpayers with a net worth from New York City, and some of them carry their business with them,” said Timothy Noonan, a legal partner at Hodgson Russ specializing in residency issues. fiscal. “With the rates set to go up, they’re ready to go out.”

When hedge fund billionaire David Tepper left New Jersey in 2015 for Miami, his decision caused dismay at the size of the hole that the largest State State taxpayer would leave in his budget (he returned in 2020, paying approximately $ 120 million to the state last year). Now, neighboring New York faces a greater loss of revenue if the exodus to Florida is accelerated among the top levels of the financial industry.

True, even if some of the rich left for good, the tax impact would be relatively small compared to the threat of millions of tourists and office workers moving away from Manhattan. What’s more, wealthy taxpayers who fled during Covid-19 may have a hard time staying away. And at least some members of the first 0.1% were it’s back this spring as Florida gets hotter and wetter.

With residents busy vaccinating themselves and betting on a post-pandemic boom, there is some hope that New York may find a way to recover from a crisis.

Taxing the richest in New York

Nearly one-third of the city’s income tax revenue comes from taxpayers earning $ 2 million or more.

Source: Independent Budget Office, for fiscal year 2018

But if the crown of New York City as the financial capital of the world begins to fall, the first signs will be in the investment business. While bank dealers and special advisors can meet face-to-face with clients again, hedge fund managers can, at least in theory, run operations as easily from a Palm Beach mansion as a tower. of Midtown Manhattan.

The $ 42 billion from Elliott Management Corp. they have seen several of their highest paid executives leave Manhattan. Jesse Cohn, head of the American activist who invests in the firm, and Jon Pollock, co-director of investments for the company, have moved near the new West Palm Beach headquarters. Paul Singer, the founder of Elliott, has also left the city, but stays in the northeast.

Other hedge fund titans are also moving to Florida permanently. Scott Shleifer, co-founder of Tiger Global Management’s $ 40 billion private equity unit, bought a $ 132 million home in Palm Beach, where he plans to relocate. Sundheim, which runs the $ 20 billion D1 Capital Partners, is moving close to its new office in Miami.

New Yorkers, rich or not, have been moving to Florida for decades, especially as they get older. The tax savings from these moves increased in 2018, following the passage of a Republican reform that limited the state and local tax deduction to $ 10,000. The new law meant the rich could no longer lower their federal taxes by deducting millions of dollars in state and local taxes, a change that made income-free states like Florida and Texas more attractive.

Some wealthy New Yorkers, such as Icahn, moved to Florida later, but the total number of wealthy taxpayers in New York remained constant and tax revenues continued to rise.

“We’ve had high taxes and it hasn’t kicked out all the billionaires,” said George Sweeting, deputy director of the city’s Independent Budget Office. The question is whether that can change, he said. “We do not know what the limit is. At what point is it more than people are willing to pay? Theoretically there is a point “.

Hedge fund partners who move to Florida, but maintain staff and operations in New York, will still owe some taxes to the state of the Empire. And larger companies find it harder to separate from the city, said Steven Winter, a partner at Grant Thornton.

One of Winter’s clients, a hedge fund director, has just moved to Florida, left the firm’s office in New York City and moved all of his employees to a remote job. It was “easier to do when you have a staff of only 15 to 20 people,” while it is “harder to do for 50 or more employees.”

Icahn, the 85-year-old activist investor who moved from New York to Florida in 2019, this month appointed a new CEO of his company. He told the Wall Street Journal that his current CEO and chief financial officer were leaving the company because neither of them planned to follow Icahn as far as the Miami area.

Taxes are an important part of discussions for smaller businesses. Let’s take the example of a manager who earns $ 10 million a year. In New York City, they would have paid more than $ 1.1 million in state and local taxes last year, and more than $ 1.2 million this year after the tax hike. By moving to Florida, the manager avoids this charge each year, as well as about $ 400,000 a year that his company owes 4% of the city’s business taxes.

New York takes center stage

With a proposed tax rate of between 13.5% and 14.8%, New York City would have the highest taxes for the country’s millionaires

Source: Tax Foundation, Bloomberg

The savings are even greater for the most successful managers. In addition to increasing the maximum rate for single files earning more than $ 1.1 million (from 8.82% to 9.65%), the state added two new tranches: incomes over 5 million dollars will be taxed at 10.3% and $ 25 million at 10.9%. Adding them to the city’s maximum rate of 3.88%, wealthy New York City residents now face marginal rates of 13.5% to 14.8%, surpassing the city’s maximum rate. 13.3% in California, previously the highest in the United States.

In approving the tax hike, Cuomo he said he expects “fully” that the blow will be offset by repealing the limit on state and local tax deductions, or SALT. “When SALT is abolished, taxes will go down,” he said.

President Joe Biden has not proposed ending the SALT limit, but a bipartisan group of lawmakers is pushing for the repeal. Critics of the effort, including New York representative Alexandria Ocasio-Cortez, have argued that ending the SALT limit would be costly, costing $ 88.7 billion a year, according to the Joint Tax Committee, and that it would mainly benefit the rich.

Noonan, of Hodgson Russ, estimates that the number of wealthy New Yorkers who want to leave is about 20 times greater than after the Republican tax bill passed in late 2017. Taxpayers who want to move are also a larger group. diverse, he said, including parents with children and millennials.

At the moment, there is little data available on how many people have permanently moved from New York. But according to its progressive income tax regime, the loss of even a small number of high-income taxpayers can have a noticeable impact.

Statewide, taxpayers who earned $ 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 were responsible for 18.5% of the city’s income tax revenue, or about $ 2.1 billion. .

New York City revenue sources

Income taxes are a relatively small part of the city’s $ 95 billion budget

But these sums are relatively small compared to the massive city and state budgets. Property taxes, the city’s largest source of income, grew steadily for decades until Covid-19 devastated real estate values. Next year, the Independent Budget Office forecasts property taxes to fall 3.3%, the first decline since 1998.

Meanwhile, the relocation of some wealthy New Yorkers has barely damaged income tax revenue. In January, the city’s projected income tax revenue will fall 6% in fiscal year 2021, to $ 12.7 billion, but then recover 6% to $ 13.5 billion, “almost a return to levels of pre-pandemic ERA “. Recent tax collections suggest that these projections may be conservative, with the city’s income tax continuing to contribute $ 13.6 billion in the last 12 months beginning in February.

Although Covid-19 left more than 900,000 New Yorkers out of work last year, incomes remained the same as higher-paid workers kept their jobs and the stock market rebounded.

The city also received 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 , who also cited the city’s mass vaccination campaign as a reason to be optimistic about the future. “While we recognize that we face a difficult path ahead, we are optimistic for a full recovery for the benefit of all New Yorkers,” he said.