States: Tax Structure Does Matter

It is sad that it takes a real life example to prove a point that should be common sense.  It is the lower and middle class citizens that end up suffering from the higher tax rates on the wealthy.  As the wealthy move in search of tax relief, a greater burden of the state’s operating expenses fall on the remaining residents who are less able to afford the additional burden. 

States take notice…Your tax structure matters.  It is all relative…Wealthy residents will move to another state to avoid taxation if a better structure is obtainable. 

N.J. loses $70B in wealth during four years as residents depart

By Leslie Kwoh/The Star-Ledger

February 04, 2010, 5:15AM

 

More than $70 billion in wealth left New Jersey between 2004 and 2008 as affluent residents moved elsewhere, according to a report released Wednesday that marks a swift reversal of fortune for a state once considered the nation’s wealthiest.

 

Conducted by the Center on Wealth and Philanthropy at Boston College, the report found wealthy households in New Jersey were leaving for other states — mainly Florida, Pennsylvania and New York — at a faster rate than they were being replaced.

 

“The wealth is not being replaced,” said John Havens, who directed the study. “It’s above and beyond the general trend that is affecting the rest of the northeast.”

 

This was not always the case. The study – the first on interstate wealth migration in the country — noted the state actually saw an influx of $98 billion in the five years preceding 2004. The exodus of wealth, then, local experts and economists concluded, was a reaction to a series of changes in the state’s tax structure — including increases in the income, sales, property and “millionaire” taxes.

 

“This study makes it crystal clear that New Jersey’s tax policies are resulting in a significant decline in the state’s wealth,” said Dennis Bone, chairman of the New Jersey Chamber of Commerce and president of Verizon New Jersey.

 

The Boston College report is the first on interstate wealth migration in the country. Wealth includes assets such as real estate, stocks, bonds, 401ks, mutual funds and vehicles.  The report was commissioned by the state Chamber of Commerce and the Community Foundation of New Jersey to study the effects of wealth migration on charitable giving after executives noticed more affluent philanthropists were moving away.

 

But economists say there are many other implications for the state’s financial health. Wealthy residents are a key driver for everything from job creation and consumer spending to the real estate market and the state budget, said Jim Hughes, dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University. In New Jersey, the top 1 percent of taxpayers pay more than 40 percent of the state’s income tax, he said.

“That’s probably why we have these massive income shortfalls in the state budget, especially this year,” he said.   Until the tax structure is improved, he said, “we’ll probably see a continuation of the trend, until there are no more high-wealth individuals left.”

 

He added the report reinforces findings from a similar study he conducted in 2007 with fellow Rutgers professor Joseph Seneca, which found a sharp acceleration in residents leaving the state. That report, which focused on income rather than wealth, found the state lost nearly $8 billion in gross income in 2005.

 

Findings from the report show that about 302,780 households left New Jersey between 2004 and 2008, only slightly lower than the 323,350 households that moved into the state. However, the average net worth of the departing households was about 70 percent higher, at $618,330.

 

Those who left were also more likely to be older and more educated, with jobs as entrepreneurs or in the finance and professional industries, the study found. Those replacing them tended to hold management or support jobs in the manufacturing industry. The study analyzed data from three main sources: The Federal Reserve’s Survey on Consumer Finances, the Census Bureau and the Internal Revenue Service.

 

Experts pointed to a wealth of anecdotal evidence to support the numbers. Ken Hydock, a certified public accountant with Sobel and Company in Livingston, said in this 30-year-career he’s never seen so many of his wealthy clients leave for states like Florida, where property taxes are lower and there is no personal income or estate tax. In New Jersey, residents pay an estate tax if their assets amount to more than $675,000. That’s compared to a $3.5 million federal exemption for 2009.

 

Several years ago, he recalled, one of his clients stood to make $60 million from stock options in a company that was being acquired by another. Before he cashed out, however, the client put his home up for sale, moved to Las Vegas, and “never stepped foot back in New Jersey again,” Hydock said.

 

“He avoided paying about $6 million in taxes,” he said. “He passed away two years later and also saved a huge estate tax, so he probably saved $7 million.”  Meanwhile, Gov. Chris Christie’s administration said the report is just another reminder of the difficult tasks ahead.  “It’s the consequence that we’ve been talking about for so long, of the spending and taxing habits that we’ve all experienced,” said Mike Drewniak, a spokesman for Christie. “It’s the sort of thing that we feel the need to stop so we can get New Jersey back on a prosperous path.”