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 is planning to leave. Larry Fink remains, but is worried about his future.

New York is struggling to retain some of the world’s richest people and the companies it operates just before Gov. Andrew Cuomo and state lawmakers pay taxes on millionaires and billionaires. The biggest names on Wall Street – 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 the attraction of Sunshine State is the income tax – it doesn’t charge anyone. Instead, the richest in New York now face the highest state and local rates in the United States.

“There is certainly an unprecedented migration of high net worth taxpayers from New York City, and some of them are taking their business with them,” said Timothy Noonan, a legal partner at Hodgson Russ, who specializes in tax residency issues. “With rates set to rise, I’m ready to go out.”

When hedge fund billionaire David Tepper left New Jersey in 2015 for Miami, his move sparked dismay over the size of the hole that Garden State’s largest taxpayer would leave in his budget (he returned in 2020, paying the state about $ 120 million last year). Now, New York’s neighbor is facing a greater loss of revenue if an exodus to Florida accelerates among the top echelon of the financial industry.

Certainly, even if some of the rich leave for good, the tax impact would be relatively small compared to the threat of millions of tourists and office workers staying away from Manhattan. Moreover, wealthy taxpayers who fled during Covid-19 may find it difficult to stay away. And at least some members of the top 0.1% were already returning this spring as Florida gets hotter and wetter.

With residents busy vaccinating and betting on a post-pandemic boom, there is some hope that New York will find a way to come back after a crisis.

Taxing the richest in New York

Nearly one-third of city 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 decline, the first signs will be in the investment business. While bank representatives and hotshot advisors may eventually return to face-to-face customer meetings, hedge fund managers can – at least in theory – make transactions just as easily from a Palm Beach mansion as and a high-rise in Midtown Manhattan.

The $ 42 billion Elliott Management Corp. they saw some of its highest paid executives leave Manhattan. Jesse Cohn, the head of the American activist who invests in the company, and Jon Pollock, the co-head of the company’s investments, moved to his new headquarters in West Palm Beach. Paul Singer – the founder of Elliott – also left the city, but remains in the northeast.

Other hedge fund titans are also moving to Florida permanently. 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 move. Sundheim, which runs the $ 20 billion D1 Capital Partners, is moving to its new Miami office.

New Yorkers, rich or not, have moved to Florida for decades, especially as they get older. The fiscal savings generated by such moves were boosted in 2018, following the adoption of a Republican reform that capped the state and local tax deduction at $ 10,000. The new law meant that the rich could no longer reduce their federal taxes by deducting millions of dollars in state and local taxes – a change that made non-income tax states like Florida and Texas more attractive.

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

“We had high taxes and didn’t drive out all the multi-millionaires,” said George Sweeting, deputy director of the city’s Independent Budget Office. The question is whether this can change, he said. “We do not know the limit. At what point does it become more than people are willing to pay? Theoretically there is a certain point there. ”

Hedge partners who move to Florida but keep staff and operations in New York will also owe some taxes in the state of Empire. Even larger companies find it harder to break away from the city, said Steven Winter, a partner at Grant Thornton.

One of Winter’s clients, a hedge fund manager, has just moved to Florida, given up his New York office and moved all his employees to remote work. It is “easier to do when you have a workforce of only 15-20 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, has appointed a new executive director for his company 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 planned to follow Icahn in the Miami area.

Taxes are an important part of discussions for smaller companies. Take the example of a manager who earns $ 10 million a year. In New York, they reportedly paid more than $ 1.1 million in state and local taxes last year and more than $ 1.2 million this year after taxes. By moving to Florida, the manager avoids this tax each year, as well as the approximately $ 400,000 annually that their company owes to the city’s 4% unincorporated business tax.

NYC takes over

With a proposed tax rate of 13.5% to 14.8%, New York City would have the highest taxes for millionaires in the country

Source: Tax Foundation, Bloomberg

The savings are even greater for the most successful managers. In addition to the increase in the peak rate for single depositors, earning more than $ 1.1 million – from 8.82% to 9.65% – the state added two new brackets: incomes over 5 USD million will be taxed at 10.3% and USD 25 million at 10.9%. Adding them to the city’s maximum rate of 3.88%, New York’s affluent residents now face marginal rates of 13.5% to 14.8%, surpassing the maximum rate of 13.3% in California, previously largest in the US.

In approving the tax increase, Cuomo he said he expected “fully” that the blow would be offset by a repeal of the ceiling for state and local taxes or SALT deductions. “When the SALT is repealed, taxes will go down,” he said.

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

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

There is still little data available on how many people have permanently moved from New York. But under its progressive income tax regime, the loss of even a small number of high-income taxpayers can have a visible impact.

At the state level, taxpayers earning $ 10 million or more paid 17% of income taxes in 2018, or $ 8.1 billion. In New York, approximately 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 sources of income

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

But these amounts are relatively small compared to the massive city and state budgets. Property taxes – the city’s biggest source of income – rose steadily for decades until Covid-19 devastated real estate. In the next fiscal year, the Independent Budget Office expects property taxes to fall by 3.3% – the first decline since 1998.

Meanwhile, the relocation of wealthy New Yorkers has barely affected income tax revenues. In January, the city’s income tax revenue will drop 6% in fiscal year 2021 to $ 12.7 billion, but then return 6% to $ 13.5 billion, “a return close to pre-pandemic ERA levels ”. Recent tax harvests suggest that these projections could be conservative, with the city’s income tax continuing to bring in $ 13.6 billion over the past 12 months since February.

Even though Covid-19 laid off more than 900,000 New Yorkers last year, incomes remained the same as higher-paid workers kept their jobs and the stock market returned.

The city also received a “blow to the arm” from the $ 1.9 trillion Biden administration stimulus bill, Finance Commissioner Sherif Soliman said at a March 24 City Council hearing, also citing , the city’s mass vaccination campaign as a reason to be optimistic about the future. “While acknowledging that we are facing a difficult road ahead, we are optimistic for a full recovery for the benefit of all New Yorkers,” he said.