New York’s exceptionally wealthy state tax base is also exceptionally fragile, due to its heavy dependence on the highly volatile (and portable) investment-driven incomes of Wall Street workers and fund managers.
In the wake of the pandemic, the lucrative tippy-top of the Empire State’s tax base has become more fragile than ever — as highlighted by three unrelated news developments just this week:
- New York-based Elliot Management, one of the world’s 10 largest hedge funds, “plans to move its headquarters to West Palm Beach (Florida) from Midtown Manhattan, according to people familiar with the matter, joining a growing list of funds that have relocated to the Sunshine State,” Bloomberg News reported (subscription required).
- Wall Street accounted for 18 percent of New York State tax collections last year, according to the state comptroller’s annual report on New York’s securities industry. With renewed profits inflated by a massive stimulus injection from the Federal Reserve, the industry will probably account for an even larger share of state revenues in the current fiscal year. But New York’s securities firms also are “on pace to lose 7,300 jobs in 2020, erasing close to half [their] job gains … since 2013,” and the outlook for the industry’s future in New York is uncertain, the comptroller’s report said.
- In 2018, newly released data from the Independent Budget Office (IBO) show, the highest-earning 1 percent of city residents generated 43 percent of the city’s income tax—and 52 percent of all state income taxes paid by city residents.
Hedging New York’s future
While the securities industry is by no means the sole employer of very well-compensated New Yorkers, the incomes of multimillionaires tend to rise and fall with Wall Street stock indexes, which in turn drive capital gains trends.
For example, during the 2007-09 Great Recession’s bear market, the incomes of New York’s top earners dropped by more than one-half, even while those of other New Yorkers did not decline by much and more quickly recovered. And because the top 1 percent pays so much of the state’s leading revenue source, any uptick in outmigration of New York’s wealthiest residents will seriously undermine the state’s revenue base.
With $41 billion in assets as of 2019, Elliott Management is headed by its founder Paul Singer, a billionaire who also is chairman of the Manhattan Institute for Policy Research (where the Empire Center was originally founded, and where I am adjunct fellow). Picking up from the Bloomberg report:
Singer’s co-chief investment officer and expected successor, Jon Pollock, owns a home near West Palm Beach and has been living there during the pandemic, said the people, who asked not to be identified because the information is private. The now-permanent move by Pollock, as well as several other senior employees, played a big role in the decision to shift the headquarters, said one of the people.
Florida has no income tax, and also is among the 38 states that—unlike New York—impose no state-level estate tax, which is an added disincentive of continued residency in the Empire State for aging high earners with substantial assets.
Among very highly paid securities industry executives, the 57-year-old Pollock surely was not alone in having moved during the pandemic to an existing second (or third) home in a lower-taxed state—and having ultimately decided it suited him as a full-time base. Pollock also is unlikely to be the last to make such a move, especially if advocacy groups bankrolled by New York’s public employee unions succeed in their push for massive new taxes on “millionaires and billionaires.” As the Bloomberg story noted:
With no individual income taxes, estate taxes or capital gains taxes, Florida has become a hot destination for hedge funds in recent years. The Covid-19 pandemic has accelerated that shift away from New York, the initial epicenter of the U.S. outbreak.
Singer himself will remain in the Northeast and Elliott Management “will continue to employ hundreds of people in its Manhattan offices,” Bloomberg reported, but the firm will also open a new office in Greenwich, CT. As it happens, the Connecticut top income tax rate of 7.99 percent is considerably lower than New York City’s 12.7 percent.
The risk, of course, is that Elliott’s move is not a one-off but the continuation of an established trend. Another longtime New York resident billionaire, Carl Icahn, has just moved himself and his asset management firm to Miami. In 2018, New York lost one of its oldest money-management firms, Alliance Bernstein, to low-tax Nashville, TN.
Wall Street rising—for now
After a sharp stock market drop from late February to mid-March, the securities industry had record profits in the second quarter, Comptroller Thomas DiNapoli’s report said. Although stock prices have been propped up by the Fed’s adoption of near-zero interest rates rather than by economic fundamentals, renewed Wall Street profitability will no doubt fuel renewed calls for soak-the-rich tax hikes from some corners of the Legislature. However, DiNapoli’s report also contains warning bells.
The current employment decline [of 7,300 jobs] looks milder than in the previous two economic downturns (2001 and 2009), where the industry faced three consecutive years of job losses before growth resumed. The current downturn poses new questions, however regarding the duration of the public health crisis and associated changes to behavior, including an accelerated adoption of technology. Its full impact remains uncertain.
The report noted a recent Manhattan Institute/Siena College Research Institute survey that found 44 percent of New Yorkers earning $100,000 or more have considered moving out of the city as a result of pandemic related impacts. Securities industry employees, who account for less than 5 percent of total jobs but fully one-fifth of private-sector wages in the city, are also more predominantly six-figure earners.
Income taxes: the top of the top
The IBO issued annual breakdown of the city’s resident income tax base includes the share of incomes reported and of both city and state income taxes paid by successively higher-earning 10 percent chunks, or deciles, of city residents. Key findings:
- In 2018, the lowest-earning 50 percent of New York City residents generated just 1.7 percent of city income tax revenues. The same filers paid no net state income tax at all; in fact, as a group, the bottom 50 percent got back refunds or credit checks equivalent to 1.7 percent of the total state income tax paid by city residents.
- The 40 percent of city residents in the sixth through ninth income deciles paid 28 percent of city income taxes and 23 percent of state income taxes.
- The highest-earning 10 percent paid 71 percent of city income taxes and 79 percent of state income taxes owed in the city.
- Just 4,412 filers with incomes above $5 million—a mere 0.11 percent of Gotham’s 3.9 million total filers—accounted for 24 percent of local income taxes (or $2.8 billion) and 31 percent of state income taxes paid by New York City residents ($6.1 billion).
That last point bears repeating: a small group of households who (assuming they are composed mostly of couples) wouldn’t fill Madison Square Garden are generating nearly one-quarter of New York City’s income taxes. On average, every 440 households in these rarified brackets accounts for a combined $891 million in city and state revenues. But at this writing, it’s not clear how many of them are still living in New York—or planning to remain.
In the meantime, the statistics provide an answer to political demands for New York to “Tax the Rich”: we already do.