What You Need to Know
- The proposed tax hike on wealthy New Yorkers may result in more of them fleeing the state, says a tax expert.
- This is an especially bad time to raise taxes because remote work has become so much easier, according to the Tax Foundation's Jared Walczak.
- And “substantially raising taxes on businesses and high earners at a time of dramatically enhanced mobility could easily backfire,” he warned.
If implemented, the tentative deal reached in New York to raise taxes on the state’s wealthiest residents could prompt many of its most mobile executives and employees to move out of state, according to Jared Walczak, vice president of state projects at the Tax Foundation.
After all, the highest-earning New Yorkers tend to be people who can work remotely more easily than others, and some of these New Yorkers have already temporarily left New York during the pandemic, Walczak told ThinkAdvisor in a phone interview on Tuesday.
“Fortunately, New York has not seen a significant decline in revenues during the pandemic,” he explained. “So this is about increasing revenue, not patching a hole” in the state budget, according to Walczak.
The tentative deal reached between Governor Andrew Cuomo and state legislators came about one week after budget director Robert Mujica said the state will have a hole of nearly $2.5 billion as New York will receive only $12.6 billion of the $15 billion in federal aid it had sought.
If the plan is implemented, income-tax rates would temporarily increase to 9.65% from 8.82% for single filers earning more than $1 million, according to a Bloomberg report. The deal would also create two new tax brackets: Those individuals with income between $5 million and $25 million would be taxed at 10.3%, and those with income over $25 million would be taxed at 10.9%.
What New York Should Do Instead
“New York’s priority should be on bringing back those who have temporarily left the state during the pandemic, not giving them an excuse not to return,” Walczak argued.
And “substantially raising taxes on businesses and high earners at a time of dramatically enhanced mobility could easily backfire,” he warned.
“The pandemic has given us this forced experiment in remote work and, while many of us will go back to offices, it’s clearly working” for many companies, Walczak said.
Therefore, “post-pandemic, far more people will work remotely or at least have significant remote work flexibility,” he explained. “For some who currently live in major metropolitan areas like New York City, in particular, this may mean the flexibility to live in a lower-cost jurisdiction.”
That will translate to lower cost of living overall and lower tax costs for those New Yorkers, he noted. While they may not have been willing to give up a job to move elsewhere, “if that job can follow them, you will see more migration” to other states.
“This is, therefore, a particularly bad time to be raising taxes on the most mobile New Yorkers, particularly when there’s not a pressing revenue need,” he said.
What Advisors Should Do
There are important discussions that advisors should have with their clients about the proposed tax hike, especially if it goes through.
For starters, “if financial advisors are talking to [clients] who are interested in remote work, there needs to be a discussion” about New York’s convenience of the employer rule that dictates if your office is in New York, then you continue to owe income taxes to New York, even if you’re both living and working elsewhere, Walczak said.
“There’s a way around this if they’re working remote” that advisors should know about and explain to these clients, he noted: “They would need to be assigned to their company’s office in another state.”
However, if they “only have a New York office, they may be hit with double taxation if they move elsewhere — obviously a huge impediment to remote work,” he said.
This is another reason why we may see smaller firms relocate outside of New York, he warned.
A large financial services company will likely have offices around the country. If an employee decides to move to Virginia, they can assign them to a Virginia or Maryland office, for instance.
“But a company that only has one office and wants to provide remote work may find it conducive to move to New Jersey or Connecticut or really anywhere to avoid that particular penalty on its employees,” Walczak explained.
That is because “there’s not a lot that can be done to hedge against income tax increases unless you choose to change where you live or work,” he said.
This may also result in changes to investment decisions so that’s another area for advisors to explore with clients impacted by this, he said, adding: “It’s particularly worrisome given how many people temporarily located out of New York.”