Can you move 1,200 miles just to lower your taxes? Well, David Tepper can, and it may save him hundreds of millions of dollars.
Tepper is the founder of hedge fund Appaloosa Management, and he’s worth more than $10 billion, according to Forbes. He ran his firm out of New Jersey for years, but recently moved the operation to Miami Beach. The top income tax rate in New Jersey is nearly 9%. In Florida, the top rate is 0. Tepper will save so much money that New Jersey finance officials worry that the tax revenue lost to his move could blow a hole in the state budget.
Connecticut lost a couple of billionaires as well—businessmen Thomas Peterffy and C. Dean Metropoulos, who also decamped for Florida recently. Their departure lowered Connecticut’s billionaire count from 15 to 13. The Nutmeg State is also losing longtime corporate citizen General Electric (GE) to Boston, a move GE made after Connecticut passed big tax hikes. Florida Gov. Rick Scott even invited Yale University to ditch New Haven and relocate to the Sunshine State, to avoid a new tax some Connecticut lawmakers wanted to impose on the school’s endowment. That bill failed to pass, and Yale says it is staying put (for now).
Tax dodges available to the wealthy – but usually, not to the rest of us – have become a sore spot among Americans growing weary of crony capitalism. Democratic presidential candidate Bernie Sanders draws roars of approval when he calls for a sharp tax hike on the wealthy. Republican Donald Trump vows to end certain tax breaks that, he says, allow hedge-fund managers to “get away with murder.” The Obama administration recently cracked down on corporations that try to avoid paying U.S. taxes through “inversions,” and the Panama Papers scandal, while snaring few Americans, stoked global outrage over the world’s fat cats setting up secret, tax-free accounts far from home.
A simpler tax haven
But there’s a simpler kind of tax haven: States with low or no income taxes, which increasingly seem to be drawing 1 percenters from the finance industry. Unlike many types of work that must be done on-site, investing firms can be run from just about anywhere, as long as a major airport is nearby. The wealthy have always sought to minimize their tax bills, but one new factor may be a tax rule the IRS recently “clarified” to indicate that certain offshore holdings of hedge funds must be repatriated by the end of 2017 – with earnings taxed. Repatriating such funds to a state with no personal income tax could save millions compared with the relatively high rates in the Northeast, California and a few other states.
Anybody can do the math. On $10 million earned in New Jersey, taxed at the top rate of 8.97%, the state tax alone would be $897,000—not including federal taxes. The tax on the same $10 million would be $882,000 in New York and $670,000 in Connecticut. In Florida it would be nothing. Florida raises taxes in other ways, through sales taxes and a lot of excise taxes, but that puts more of a burden on the middle class -- and less on the wealthy -- than in other states with progressively higher taxes on income.
That has made Florida a magnet for tax minimizers able to come on down. At least 29 hedge funds opened in Florida in 2015, many of them run by Wall Street departees. Locals talk of a “new Manhattan” forming in south Florida. Groups such as the Palm Beach Hedge Fund Association, formed in 2013, tout the fact that Florida levies no tax on incomes, estates or certain types of corporations -- which happen to be the kind most hedge funds and private-equity firms are structured as. Gov. Scott, for his part, aggressively recruits corporations to his business-friendly state. Florida does have a corporate tax rate of 5.5%, but that, too, is relatively low compared with 9% in New Jersey, 7.1% in New York, 9% in Connecticut and 8.84% in California.
The path from high-tax northern states to low-tax southern ones is well-trod by now. Annual data on state-to-state moves gathered by United Van Lines shows that New Jersey, which has the fifth-highest state income tax rate in the nation, also has the highest portion of people moving out. New York, with the eighth-highest income tax rate, is No. 2 for departures. Florida, with no income tax, has the largest portion of in-bound movers. Five other states with no state income tax – Nevada, Texas, Washington, South Dakota and Wyoming – also had a net inflow in 2015. (Alaska has no state income tax, but it wasn’t included in the United survey.)
Puerto Rico is the latest municipality to lure 1 percenters with generous tax breaks. A set of laws passed in 2008 taxes certain businesses that move to Puerto Rico at a flat 4% rate, while offering huge reductions in many types of investment income for people who can prove they spend at least 183 nights on the island. Hedge-fund giant John Paulson is investing at least $1.5 billion in development in Puerto Rico, while holding seminars for investors and businesspeople touting the island’s virtues as a tax haven. Paulson says he may move there himself, joining more than 1,000 wealthy emigres who made the same move in recent years.
You don’t necessarily need $1 billion to move to a tax haven. But if you do, you’ve got a powerful incentive to find one — and the resources to get there.
Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman.