Hedge funds are ready to move out of 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 remains, but is worried about its future.

New York struggled to retain some of the richest people in the world and the businesses they run even before Governor Andrew Cuomo and state legislators raised taxes on millionaires and billionaires. Wall Street’s biggest names – including Goldman Sachs Group Inc., Apollo Global Management Inc. and Point72 Asset Management – take steps to expand elsewhere, particularly Florida.

The key to the attractiveness of the Sunshine State is its income tax – it does not charge any amount. In contrast, the richest in New York are now among the highest state and local rates in the US

“There’s definitely an unprecedented migration of high-value taxpayers out of New York, and some of them are taking their business with them,” said Timothy Noonan, a legal partner at Hodgson Russ, which specializes in tax residency issues. “With rates going up, they are ready to climb out.”

When hedge fund billionaire David Tepper left New Jersey for Miami in 2015, his move caused uproar over the size of the hole that would leave the state’s largest taxpayer in its budget (he returned) in 2020, which last year was estimated to have paid $ 120 million to the state). Now, neighboring New York has accelerated a greater loss of revenue than an exodus to Florida in the higher end of the financial industry.

To be sure, even if some rich people leave permanently, the fiscal impact will be relatively small compared to the threat of millions of tourists and office workers staying away from Manhattan. What’s more, wealthy taxpayers who fled during Covid-19 may find it difficult to stay away. And at least some members were the best 0.1% is already coming back this spring as Florida gets warmer and wetter.

As residents are being vaccinated and betting on a resurgence after the pandemic, there is hope that New York can once again find a way to bounce back after a crisis.

Taxes in New York’s Richest

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

Source: Independent Budget Office for tax year 2018

But as the crown of New York as the financial capital of the world begins to slide, the first signs will be in the investment industry. While bank traders and advisory advisors may eventually meet clients again, hedge fund managers – at least in theory – can trade from an mansion in Palm Beach just as easily as a Midtown Manhattan building.

In the $ 42 billion Elliott Management Corp., several of its highest paid executives left Manhattan. Jesse Cohn, chief of the American activist’s investment firm at the firm, and Jon Pollock, the company’s co-investment chief, have moved near its new headquarters in West Palm Beach. Paul Singer – Elliott’s founder – also left the city, but remains in the northeast.

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

New Yorkers, rich or otherwise, have been moving to Florida for decades, especially as they get older. The tax savings due to such moves were increased in 2018 after the passage of a Republican reform that limited state and local tax deductions to $ 10,000. The new law meant that rich people could no longer reduce their federal taxes by deducting millions of dollars in state and local taxes – a change that made states without an income tax like Florida and Texas more attractive.

Some wealthy New Yorkers, such as Icahn, did move to Florida in the aftermath, but the total number of wealthy taxpayers in New York kept steady and tax revenues continued to rise.

“We had high taxes and it did not drive away all the multimillionaires,” 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 does it become more than people are willing to pay? Theoretically, there is a point. ‘

Hedge fund partners who move to Florida but keep staff and operations in New York will still owe taxes in the Empire State. And larger businesses are finding it harder to untangle themselves from the city, said Steven Winter, a partner at Grant Thornton.

One of Winter’s clients, a hedge fund principal, had just moved to Florida, gave up the office space in New York City and moved all his employees to remote work. It’s ‘easier to do if you have a workforce that only has 15 to 20 people’, he said, 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, appointed a new CEO for his firm this month. He told the Wall Street Journal that his current CEO and chief financial officer are both leaving the company because neither of them plans to follow Icahn to the Miami area.

Taxes are an important part of the discussions for smaller businesses. 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 increase. By moving to Florida, the manager avoids the levy each year, as well as about $ 400,000 a year that their firm owes to the city’s 4% unincorporated business tax.

NYC takes the lead

With a proposed tax rate between 13.5% and 14.8%, the city of New York will have the highest tax for millionaires in the country

Source: Tax Foundation, Bloomberg

The savings are even greater for the most successful drivers. In addition to raising the highest rate for single executives earning more than $ 1.1 million – from 8.82% to 9.65% – the state has added two new brackets: income above $ 5 million is taxed at 10.3% and $ 25 million at 10.9%. When added to the city’s highest rate of 3.88%, New York’s wealthy residents now face marginal rates of 13.5% to 14.8%, up from 13.3% in California. previously the highest in America, surpassed.

At the approval of the tax increase, Cuomo said he expects “fully” that the blow be offset by the deduction of the limit on deductions from state and local taxes, or SALT. “When SALT is revoked, the tax will go down,” he said.

President Joe Biden has not proposed ending the SALT petition, but a dual group of lawmakers is pushing for it to be repealed. Critics of the effort, including New York Representative Alexandria Ocasio-Cortez, argued that ending the SALT cap would be costly, according to the Joint Committee on Taxation, would cost $ 88.7 billion a year and especially the rich benefit.

According to Hodgson Russ’s Noonan, the number of wealthy New Yorkers who want to leave is now about 20 times greater than after the Republican tax bill passed in late 2017. Taxpayers who want to relocate are also a more diverse group, including parents with children and millennials.

There is still little information available on how many people actually moved out of New York permanently. But under its progressive income tax regime, the loss of even a small number of taxpayers can have a noticeable impact.

Nationwide, taxpayers earning $ 10 million or more paid 17% of income tax in 2018, or $ 8.1 billion. In New York City, about 1,800 people earned at least $ 10 million in 2018 and they accounted for 18.5% of the city’s income tax revenue, or about $ 2.1 billion.

New York City’s Sources of Revenue

Income tax is a relatively small part of the city’s $ 95 billion budget

But these amounts are relatively small compared to the massive budget of the city and the state. Property taxes – the largest source of income in the city – grew for decades until Covid-19 destroyed real estate values. In the coming financial year, the Independent Budget Office expects property taxes to fall by 3.3% – the first drop since 1998.

Meanwhile, the relocation of some wealthy people from New York has barely dipped the income tax revenue. In January, the city’s projected income tax revenue fell by 6% to $ 12.7 billion in the 2021 financial year, but then by 6% to $ 13.5 billion, a near return to pre-pandemic ERA levels. ‘Recent tax collection suggests that forecasts may be conservative, and the city’s income tax will continue to bring in $ 13.6 billion from February.

Although Covid-19 threw more than 900,000 New Yorkers out of work last year, the income continued as more paid workers kept their jobs and the stock market recovered.

The city also received a “shot in the arm” from the Biden administration’s $ 1.9 billion stimulus bill, Finance Commissioner Sherif Soliman said during a March 24 city council hearing. “While acknowledging that we have a difficult road ahead, we are optimistic for a full recovery for the benefit of all New Yorkers,” he said.