Hedge funds are poised 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 concerned about his future.

New York struggled to keep some of the world’s richest people and the businesses that operate them, even before Governor Andrew Cuomo and state legislatures increased taxes on millionaires and billionaires. Wall Street’s biggest names – including Goldman Sachs Group Inc., Apollo Global Management Inc. and Point72 Asset Management – are taking steps to expand elsewhere, particularly Florida.

The key to the Sunshine State’s appeal is its income tax – it doesn’t have one. In contrast, New York City’s wealthiest now face the highest state and local rates in the US.

“There is definitely an unprecedented migration of high net worth taxpayers from New York City, and some of them are taking their businesses with them,” said Timothy Noonan, a legal partner at Hodgson Russ who specializes in tax residence issues. “Now that rates are going up, they are ready to go.”

When hedge fund billionaire David Tepper left New Jersey for Miami in 2015, his move caused consternation over the extent of the gap the Garden State’s largest taxpayer would leave in his budget (he returned in 2020, paid an estimated $ 120 million to the state last year). Now neighboring New York is facing greater revenue loss as an exodus to Florida accelerates in the upper echelons of the financial sector.

Certainly, even if some of the wealthy were to leave permanently, the fiscal impact would be relatively small compared to the threat of millions of tourists and office workers staying away from Manhattan. In addition, 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 will return this spring as Florida is getting warmer and more humid.

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

Taxing the richest in New York

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

Source: Independent Budget Office, for assessment year 2018

But as New York City’s crown as the financial capital of the world begins to slide, the first signs will be in the investment sector. While bank deal makers and hotshot advisers eventually go back to meeting clients in person, hedge fund managers can – at least in theory – conduct transactions from a Palm Beach mansion as easily as a high-rise in Midtown Manhattan.

The $ 42 billion Elliott Management Corp. has seen several of its highest-paid executives leave Manhattan. Jesse Cohn, head of US activist Investing at the company, and Jon Pollock, the company’s co-chief investment officer, have moved into the company’s new corporate headquarters in West Palm Beach. Paul Singer – the founder of Elliott – has also left the city, but resides in the Northeast.

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

New Yorkers, rich or not, have been relocating to Florida for decades, especially as they got older. The tax savings from such moves ramped up in 2018, following the adoption of a Republican reform that halted the state and local tax deductions at $ 10,000. The new law meant that the wealthy could no longer lower their federal taxes by deducting millions of dollars in state and local taxes – a change that made states with no 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 remained stable and tax revenues continued to rise.

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

Hedge fund partners who move to Florida but keep staff and operations in New York will still owe some tax in the Empire State. And larger companies find it more difficult to break away from the city, says Steven Winter, a partner at Grant Thornton.

One of Winter’s clients, a hedge fund principal, just moved to Florida, gave up the company’s New York City office space and relocated all of its employees to remote work. It’s “easier to do when you have a workforce of just 15 to 20 people,” he said, while it’s “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 company this month. He told the Wall Street Journal that his current CEO and chief financial officer both left the company because neither intended 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 makes $ 10 million a year. In New York City, they are said to 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 that charge every year, as well as about $ 400,000 a year their company owes on the city’s 4% unrecognized corporate tax.

NYC takes the lead

With a proposed tax rate between 13.5% and 14.8%, New York City would have the highest taxes for millionaires in the nation

Source: Tax Foundation, Bloomberg

The savings are even greater for the most successful managers. In addition to raising the top rate on single filers who earned more than $ 1.1 million – from 8.82% to 9.65% – the state added two new brackets: earnings above $ 5 million are taxed at 10.3% and $ 25 million at 10.9%. Adding these to the city’s top rate of 3.88%, wealthy New York City residents now face marginal rates of 13.5% to 14.8%, giving them the highest rate of 13.3% in California, formerly the highest percentage in the US.

In approving the tax increase, Cuomo said he “fully” expects the blow to be offset by a repeal of the cap on state and local taxes, or SALT, deductions. “If SALT is withdrawn, 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 it to be repealed. Critics of the effort, including New York representative Alexandria Ocasio-Cortez, have argued that an end to the SALT limit would be expensive – $ 88.7 billion a year, according to the Joint Committee on Taxation – and especially benefit the wealthy. come.

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

Little data is available on how many people have in fact moved permanently from New York. But under the progressive income tax regime, the loss of even a small number of high-earning taxpayers can have a noticeable impact.

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

Sources of Income from New York City

Income taxes make up a relatively small portion of the city’s $ 95 billion budget

But these amounts are relatively small compared to the huge budgets of the city and the state. Real estate tax – the city’s biggest source of income – grew steadily for decades until Covid-19 devastated property values. In the coming fiscal year, the Independent Budget Office expects property taxes to drop by 3.3% – the first drop since 1998.

Meanwhile, the relocation of some wealthy New Yorkers has barely affected income taxes. In January, the city’s projected income tax revenues will fall 6% in fiscal year 2021 to $ 12.7 billion, but then pick up 6% to $ 13.5 billion, “a near return to pre-pandemic ERA levels. ” Recent tax collection suggests these forecasts may be conservative as municipal income tax has continued to yield $ 13.6 billion over the past 12 months from February.

Although Covid-19 put more than 900,000 New Yorkers out of work last year, earnings were held up as better-paid workers kept their jobs and the stock market recovered.

The city also received a “shot in the arm” of the Biden government’s $ 1.9 trillion stimulus bill, Finance Commissioner Sherif Soliman said at a March 24 city council hearing, also citing the city’s massive vaccination campaign cited as a reason to be optimistic about the future. “While we recognize that we face a difficult road, we are optimistic for a full recovery to the benefit of all New Yorkers,” he said.