President-elect Joe Biden’s tax plans have come under scrutiny over intentions to raise rates for wealthy Americans – but some experts say they could also contribute to an exodus from high-tax states.
There are a combination of measures within Biden’s tax plan that will affect the finances of the wealthy through a stated concentration on people earning more than $400,000.
First, the former vice president would increase the top income tax bracket to 39.6%, from 37%.
He has also called for capping itemized deductions at 28% for the wealthy, and exposing incomes above $400,000 to the 12.4% Social Security tax (currently, there is a wage cap of $137,700).
There are also changes that have been proposed involving the estate tax basic exclusion amount, step-up in basis and capital gains taxes.
Beau Henderson, financial adviser and founder of RichLife Advisors, said he has clients who are actively considering relocations to lower-tax areas as a means to stretch their retirement dollars – a trend he said could “accelerate” if these changes were to go into effect.
Experts are predicting Biden’s plan could result in marginal tax rates of more than 60% in three states – New Jersey, California and Hawaii – as well as New York City. A handful of others would have rates just shy of 60%.
“Rates are going to go up so you better be looking for an alternative if you have the flexibility,” Timothy McGrath, managing partner at Riverpoint Wealth Management, told FOX Business.
And there may be more pain to come. State and local governments are dealing with massive coronavirus-related budget deficits, which means they are in need of additional sources of revenue. Some localities have already committed to tax increases as part of a solution, but McGrath added that more increases could be on the way as states try to “nickel and dime” residents.
McGrath, who deals with wealthy clients, noted that many of these people are not only mobile because they have second or even third homes, but the telework environment has given an added sense of relocation flexibility that people largely did not have before the pandemic.
Further, the pandemic created a scenario where some people have appeared to move away from densely populated metro areas – like Manhattan and San Francisco – creating a potential perfect storm for households looking to leave.
As previously reported by FOX Business, as many as 23 million households said they planned to relocate to another city or region because of the pandemic – with most seeking out more affordable arrangements.
And nearly half of New York City’s wealthy residents have considered leaving because of the high cost of living.
Besides nearby suburbs, Florida remains a popular destination for those fleeing the Northeast. The latest data from United Van Lines shows moving interest to Florida from New York City is up 10% year over year.
From New York, New Jersey, Connecticut, and Massachusetts, collectively, there is a 4 percentage point uptick in actual moves to Florida compared with last year.
Marianela Collado, a financial planner at Tobias Financial Advisors, however, told FOX Business that the people who are likely to move are the ones who either had prior plans to do so, or have a second home.
“There’s a lot of buzz that goes around when there’s major legislation, but at the end of the day people are going to live where it makes the most sense for them and their family,” Collado said.
The Tax Cuts and Jobs Act was credited with accelerating a flight of people from states like New York and New Jersey to lower-tax states after it capped state and local tax deductions at $10,000.