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New York's wealthiest are threatening a mass exodus because of the GOP tax plan

Wall Street tax expert Robert Willens, president of Robert Willens LLC, has never heard more discussion from wealthy New Yorkers about relocating to another state with a more favorable tax environment until now because of the GOP tax plan.

“Everybody I speak to brings this up. Every NYC resident I speak to asks about the feasibility involved in doing it,” Willens, who regularly advises hedge fund clients on tax matters as it relates to investing, told Yahoo Finance. “I’ve been doing this more than 40 years, and never heard more discussion about relocating than recently.”

The tax plan Congress seems likely to pass soon would severely curtail the deduction for state and local taxes, known as the SALT provision, which about one-third of all taxpayers claim when they file their federal income taxes. In the 43 states with an income tax, the more you earn, the more this tax break is worth, since it lets you lower your taxable income at the federal level by the amount of taxes you pay to the state. Since it also includes property taxes, it also disproportionately benefits people with expensive real estate.

Swap snowy sidewalks and higher taxes for lower taxes and a sunny stroll along Ocean Ave. in Palm Beach, Florida. REUTERS/Joe Skipper

Some wealthy people in states such as New York can easily use the deduction to lower their federal taxable income by $100,000 or more. Congress, however, is poised to cap the total amount of state and local deductions at a mere $10,000. That would push taxable income, or the amount subject to federal tax, way up for people who typically claim a large SALT deduction.

A recent encounter that former hedge fund manager Whitney Tilson, a Democrat and supporter of the “Buffett rule,” had with a hedge fund manager summed up the dismay felt by some in the hedge fund community. Tilson recalled it in an email blast he distributed to his readers.

“I assumed that all of my rich Republican friends would be doing handsprings over this tax ‘plan’ (every study shows that corporations and one-percenters will benefit in a hugely disproportionate way; see here, here and here), especially since the outrageous carried interest loophole (which Trump pledged to close) is maintained, so I was shocked when I ran into an extremely wealthy NYC-based hedge fund manager on Monday and he, unprompted, started railing against it for at least 10 minutes,” Tilson wrote in the email.

Tilson continued: “He believes it will devastate NY (and, to a lesser extent, CA), primarily by ending or severely limiting the deduction of the very high state and local taxes. He estimated that his tax rate (and others [similarly] situated) will go from mid-30% to 56%, which will trigger a massive exodus from NY to places like Florida, which will crush the NYC (and therefore state) economy.”

According to Tilson, this hedge fund manager said that many of his Republican friends are “even more outraged.”

“Interestingly, he blames NY Sen. Chuck Schumer for what’s about to happen to NY because he didn’t cut a deal with Trump, which I think strains credulity given that Republicans are jamming this through despite vociferous, unified opposition from every Democrat in Congress,” Tilson wrote.

New York City is currently home to 82 billionaires, according to a tally on Forbes’ annual rich list.  New York state has a population of 9,530 people who are classified as ultra-high-net-worth individuals with assets of at least $30 million, according to Wealth-X.

‘Very serious’ inquiries about moving to Palm Beach

Some might be serious about making a move, though.

Kelly Smallridge, the president and CEO of Palm Beach County’s Business Development Board, has seen an uptick in activity from CEOs looking to explore Florida since there’s no state tax on personal income.

“The vast majority of inquiries are coming from the financial service industry such as hedge funds, private equity, and family offices,” Smallridge told Yahoo Finance.

Smallridge said she noticed the spike in interest in the last two months. She estimated that she has personally received 20 to 30 “very serious” inquiries. The move from the northeast to Florida has been somewhat of a trend in recent years. In the last five years, 60 financial services firms have relocated to the Palm Beach area, Smallridge noted.

In anticipation of possible relocations, Smallridge said that they tailored their services to meet frequently asked questions such as office space with water views, how to legally domicile in Florida, private schools for young children, direct flights to the Northeast, residential communities, and introductions to country clubs.

It’s tough to prove you’ve moved if your business dealings are in New York

Willens, however, expects a lot more talk than action.

“I think people definitely entertain that possibility. And I don’t know if we are at the point where they will actually act on that. A lot more talk than actual action, I have to say,” he said, adding, “When you tell people that their effective tax rates all in will be well over 50%, it does tend to get their attention.”

There’s certainly much more favorable tax environments in other states such as Florida. Plus, it’s possible to work remotely without much disruption. The problem, however, is that it’s not so easy to eliminate your New York state residency.

“You have to prove that you’ve actually changed your domicile to wherever it is that you would like to move to. It’s up to you to affirmatively establish that you have done that,” Willens said. “If you maintain ties to New York — we’ve had cases on this through the years involving prominent people who have tried to do this — if you maintain any ties to New York, even though you might have moved to Florida or Texas, it’s going to be hard to prove to New York that you actually changed your domiciles, particularly if your business is centered in New York. It might be almost impossible.”

He added that an individual might wind up physically relocating to Florida, but New York state will continue to argue, and probably successfully, that the person is still a New York resident.

“Even if you take the steps to do it, you still have to confront New York and their need for tax revenues, and their aggressive posture regarding your domiciles,” Willens said. “It’s a tough thing to prove. It probably isn’t going to deter New York from saying that you haven’t abandoned your domiciles. It might help a little. They’re going to look at the fact that you have business ties and business dealings in New York and they are going to rely on that factor.”

For many wealthy New Yorkers, the tax plan is seen as a double-whammy. In addition to capping the SALT deduction, the other issue is not allowing people that conduct a service business through pass-through entities to take advantage of the lower rate. Many businesses in New York such as law firms, architecture firms, health companies, investment management firms are considered pass-through entities, he added.

“[The bill] really favors people in low tax states that conduct business where tangible assets are sold,” Willens said, noting that it’s a great thing to benefit people who manufacture goods. That said, the bill penalizes new economy businesses where services and other intangible assets are sold.

Willens said that the GOP has not been selling the bill very well. It’s still seen as a giveaway to the upper-income group.

Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.